TechTarget, Inc.

Hello and welcome to the TechTarget Report's fourth quarter and full year 2022 financial results conference call and webcast. My name is Lauren and I will be coordinating your call today. There will be an opportunity for questions at the end of the presentation. If you would like to ask a question, then please press star followed by one on your telephone keypad. I will now hand you over to your host, Charlie Rennick, General Counsel, to begin. Charlie, please go ahead.

Thank you, Lauren, and good morning. Joining me today are Greg Straykosch, our executive chairman, Mike Cutoya, our CEO, and Dan Norick, our CFO. Before turning the call over to Greg, I'd like to remind everyone on the call of our earnings release process. As previously announced, in order to provide you with an update on our business in advance of the call, we posted our shareholder letter on the investor relations section of our website and furnished it on a Form 8K. Following Greg's introductory remarks, the management team will be available to answer your questions. Any statements made today by TechTarget that are not factual, including during the Q&A, may be considered forward-looking statements. These forward-looking statements, which are subject to risks and uncertainties, are based on assumptions and are not guarantees of our future performance. Actual results may differ materially from our forecast and from these forward-looking statements. Forward-looking statements involve a number of risks and uncertainties, including those discussed in the risk factor section of our filing with the SEC. These statements speak only as of the date of this call, and TechTarget undertakes no obligation to revise or update any forward-looking statements in order to reflect events that may arise after this conference call, except as required by law. Finally, we may also refer to certain financial measures not prepared in accordance with GAAP. A reconciliation of certain of these non-GAAP financial measures to the most comparable GAAP measures to the extent available without unreasonable effort accompanies our shareholder letter. With that, I'll turn the call over to Greg.

Great. Thank you, Charlie. For the full year 2022, GAAP revenue grew 13% to approximately $297.5 million. Adjusted revenue grew 9% to approximately $299.2 million. Net income was approximately $41.6 million, an increase of 4,285%. Adjusted EVIAT grew 16% to $122.4 million. Net income margin was 14%. Adjusted EBITDA margin was 41%. GAAP gross margin was 74%. Adjusted gross margin was 77%. Longer-term revenue grew 18% to $123.5 million, representing 41% of total revenue. Cash flow from operations was $90.7 million. Free cash flow was $76.7 million. For Q4 2022, GAAP revenue was approximately $73 million, a decrease of 5%. Adjusted revenue decreased 7%, so approximately $73 million. Net income was approximately $7.2 million, an increase of 145%. Adjusted EBITDA decreased 9% to $29.5 million. Net income margin was 10%. Adjusted EBITDA margin was 40%. Gap gross margin was 73%. Adjusted gross margin was 76%. Longer-term revenue grew 5% to $29 million, representing 40% of revenue. Cash flow from operations was 19.8 million. Free cash flow was 16.6 million. I will now open the call to questions.

Thank you. If you would like to ask a question, then please press star followed by one on your telephone keypads. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure that your phone is unmuted locally. Our first question is from Justin Patterson from KeyBank. Justin, please go ahead.

Great. Good morning. Two, if I can. First, just with respect to the macro environment, you've been through cycles before. Could you give some context on just how the current environment compares to past periods of anxiety and elongated sales cycles that you've seen and how long you think that could last and pressure some of the KPIs that you said deteriorated a bit in Q4? And then secondarily, I just want to talk about efficiency. I saw the headcount reduction in there. You alluded to some other potential savings on that. on excess office space, kind of walk through what savings is contemplated in the guide today and where you think you have some further opportunities over the course of the year. Thank you.

