Earnings Call Transcript - TTGT Q1 2024

Operator, Operator

Good afternoon. Thank you for joining TechTarget's first quarter 2024 conference call and webcast. My name is Cameron, and I will be your moderator today. I would like to now turn the conference over to your host, Charles Rennick with the General Counsel. Please go ahead.

Charles Rennick, General Counsel

Thank you, Cameron, and good afternoon, everyone. The speakers joining us here today are Greg Strakosch, our Executive Chairman; Mike Cotoia, our Chief Executive Officer; and Dan Noreck, our Chief Financial Officer. Before turning the call over to Greg, we would 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 have posted our shareholder letter on the Investor Relations section of our website and furnished it on an 8-K. You can also find these materials with the SEC, free of charge, at SEC's website at www.sec.gov. The corresponding webcast as well as a replay of this conference call will be made available on the Investor Relations section of our website. Following Greg's introductory remarks, the management team will be available to answer 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 Factors section of our most recent periodic reports on Forms 10-Q and 10-K. 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 efforts, accompanies our shareholder letter. And with that, I'll turn the call over to Greg.

Greg Strakosch, Executive Chairman

Great. Thank you, Charlie. On January 10, we entered into a definitive agreement with Informa to combine TechTarget with Informa Tech's digital business. The combined company will have increased scale with over 8,000 customers in over 20 countries, first-party purchase intent data from over 220 leading digital brands and a permission audience of over 50 million people. The combination increases our total addressable market by 10x as we will enter 18 new vertical markets with the unique end-to-end solution across our clients' go-to-market. We've been pleased with the progress we have made over the past 4 months, and we are on track to have this transaction closed during the second half of 2024. The combination creates a company with a strong financial profile. We expect 2024 pro forma revenues to be over $500 million. Within 5 years, we expect revenue to grow to over $1 billion and with at least 35% EBITDA margins. We structured the deal so our shareholders will get some immediate benefit by paying out $11.79 per share in cash and long-term benefit by providing the opportunity for shareholders to participate in a long-term value creation through a 43% stake going forward. In regards to our first quarter, we are pleased to report revenues above consensus, and we believe our investments and product offerings are and will continue to pay off. We are forecasting Q2 revenues to be in the range of $57 million and $59 million, which represents a 12% sequential increase from Q1 and roughly flat year-over-year. We see that as support for a stabilized business with some signs of a return to normal seasonality. This reflects the macro technology environment, which customers remain cautious regarding the sales and marketing investment levels. We expect this dynamic to continue throughout 2024 because of uncertainty surrounding inflation, interest rates, the presidential election and geopolitical issues. We expect a better macro environment in 2025 and 2026, which is good timing as the combined company will have additional scale to take advantage of the recovery. I will now open the call to questions.

Operator, Operator

And the first question is from Justin Patterson with KeyBanc.

Miles Jakubiak, Analyst

This is Miles Jakubiak on for Justin. Just to start, would love to get an update on what you're seeing with the macro environment. You touched on it a little bit with kind of the transition from R&D spend to S&M spend, but maybe just touch on any updates you're seeing there and any change to visibility.

Michael Cotoia, CEO

Thanks, Miles. In terms of the macro, nothing has really changed over the last several quarters. We still see the enterprise technology market facing some headwinds with high interest rates and inflation. As we mentioned in the shareholder, a lot of international tensions and we have an upcoming presidential election. But I'd say, we've been in business, we're going to be celebrating our 25th anniversary this year being in business and we’ve managed through several pullbacks. Our playbook is pretty simple. We leverage our strong balance sheet to take an opportunity to invest in the right areas around product evolution, functionality, audience and content to make sure that we continue to be the leader when it comes to enterprise B2B marketing and sales services for our customer. So even though there's no real catalyst, we feel that the investments that we're making are paying off. We've done a lot of stuff on our product front in terms of leveraging some of our AI functionality and capabilities. It's our first full quarter. Customers have been able to leverage our IntentMail AI which we've seen a great retention, increase in usage from sales users in our platform that are leveraging our prospect-level intelligence for email outreach and automation, again based on our prospect-level intelligence, and we combine it with our customers' most recent and most relevant product marketing positioning. So we're seeing healthy adoption on that, retention, competitive usage, repetitive usage. And our roadmap on that is going to continue to expand the future to work with multi-email sequences and integrations into sales engagement platforms, so continuing around the platform and making sure we're making the right investments. As we mentioned in the shareholder letter and in Greg's opening, 2024 doesn't present a lot of catalysts in terms of high interest rates, and as I mentioned, high inflation. But we know a couple of things to be true, that the tech market will return, interest rates are low and there'll be a recovery, so making sure we're making the right investments today to capture that recovery. And as you can see in our Q1 results and our Q2 forecast, we feel we're doing the right things to navigate through this challenging macro.

