Earnings Call Transcript - TTGT Q1 2020

Operator, Operator

Good afternoon, and welcome to the TechTarget Q1 2020 Earnings Release Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Charles Rennick, General Counsel. Please go ahead.

Charles Rennick, General Counsel

Thank you, and good afternoon. Joining me here today remotely are Greg Strakosch, our Executive Chairman; Mike Cotoia, our Chief Executive Officer; and Dan Noreck, 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 the 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. 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 may be considered forward-looking statements. These forward-looking statements are based on assumptions and are not guarantees of our future performance. Actual results may differ materially from our forecast. Please refer to our risk factors in our periodic reports filed with the SEC. These statements speak only as of the date of this call, and TechTarget undertakes no obligation to update them. We may also refer to financial measures not prepared in accordance with GAAP. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures accompanies our Shareholder Letter. With that, I'll turn the call over to Greg.

Greg Strakosch, Executive Chairman

Great. Thank you, Charlie. I hope everyone is healthy. We are very proud of the TechTarget team. We are grateful for the resilience and positive spirit as productivity has remained high by working from home. Revenue grew in Q1 5% to $31.4 million, adjusted EBITDA grew 7% to $8.5 million, adjusted free cash flow was $7.7 million, representing 91% of adjusted EBITDA. Our balance sheet remains strong with $45 million of cash and $23 million in term loan debt, but only $1.6 million of the debt is due for the rest of 2020. In the quarter, we purchased 736,000 shares of TechTarget stock. Today, we announced a new $25 million stock repurchase plan. I will now open the call to questions.

Operator, Operator

We will now begin the question-and-answer session. Our first question will come from Aaron Kessler with Raymond James. Please go ahead.

Aaron Kessler, Analyst

Great, thanks guys. A couple of questions. One, maybe just on the customer size performance, if you can give us an update there, what you're seeing, especially during this period. Second, just what sort of pressure are you seeing more on the advertising side of the business with the display products? And third, maybe just some of the expense controls, what type of – which lines should we see that in? Thank you.

Mike Cotoia, CEO

Right. Hey, Aaron, I hope you're doing well. This is Mike. In terms of the customer size performance, we break this down into typically three different customer segmentation groups, the Global 10, the next 100, and all others. When we talked about this during the last call, back in February, we were probably going to move in 2021 to breaking this down into two classes of customers, the Global 10 and then all others. The reason I say that is because the Global 10 is the only consistent cohort of customers that we report quarter-over-quarter and year-over-year, where the next 100 and all others can flip back and forth depending on their growth and their decline within the quarter. To bring more clarity on that and make it easier to understand, we've got to break it down into those two categories moving forward. In terms of customer size performance, our large global accounts in North America declined year-over-year. But the all other accounts were up 11%. In North America, primarily, those customers have headquarters there, with most of their employees and a large percentage of their revenue based in North America, where you might see them perform larger brand campaigns and programmatic campaigns. In a pullback like we're all dealing with during this COVID-19 period, you'll see many of those programs get reduced, paused, or just run at a small level. Conversely, those global accounts were actually up internationally. There’s still some large brand and advertising campaigns, but their offices are primarily employed by field marketers, marketers, and sales organizations so that they're working closely together, leveraging data around opportunities. There are a lot of regional events internationally that have stalled out temporarily. The timeline for recovery is uncertain. Regarding advertising pressure, our branding dollars, which come from larger accounts, face a pullback during downturns where they typically revert to more content syndication or shorter-term programs. Branding revenue represents 10-15% of our overall revenue, with charges ranging from $100 to $500 CPM. Regarding expense controls, TechTarget has generated positive cash flow for the last 17 years. We manage our expenses closely. We anticipated some of this in early February and pulled back all discretionary expenses, travel, and entertainment. We assessed head count and froze open requisitions. We managed closely, as shown by the good EBITDA and gross margins, and we will continue to monitor that. Hopefully that answers your questions across all three.

Aaron Kessler, Analyst

That's great, thank you.

Mike Cotoia, CEO

You're welcome.

Operator, Operator

Our next question will come from Eric Martinuzzi with Lake Street. Please go ahead.