Great. Yeah, Justin, in terms of the macro cycles, what we've seen is I think it's been highlighted in the document over the last 45 days how quick and material companies are laying off, and it's very widespread. So we started seeing signs of that a little bit after our Q3 earnings call in November, but it really was the middle of December and all the way through today where there is widespread, quick, and very deep cuts. So when we see that, and I don't recall in past cycles the material cuts and the deep cuts and how fast they came. So there's a behavior element to that where when customers cut headcount, They're also very nervous on allocating any budget, and they make those quick decisions to hold on. So everything that I've read, seen, conversations with customers, partners, actually even some of the competitors is Q4 got worse. It got really bad at the end of December, worse than Q3, and Q1 is off to a slow start because of this behavior. So I think that's, you know, Something that we've seen on that, and that's obviously going to elongate sales cycles, budget reviews, approvals, and that's continuing as we see, gosh, in today, currently. In terms of efficiency, yeah, we had a reduction in headcount in December of about 5% of the workforce. And as we go into this year, we've, you know, announced a 90-day hiring freeze, a budget freeze on that, only material, you know, imperative business travel for, you know, customer and employee customer engagement. We are looking at leasing and subletting some of the buildings and office space, and we feel that we're in pretty good shape. It's really important, even during a downturn, that we stay opportunistic around the key priorities that will help, which we've seen historically, and you've covered this for a while, where we take an opportunity to take market share by making the right investments. So, yes, we've lowered our overall EBITDA margin, guys, to 35%. Could we have maintained that 40%? We believe we could, but I don't think it would have been the right decision in terms of addressing the short-term opportunity to take advantage and gain market share for the long-term growth opportunity. Because the overall trends that we've seen and we've talked about over the last three years haven't changed. You know, when you look at our customers, their sales and marketing departments have to be modernized and they really want to focus on first-party data. Having access to real first-party data, not only at the account level, but the individual prospect level is really critical for our customers. And privacy and compliance concerns that can continue to go, you know, address this market really put us, those long-term elements and those long-term local tailwinds don't really go away, even during a downturn in the macro.

Great. Thank you.

Thank you.

Our next question is from Aaron Kessler from Raymond James. Aaron, please go ahead.

Great. Thanks, guys. Maybe a couple of questions on the kind of the guidance as well. Just in terms of the kind of the reduction in spend, is that kind of across all client types, all sizes? And second, any product areas you would call it specifically where you're seeing more pressures and more on the advertising side versus priority engine, et cetera? Thank you.

Yeah, we're seeing reduction across all customer phases, you know, from SMB, mid-market to enterprise. And it's been, like I mentioned in the previous answer, it's been really quick and really wide and really deep on that. So we've seen that across the board. I think customers are trying to reset their costs, manage their budget, figure out what's going on. And I've seen probably the highest level of uncertainty than I've seen in previous downtimes. In terms of product material, we actually do see a mix in product spend and product mix. The first thing that will absolutely get pulled back is the brand. And we've talked about this in the past. It's less than 10% of our overall business, really hard to measure for companies, and they pull that back. When markets get better, that's probably one of the first things they come back on and they will increase their brand investments on that side. We also see a reallocation. We'll see that some of the long-term contracts, which might be a priority engine, might get reallocated to short-term product needs. We have a qualified sales opportunity, HQL type of product, where our customers are trying to land any deal that they can see right now and they want to have more bottom-of-the-funnel type of product mix that they can do. So we'll start seeing that mix. I've talked to some customers where they have allocated to appointment setting for the short term. What I would say on that is it's really important for customers to manage their pipeline, because here's what we typically see. We see customers will retreat, leverage their own data right now, try to orchestrate it in a very organized way, and they're looking at a pipeline that they appear to be helping. If that pipeline doesn't progress over the next quarter or two quarters, and it doesn't progress into closed deals, they then realize that they still have numbers to hit. They have to quickly get that pipeline built up. And what we've seen historically, and we predict that this will happen again, there's a quick flight back to quality. And that's where our first-party intent data at not only the account level, but at the prospect level, is really what we believe is the quickest path and the truest path to our company's next deal, our customer's opportunity to land the next deal.

Got it. Great. And any more color you can provide in the letter you talked about investments in the content enablement services as well as the content, the closed content. Can you just provide a little bit more details around that?

Yeah, we believe that that is still a really good growth area, and we're seeing that part of the business continue to grow. We talked about the dynamics and the demographics of today's buyer. Today's buyer, we've seen in multiple studies and what we're seeing in our own research, a majority of those buyers today are want a rep list experience when they're dealing with their next purchase or the next opportunity and what does that mean they want to engage in relevant information relevant content project-based content really to help guide them without having to take a call from a sales rep we made the acquisition of esg a couple years ago and we really focused on our efforts around making sure that our customers have a good content experience to help them position their products position their overall company's value prop against their competitive set. But also, and especially in times like this, there's economic validation. Why should you be buying my solution right now in a downturn? And our customers are really craving for that, saying we need to make sure that we're taking advantage of the downturn to capture market share as well. So that's all part of this end-to-end, content-to-close concept, helping our customers build, create value, and execute on the right content and messaging strategy, putting that content into the right executable programs to engage the right buyers, and then helping prioritize those buyers and accounts back into their sales force through our priority engine and other platforms that we can then help them close more deals quickly.