Miles Jakubiak, Analyst

That's helpful. And then maybe just building off that last point about investments in the product. It seems like there's some upcoming improvements to Priority Engine and maybe a little bit more focus on the direct integration side. So just would love to hear about how you think about current product priorities as you kind of invest through the cycle.

Michael Cotoia, CEO

Yes, great. As I mentioned, IntentMail, which is our generative AI offering, is 1 full quarter into use. We've had a big focus on integrations, integrations in our customer CRM, marketing automation platforms. But over the last 6 to 9 months and beyond, we really made a concentrated effort of integrating our Priority Engine information and data into other technology platforms. We reallocated and invested in internal resources to help support customers who want to integrate Priority Engine data into existing workflows within other platforms. We have announced some partnerships, and we're going to continue to announce some strategic partnerships throughout Q2, Q3, and Q4. And we're working with partners that have a shared critical mass of joint customers. Our customers are looking to get the benefits from TechTarget's first-party data, leveraging our partners' existing platforms. So we're seeing some good success on that and it's a big focus for us, and we're pleased with where we are with this and we're pleased with the roadmap.

Operator, Operator

The next question is from the line of Bhavin Shah with Deutsche Bank.

Bhavin Shah, Analyst

Just kind of on that last point in terms of product improvements just on IntentMail and Priority Engine, kind of when do we think about that kind of helping translate over to kind of improvement in the long-term revenue as that kind of continues to lag overall total revenue growth?

Michael Cotoia, CEO

Yes, that's a great question, Bhavin. The investments we're making now, including IntentMail, are significant. I will discuss the roadmap for Priority Engine, which will help address your question. It's crucial for us to keep our customers engaged on two fronts: ensuring they continue to use the platform and improving our integration capabilities. We are making good progress in both areas. IntentMail is one iteration of our personal assistant product line, and we are exploring additional features, such as integrating multi-email sequences with sales engagement platforms like SalesLoft and Outreach. In such organizations, having access to prospect-level intelligence is essential for their outreach efforts. Therefore, the integration of personalized and prospect-level data enhances engagement and usage. I've outlined our integration strategy, and regarding our priorities and roadmap, we are undertaking a major initiative to unite various TechTarget offerings into a cohesive user experience. This will include a unified view of program impact, insights based on action intent to aid decision-making, and the ability to engage with active buying teams. Essentially, we aim to provide a comprehensive solution that encompasses content, demand, and branding within a single platform, giving customers visibility into the performance of all programs instead of being limited to just an intent offering. These investments are showing positive momentum, and we plan to make announcements about the roadmap and the overall Priority Engine platform by the end of the second half of 2024.

Bhavin Shah, Analyst

Got it, that's helpful there. And just 1 follow-up, a little bit more macro-related, but it looks like your top 10 largest kind of legacy customer base, their revenue grew in the quarter, which is great to see for the first time in a while. But the remainder continues to decline year-over-year. Anything to call out macro-wise, SMB or large enterprise, that you can notice the difference?

Michael Cotoia, CEO

Yes. Regarding enterprise accounts, we've discussed our key acquisitions and investments in the Enterprise Strategy Group, BrightTALK, and Xtelligent, which have helped us build a comprehensive go-to-market strategy and product offering for our customers. Our product portfolio now offers more entry points, allowing us to engage with various budget stakeholders effectively, from research and advisory to strategic content development and activation. We're experiencing strong momentum in reaching different stakeholders across our strategy. The larger the account, the more engagement opportunities we have. For smaller accounts, the market does present challenges. However, our current product offerings have significantly improved compared to two years ago, providing various entry points to create value for our customers. For instance, if a small or medium-sized business isn't ready for a Priority Engine subscription, they may still need help with lower-end projects or positioning. We've utilized our ESG capabilities in conjunction with BrightTALK Studios for content creation, enabling demand generation within shorter timeframes. Given recent market upheaval, many smaller accounts are looking to adjust their budgets carefully and are seeking genuine value in content, brand positioning, and demand generation. We believe we are well-positioned to engage and provide value to these SMB customers.

Operator, Operator

The next question is from the line of Joshua Reilly with Needham.

Joshua Reilly, Analyst

As we examine the June quarter guidance, I understand that historically you have mentioned how customer product launches can drive the usual seasonality, leading to a sequential increase in revenues. I would like to know if this typical seasonality is what is boosting the improved revenues, or if there are other factors that we should consider.