Eric Martinuzzi, Analyst

Yes. Kind of interested in the green shoots question. I've heard other companies in digital advertising definitely talking about the dramatic fall-off at the end of March and in April. But late April, early May, signs of budgets thawing. Any comments regarding TechTarget?

Mike Cotoia, CEO

Right now, I would classify our customers into three buckets during this pandemic. The first bucket consists of customers who are very opportunistic, seeking to take market share and drive mind share, knowing we're in a downturn now but anticipating a recovery at some point. The second bucket contains customers wanting to maintain the status quo; they may not try new things but recognize they need to stay in front of prospects. Lastly, there's a bucket of accounts that may not have the strong financial statements they had before and are seeking to preserve cash and capital, playing it safe. Our historical downturn in 2008 and 2009 saw 40% of our business aligned with the Global 10; today, it's about 20%, which reduces our risk exposure. We have a long-term data subscription business, and we also provide short-term customer capabilities. I think this situation is fluid.

Eric Martinuzzi, Analyst

Okay. Another way to frame the question is to go out, maybe not so much in the near term, but in the mid to longer term. Is your assumption or as you're forecasting for 2020 internally, even though I know you've withdrawn your 2020 guidance. Is your assumption that there is relief in Q3 or that there's relief in Q4? Just at a high level, I'm not looking for dollars.

Mike Cotoia, CEO

It's unpredictable. I think the market is transitioning to a data-driven market, which is not changing. Our investments in the priority engine and data-driven business positions us well. Our customers want real observed purchase intent data at the account and individual level. We publish relevant content across 140-plus technology websites while ensuring GDPR and CCPA compliance, which positions us strongly. I’m cautiously optimistic, but the timeline remains uncertain.

Dan Noreck, CFO

If you look at Q1 numbers, we finished well despite COVID showing up, and our Q2 guidance reflects normal seasonality with a normal sequential revenue increase. Customers are resilient, and our product line has held up well during this transition. If the economy improves, we hope to perform well.

Eric Martinuzzi, Analyst

Okay. And last question for me has to do with the repurchase plan. You bought 736,760 shares in the first quarter. I understand that you've now reloaded on that stock repurchase program. There was – the way it was worded made me think, hey, current prices probably aren't as attractive to us. Is that to say that the average price that you purchased at in Q1 is where you would be more supportive? Or am I misinterpreting?

Mike Cotoia, CEO

I don't want to get into specific prices, but generally, during this uncertain period, everyone, including us, will manage cash carefully. We won't be excessively aggressive in our buybacks but want to have a plan in place. Historically, we've been opportunistic with our share purchases, and if opportunities arise where shares are undervalued, we may act. For now, we're focused on conserving cash.

Eric Martinuzzi, Analyst

Got it. Thank you for taking my questions.

Operator, Operator

Our next question will come from Marco Rodriguez with Stonegate. Please go ahead.

Marco Rodriguez, Analyst

Good afternoon guys. Thank you for taking my questions. I was wondering if maybe you could talk a little bit more about your three buckets of clients. You've provided the percent of revenue for your Global 10 at about 20%. Just wondering if you could parse the additional data for the other two buckets. And then if you can talk about where you kind of see the biggest risks to your revenue or revenue growth movements through the year as it relates to those three buckets?

Mike Cotoia, CEO

Marco, the Global 10 consists of our largest legacy hardware and software global accounts. We identify the next 100 accounts and a bucket termed all others. There can be occasional confusion regarding how these buckets work since accounts may move between them based on their spending in different quarters. Going forward, we’ll provide clarity to address this. Regarding risks, we’ve done extremely well at reducing risk through our suite of products and solutions. Today, 20% of our revenue comes from Global 10 versus 40% during past downturns, which reduces our customer concentration risk. Small clients are preserving cash and becoming cautious, while larger brands may limit advertising components in North America during pullbacks. Across the sector, companies are wanting to transition to data-driven sales and marketing. Real observed purchase intent data is key for our growth strategy.

Marco Rodriguez, Analyst

Understood. In terms of the impact you guys saw from a revenue standpoint, can you just maybe touch on what you've seen thus far here in April, as it relates to the different regions?