Okay, great. Thank you.

Thank you. Our next question is from Joshua Riley from Needham. Joshua, please go ahead.

Thanks for taking my questions. The Q1 guidance implies below normal seasonal trends that typically include a sequential decline in revenue of roughly 10%. What does this imply for the normal seasonal patterns for the business in 2023 where Q2 and Q4 are typically your stronger quarters? Do you still expect that dynamic to play out in 2023 just off an overall lower revenue base, implying that revenue should improve sequentially in Q2?

Yeah, great question, Josh. And from based on what we see right now, the pattern should stay pretty consistent on that. You know, in Q1, as you see, it's lower than our normal seasonality, and that's because what we talked about earlier, the end of December and out of the gates in January, we've seen a lot of customers really try to navigate their budgets and their cost cutting. And obviously that's the catalyst on that. It's the massive layoffs that we've seen. But we expect Q2 to grow. Q3 would be relatively consistent with Q2, maybe up slightly, and then Q4 would be our biggest quarter. And, you know, when you take a look at that and you compare it even to last year's COPS, we still believe that pattern will shake out for 2023. Got it.

That's super helpful. And then, If you look at the customer additions of 539 in 2022, that's a really pretty strong, impressive number. Given the lower outlook here for 2023, is the slower spending include these new customers that you just brought on in the last year, spending less as well? Or can you give us any color on either the profile of the customers that you added in terms of technology, vertical or size, and how are they going to spend? in terms of your expectations this year?

Yeah, I think in terms of the new customers that we added, you know, it spreads across all of our customer segmentation. So a lot of, you know, small customers, a mix of midsize customers and an add-on to a few of the larger customers as well. And we've added those customers throughout 2022, but they're also going to be going through, you know, we're baking into everything of our guidance today of what we know and what we're seeing in the behavior in the market. So those customers will also have decisions to make in terms of budget, coming out of the gate, managing expenses, and then identifying where they're lying on pipeline. And we believe that a lot of those customers will stay with us. Some will grow. Some may reduce their spend. Some may delay their spend. But I think the one common theme that we've seen, even in past downturns, is when you identify the current pipeline within customers not progressing and trying to do it with their own data or leverage what they currently have, there is a fight back to quality. When that happens, you know, we're not sure. I mean, this market has changed so much in the last 45 days, and we continue to see announcements every day in terms of massive layoffs. But that's what we expect to see going into 2023.

Got it. That's super helpful. Thanks, guys.

Thank you. Our next question is from Brian Burgin from Cowan. Brian, please go ahead.

Hi. Thanks, Zach. Easy on for Brian. First question on guidance and visibility. Just curious on the macro considerations that you're embedding here for the calendar 23 outlook. And what's the underlying priority engine growth assumption?

I think the macro considerations that we're taking is today's reality. Like, we're taking a look at what we know right now, what we've seen in the last 30 days or 45 days, and that's what we baked into our guidance. As I mentioned, it's moved so fast in the last 45 days. I mean, you can see the announcements, you can see the depth of cuts, and you can see the breadth of cuts. So, we can only predict based on what we know and what we're experiencing today. And in terms of priority engine, I expect that to slow down this year because that's a commitment to long-term contracts. We've seen that in the past where people might slow it down. We might see a deceleration in revenue for the first, you know, couple quarters on that and, you know, when things turn around. Again, what we're doing not only on the business side, on the product development side, we expect to see, you know, on the booking side of pickup after we navigate through this. So I think you're going to see it decline a little bit during the year, and we've seen that with the behavior of our customers at the end of December and the beginning of January, and that's really what we're going by based on what we are dealing with right now in today's customer behavior.

Understood. And then to follow up on the same customer sales metric, it stood at 100% in 2022, so it was about flat. Can you give us a sense of where this metric stood after the first nine months of the year to try and get a sense of what changed in 4Q as it relates to the same customer sales metric, and what's the assumption embedded for same customer sales in the 2023 outlook?