Michael Cotoia, CEO

I believe there are a few factors at play. Firstly, the variety of product offerings we provide can support customers who may not be ready for long-term contracts but still need to achieve their sales and revenue goals. As mentioned previously, even during a downturn, when the market recovers, there will be a shift back to quality, driven by first-party purchase intent data and permission-based audiences. Our discussions with customers began in the middle of last year, and we’re starting to see things stabilize, allowing us to better understand and meet their needs. This is currently yielding positive results. As we enter 2024, our portfolio is well-structured and positioned to meet customer needs, whether that relates to content strategies or understanding buyer intent. The quality of our data and investments is paying off, particularly in securing confirmed projects and qualified sales opportunities. We've just launched a new initiative called the Account Insights Feed as part of our Priority Engine offering. While this won’t contribute to revenue in Q2, it focuses specifically on account insights for customers' programmatic account-based marketing and propensity scoring. I want to emphasize that first-party data is crucial, not only at the prospect level but also at the account level. With Google's upcoming phase-out of third-party cookies set for 2025, we anticipate new revenue opportunities with new buyers and case studies that we couldn't previously engage. Regarding June revenue, our projections were outlined two quarters ago. We anticipated a decrease of about 10% in Q1, a narrowing gap in Q2, growth in Q3, and an overall year-over-year revenue increase in Q4. We are on track with these expectations and are satisfied with our business performance.

Joshua Reilly, Analyst

Got it. That's very helpful. And then how should we think about the gross margin leverage moving into Q2? As we know your margins are sensitive to the overall levels of revenue, but then you also have a lot of other investments you're making here. Are there any other considerations that we should be thinking about as we kind of model our Q2 gross margin and going forward?

Michael Cotoia, CEO

Yes. Thanks, Josh. So again, we plan to make the right investments to help the business feel and to drive margin expansion. So some areas that we've done this year is we're currently implementing a workflow management solution so it provides end-to-end visibility from contracts to execution to close to billing. And we feel that this is the right investment so we can streamline the visibility and the information across all of our product fulfillment sets, our sales, our sales operation teams and our customer success teams. So we're in the middle of implementing a workflow solution on that. We expanded the scope a little bit. But at the end, what that will do for us is provide better visibility and be able to create a more efficient cost of sales as we head into Q4 of 2024. So we're in the middle of doing that right now. It's something that we knew we needed to get done. We made the right investments on that so you see a little bit of cost on that. But at the end, that will make a cost of sales that is still more efficient and continue to help expand margins.

Operator, Operator

The next question is from the line of Bruce Goldfarb with Lake Street Capital Markets.

Bruce Goldfarb, Analyst

Greg, Michael, Dan, congrats on the results. Just a question on long-term revenue, where do you expect long-term revenue as a percent of total revenue to be at the end of 2024?

Michael Cotoia, CEO

Yes, we expect that to be in the low to mid-30s. When we consider 2024, the pullback in the macro environment reinforces our belief that now is the perfect time for our current initiatives. In evaluating acquisitions and different assets, we focus on several factors. We assess audience and permission-based audiences, as well as first-party insights. As we anticipated over the last couple of years and looking ahead to 2025, first-party purchase intent insights will be highly valuable. We also analyze content and its capabilities to increase revenue through long-term contracts and expand into new tech-enabled vertical markets. The assets we are merging with Informa Tech's digital business, particularly with Industry Dive and Omdia, are of high quality and include many notable digital media brands. This merger focuses on intelligence research and advisory services alongside our Enterprise Strategy Group. Notably, about 65% of Omdia's revenue comes from long-term contracts. Therefore, it is crucial to consolidate and integrate these quality assets at this opportune moment as we prepare for recovery. While we may be in the low to mid-30s this year, our goal for the next three to five years is to increase long-term revenue contracts to over 50%.

Bruce Goldfarb, Analyst

And then in terms of the merger with Informa Tech, are you getting any inbound inquiries from Informa Tech customers regarding working with TechTarget?

Michael Cotoia, CEO

No, we haven't got any inbound Informa Tech customers inbound to us on this. I mean, we're working right now, as we mentioned in the shareholder letter, and I think Greg's introduction, yes, we're really happy with the progress that we've made. We have really strong conviction on the timing of this. We're focused on our business as usual but also making sure that we're ready for the combination, which we are still scheduled to have complete in the second half of 2024. But we haven't heard directly from Informa Tech customers reaching out to us.

Bruce Goldfarb, Analyst

And then I saw like you weren't active on buyback during the quarter. Are you likely quiet until after the Informa Tech transaction closes?

Michael Cotoia, CEO

Yes, I think we're going to remain quite reserved on that matter. I believe that's scheduled for November 2024 anyway.

Bruce Goldfarb, Analyst

Great, so it's coming up anyway. Congrats on the results.

Michael Cotoia, CEO

Thank you.

Operator, Operator

There are no additional questions waiting at this time. I would like to pass the conference back over to the management team for closing remarks.

Michael Cotoia, CEO

No other questions? No closing remarks. We appreciate everybody joining and talk to you next quarter.

Greg Strakosch, Executive Chairman

Thank you, everyone.

Operator, Operator

That concludes the TechTarget reports first quarter 2024 conference call and webcast. Thank you for your participation, and enjoy the rest of your day.