Mike Cotoia, CEO

Yes. April was the first full month impacted by COVID-19. Customers are overall responding in various ways: some are being very opportunistic, while others seem to maintain their status quo. International numbers suggesting continued growth, but regional events have stalled, and companies need to engage in revenue-driven activities. There may be a transition to digital marketing, which could present opportunities; however, it's uncertain how face-to-face events will rebound.

Marco Rodriguez, Analyst

Got it. And last quick question here. You guys operate a highly variable model, a little surprised by the gross margin, with a sequential decline and a year-over-year decline. Can you maybe talk a little bit about that or what the drivers were there or if there are any sort of one-time items? And how should we be thinking about that as we progress through the year?

Mike Cotoia, CEO

Our gross margin dropped about 2.5%. We have a significant focus on data quality, which involves hiring third-party resources to cleanse and append data we collect. This is vital for maintaining high-quality data. We will continue investing in this data cleansing, which affects expenses. While we see a decline this quarter, preserving quality is our priority.

Dan Noreck, CFO

Part of the decline is also a function of revenue levels. Q1 is typically our lowest revenue quarter and usually has our lowest gross margin. We’ve invested in data cleansing, but seasonality plays a role too.

Marco Rodriguez, Analyst

Got it. And is there an expectation that those individuals will continue to work through some data cleansing for the remainder of the year? Or are they stopping sometime mid-year?

Mike Cotoia, CEO

We'll monitor efforts throughout the year; we may scale back resources if needed. We take data cleansing seriously, especially since we acquired Oceanos in August 2018 for that focus. We may pull back or increase resources based on revenue growth.

Marco Rodriguez, Analyst

Got it, thanks a lot. Appreciate your time.

Mike Cotoia, CEO

You bet.

Operator, Operator

Our last question will come from Allen Klee with National Securities Corp. Please go ahead.

Allen Klee, Analyst

Yes, hello. A couple of questions on Priority Alert. First off, I think you were planning to implement a price increase at the beginning of the year. If you have any comments on how that's gone? And then you've talked about adding some additional features linking it more to Salesforce.com. Is that still on track? During the quarter, you rolled out a product, Verified MSP Targeting, which uses Priority Engine to focus on the managed services. Is that meant to better target a market you already had, or is it to expand the pie you're going after?

Mike Cotoia, CEO

You're welcome, Allen. In terms of the price increase, we typically don't face pushback when we raise prices in January. The current macro situation hasn’t affected this, and we will continue to enhance features in Priority Engine that justify future price increases. Regarding features in Salesforce, we are moving forward with investments in integration to improve our customers' workflows. We’re planning on an updated version of Priority Engine by the end of summer, with beta testing in mid-summer. Our key focus will be on how to market within accounts and build net new contacts. We're working on improving user interfaces and sales use cases around Priority Engine. The Verified MSP solution aims to monetize a community we had better; it's an extension into a market relevant to our overall growth strategy.

Allen Klee, Analyst

That's very helpful. In early March, you announced the acquisition of Data Science Central. Should we view this as a little tuck-in, or is there a more significant contribution we should anticipate?

Mike Cotoia, CEO

Regarding Data Science Central, consider it an audience play. We weren't focused on revenue or EBITDA but rather on acquiring an audience aligned with machine learning, enterprise AI, and data privacy markets. The acquisition aligns with our theoretical audience on TechTarget, so while it's a small financial tuck-in, it positions us well given market trends.

Allen Klee, Analyst

My last question is just definitional. I forgot—when you talk about adjusted free cash flow, how do you define that?

Dan Noreck, CFO

Adjusted free cash flow means the change in operating cash, less purchases of equipment and other capitalized assets and debt repayment. We disclose this definition in our shareholder letter.

Allen Klee, Analyst

Okay, wonderful. Thank you so much.

Mike Cotoia, CEO

Thanks, Allen.

Dan Noreck, CFO

Thank you.

Operator, Operator

This concludes our Q&A and conference. Thank you for attending today’s presentation. You may now disconnect.