So we only disclose that on an annual basis, and that's when we started providing these numbers two years ago, or three years ago, it was on an annual basis. So we don't want to disclose them on a quarterly basis. But I would say that there will be some pressure on that number in 2023. You know, we monitor it. We don't disclose it each quarter. But I would just say there will be a little bit of pressure just based on today's current customer behavior in the pullback on short-term budgets.

Got it. Thanks.

Thank you. Our next question is from Bavin Shah from Deutsche Bank. Bavin, please go ahead.

Great. Thanks for taking my question. Just one quick one in terms of the different products that you guys have and completely understanding that brand marketing can shift pretty quickly depending on the macro. But maybe what are some of the trends that you're seeing in solutions such as Priority Engine? Are customers being proactive here and maybe reducing spend as they are reducing headcount? Or is that something that they might look to do upon renewal?

I think you cut out for a little bit, but in terms of, you talked about the brand piece and that gets cut in on the priority engine. You know, we're seeing some people delay the renewals because they don't want to commit to the annual or monthly year deals. We're seeing a shift on some of those, on the product shift from priority engine to some of our qualified sales opportunities and H2O products because, again, customers are looking and they have a lot of pressure to land the current pipeline that they have in place. They want as much information to help land those deals, identify new deals, and close them in the next, 30 to 45 days. So we'll continue to see some of those shifts. I mentioned earlier, I was actually speaking to a couple of customers and they said, listen, we're putting a lot of stuff on hold right now. We'll be back in a quarter, we'll be back in two quarters and we're looking at appointments at it because we need to see some short-term numbers. The concern on that in terms of that approach is you really negatively impact your pipeline and you have to be looking at this more than over a 30-day or a 90-day period So customers might reallocate their budget. We have a lot of customers that want to stay with us in terms of buying the content marketing, content syndication, QSOs. But you will see a shift over the next quarter, possibly two, in terms of, you know, with budgets get cut or reduced, they may reallocate to more of this short-term gratification. I need to be in front of a customer or prospect ASAP. But that, we've seen this before, and the pendulum swings back to, right back to quality. I need to get in front of the customers. Where are my customers when they're not with me? They're researching on the tech target sites and communities that our editorial team, you know, produces and our analyst team produces, and that will come back in our prediction.

Got it. That's super helpful. Just one quick follow-up. In terms of just somewhat you just mentioned, in terms of your content and your websites, what are you seeing in terms of traffic trends or change in registered users more real times Have you seen a decline as maybe enterprises are less apt to kind of make IT purchase decisions, or are you seeing that remain stable?

It's actually the opposite. It's been very positive. So our organic traffic increased 50% year over year. So that tells me that our customers, their prospects and their customers are going to our sites to get information. Now, their deals might get extended. It might get elongated as well, just like we're seeing with our customers. But they're actively researching because they know they have to make the right technology decision at the right time, and they're leveraging our sites. And that's also been shown in our Google search rankings. We have 1.2 million search terms that rank one on page one of Google. So we're seeing the activity there. And what we really say to our customers are, your prospects and your existing customers research with TechTarget. And that is proven based on the organic growth in traffic of 50%. and 1.2 million key terms that are ranked on page one of Google organically.

Got it. Super helpful. Just a quick clarification. That's 50%. That's an annual number. Any way to think about just what that trajectory looked like in 4Q or even what you're seeing in January?

We report it year over year. That 50% was up from last Q1 in 2022, which, I mean, shows some positive trends.

Got it. Thanks for taking my questions.

Thank you. Our next question is from Jason from Craig Hallam. Jason, please go ahead.

Thank you, guys. Just wondering any comments on churn related to long-term contracts. I'm curious to what degree those are being paused or if there's any instances where those are just being outright canceled.

Yeah, Jason, some of them are being delayed. We have some of them being canceled. You know, at the beginning of the year with the budget cuts that we're seeing, we're seeing some of them getting reallocated to other products. And then we're also seeing net net. I mean, there are people that are still buying the long-term contracts. But I just think it goes back to this whole uncertainty over the last 45 days. And, you know, correct me if I'm wrong, it's been a long time, if ever, that I've seen a period of so many cuts in 45 days in the enterprise tech business. versus more of a forecasted and more predictable reduction. So that's what we're seeing in terms of the churn on the long-term contracts as it relates to priority engines.

And then in past recoveries, I know you guys have been really successful gaining share. It sounds like you're leaning into that opportunity now. Just curious what specifically you can do or what are the key areas of investment that you think position you for more share gain on the other end of this kind of macro uncertainty?

Yeah, you know what? I think there's three areas that we're really laser-focused on. Number one is the content and implement business and making sure that we're investing in the right resources and the functionality to help with our customers who need it. purpose-built relevant and impactful content because without the content you're not going to be able to engage with the buyers these are really savvy enterprise tech buyers and they mentioned earlier i mentioned the past couple earnings calls you know close to 50 of those buyers want a reckless experience they don't want to be dealing with vendors uh sales teams out of the gate they want information and they need relevant information it's got to be pretty deep rich relevant technical, you know, ROI, TCO type of information. And that's what we see the metrics over the long term. And those demographics of those buyers are not changing. They're not going back to the old days. So we're going to continue to invest in that with reallocated teams, technology, process towards the content enabling business. We have a really good opportunity with our priority engine platform in terms of we talked about this in terms of having tight integrations into our customers' workflow. We have it. increased our resources in the development team by 40% plus over the last seven months in really the better integration, automation, visualization, and really about attribution by marrying our first-party data with our customers' first-party data to help them out and identify clearly at the account at the prospect level. But not only showing that, but also highlighting that in our ROI dashboards and visual capabilities. And that's really important, and we're working on that. And you're going to see some announcements coming out later in the first half of 2023. We've also put a lot of work into enhancing to run our BrightTalk channel platform. You know, our customers come to us today, and they're saying, gosh, we need to stay close to our existing customers, customer retention. We need to find that net new deal. And there's a way to effectively stay in front of your customers through episodic content through a webinar platform. And what we've built and what we'll release will show a big focus on engagement and conversions so that they can stay in front of their customers, get better conversions, leverage that information, integrate it also into our overall platform capabilities to help them. So those are three key areas that we're really focused on in terms of gaining market share. And again, you've covered this for a long time. When we've seen a dip and it's been quick, typically do the right things, stay opportunistic, manage our cost structure, and gain market share and come out strong on the other end.

Appreciate it. Thank you.

Thank you. Our final question comes from Eric Martinuzzi from Lake Street. Eric, please go ahead.

Yeah, I wanted to get a little bit of greater detail on the geographic You talked about in Q4, EU off 9%, US off 3%. Just as we look at Q1 and your guidance for revenue decline of about 16%, how is that weighted between the geographies?

We don't disclose how that's weighted, but I will tell you, Eric, that the international markets are a little worse shaped than North America. So we've seen that, you know, you've watched all the news in the media over the last couple quarters, you saw it coming, and they're getting hit a little bit more. So I think that North America will hold up a little bit more than the international markets, but it's going to be fairly consistent in terms of the ratio.

Okay. And then the same issues in both geographies, the elongated sales cycles, budget cuts, freezes.

Absolutely. the folks that have the regional budgets they're still seeing it a lot of the um regional field marketers and sales teams and marketers are getting the mandates from corporate and a lot of those corporate offices are in north america and they're saying pull back they're going to pull back quickly on that and they're going to wait for the green light to go so that'll like i said it all goes back to pipeline progression of pipeline impact of what they're doing and then a flight back to quality. So if it's a quarter, it's a quarter, if it's two quarters, it's going to happen. And we know that. And there'll be a flight back to quality and there'll be a flight back to accelerating my pipeline because they all have numbers to hit across each region.

Got it. And then my last question has to do with the buyback. You announced a $200 million buyback in November of 2022. That plan assumed, I want to say, $100 million of free cash flow in 2023. Given the reduction in outlook for 2023, are we going to be less aggressive on the buyback? And then what is the new free cash flow expectation for 2023?

I'll answer the buyback approach on this. And I think we want to continue to be aggressive on the buyback and continue to stick to the plan that we laid out. We've seen over the history of our buybacks, it's been very accretive for the shareholders and for the overall organization. We've taken out close to 40% of our shares over the time at a price that's very attractive, and we believe in the future of the business, and we believe in where we can bring the business. In terms of the free cash flow, I don't know if we gave any guidance on that. So you can make some assumptions based on last year's numbers and this year's guidance, what we do for free cash flow.

Thank you. Thank you. We have no further questions. This concludes today's call.

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