Earnings Call Transcript - TTGT Q4 2020

Operator, Operator

Good afternoon. Welcome to TechTarget 2020 Fourth Quarter and Full Year Financial Results Conference Call. All participants will be in a listen-only mode. 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, Kate, and good afternoon. Joining me here today 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 want to remind everyone on the call of our earnings release. 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.

Gregory Strakosch, Executive Chairman

Great. Thank you, Charlie. We finished the year on a very strong note. Our momentum from 2020 has carried into 2021. We had an extremely busy Q4. We closed two acquisitions and completed a $200 million convertible debt offering. Our results for Q4 2020. Revenue grew 28% to approximately $45.9 million. We recognized approximately $1.2 million from the nine days that we owned BrightTALK. Excluding the BrightTALK revenue contribution, TechTarget revenue grew 24% in the quarter. Adjusted EBITDA grew 53% to approximately $18 million. Adjusted EBITDA margin was 39%, long-term contracts represented 34% of revenue, gross margin was 76%. And adjusted free cash flow was $13.6 million, representing 76% of adjusted EBITDA. I will now open the call to questions.

Operator, Operator

Our first question is from Aaron Kessler from Raymond James. Go ahead.

Aaron Kessler, Analyst

Great. Thanks, guys and congrats on the quarter and the year. Just a couple of questions. First, maybe just in terms of the 2021 guidance, kind of how should we think about maybe the drivers that would lead to more of the high end of the range, kind of what needs to go right? And then maybe on the quarter, maybe it's probably still early, but can you comment on traction with the expanded sales use case of the product? And then maybe just the linearity you saw during Q4, maybe into the early part of Q1 here, just the traction you're seeing as well?

Michael Cotoia, CEO

Hey, Aaron, it's Mike. In terms of the 2021 guidance to get to the high end, obviously, as we've talked about in the past several quarters, we see this early transition—when we're in the early innings of this whole transition for data-driven sales and marketing organizations in enterprise B2B companies to really drive their marketing and sales efforts. We're seeing a quick adoption of that in terms of what we're able to offer on our first-party purchase intent data. We're still seeing those trends shift from face-to-face events, which have obviously been depleted. We don't believe that those will ever come back to pre-COVID levels. So as companies get more adept and inclined to adopt first-party purchase intent data to help fuel sales and marketing organizations, we feel we're in a really good position on that. Remember, our investments start at the content level. We produce the content, we have a registered opt-in audience which creates, first, the largest first-party purchase intent network for enterprise B2B technology marketing and sales to use. You have some macro trends going on in the market in terms of third-party cookies and midstream data that are going to come under scrutiny. So we feel we can execute on that. Obviously, the integration and the work with BrightTALK and ESG, as we work through those, could help accelerate and get to the higher end in the market. In terms of the sales use case, we have a very strong focus on our Priority Engine sales use case. As you know, we launched back in the beginning part of Q4 some modifications which were really significant updates for Priority Engine. Typically, and even now, we still sell into marketing organizations. Marketers take our data. They leverage it for account-based marketing, net new accounts, penetration, and competitive takeout. Now we're seeing a lot of the sales folks, territory managers, and inside sales reps leveraging the data. So we made massive investments to make sure that the data we are supporting and putting into Priority Engine will integrate into their sales workflow more naturally. One of the things that we've worked on was a prospect-level intelligence. So that was a huge launch in October, and we've seen a lot of success with that. Previously, we ranked all of our accounts in Priority Engine based on technology segment and region, and then within those accounts, you would know the active prospects to focus on. Well, reps have a different use case. They want to know who they should call now, and what they should say to those folks at the individual level. So that was a big advancement, and we're seeing a lot of success. Another big advancement was we now have customized entry points. So if somebody is an inside sales rep or works at an account and they want to cover the data protection market, we can now customize entry points to go even deeper than the data protection market, which vendors are they engaged with right now. Are they looking at data backup and protection? Are they looking at asynchronous replication? Now those sales reps have more insights into the individual prospect-buying team member they want to target. Tighter integration into sales force has been a very big focus for us. As we head into 2021, we'll continue that. We want to personalize the Priority Engine sales use case to help guide our sales reps to our customers to know not only who to approach but when to call, to be able to interact on the fly and say, 'By the way, this prospect just engaged with your content. This prospect just visited your website. This prospect is doing something on social media.' So we're really focused on that. We're seeing good traction and a solid use case. Regarding the Q4 to Q1 momentum, we saw a lot of our customers come back, navigating through the COVID pandemic, and we saw a big uptick in our lead-generation efforts. That's been a good thing for us because it has resulted in many net new customers that trust TechTarget because of our audience investment, our registered opt-in members, and our first-party intent. We have a huge focus, as I mentioned last quarter, to transition three- to six-month programs into subscription-based, always-on integrated programs that will be at the foundation of Priority Engine.

Aaron Kessler, Analyst

Got it, great. And then, just finally, international. I didn't see that broken out. Can you provide any color around international numbers for the quarter?

Michael Cotoia, CEO

Yes, the international numbers grew almost 30%, about 29%. We're seeing great success in the international markets. When looking at those international markets, they're typically a little bit behind the U.S. market in terms of data-driven and digital strategies. You see some of these regions that are heavily concentrated in face-to-face events. So this whole digital transformation, which could have been projected to happen over the next two, three, or four years, has been accelerated due to the COVID opportunity. We continue to invest in those markets, and we expect to see solid growth in 2021.

Aaron Kessler, Analyst

Great. Thank you, guys.

Michael Cotoia, CEO

You're welcome.

Operator, Operator

Our next question is from Jason Kreyer from Craig and Hallum. Go ahead.

Jason Kreyer, Analyst

Thank you. Just wanted to ask on the last couple of quarters, we've talked about your customers opting for shorter-duration agreements as opposed to Priority Engine. So wondering if any of that changed in Q4 or early here in Q1. And then maybe you can also elaborate on just as things open up a little bit more, what is the strategy to go back to some of those customers and try to get them into that longer-term subscription?

Michael Cotoia, CEO

Jason, yes, good question. As I mentioned, since March of 2020, when the pandemic hit, a lot of our customers' mindset was we have to hunker down, we want to navigate through this. Especially for smaller customers, we don't want to commit to something new and long-term. Our customers have come to us knowing we have a good relationship with our audience due to our content investments across our 140-plus sites. They have come in to help navigate through this during Q3 and Q4. They’re still navigating some uncertainty with the pandemic, so we're seeing good growth. Our playbook is to stay close to those customers, make sure they understand that all of our intent-led lead-generation programs and other programs are working. We'll walk them through how to transition from that three or six-month to an annual subscription with Priority Engine. Not only with Priority Engine, but also emphasize the value of integrating it with content marketing and contextually aligned branding to surround the buying team members throughout the entire buying journey. That's our playbook on that. We're seeing some good momentum as we head into 2021, with customers that were on 90-day or 180-day programs starting to transition into that longer-term commitment around Priority Engine and integrating it with our content marketing.

Jason Kreyer, Analyst

And you mentioned that prospect-level intelligence just a little bit ago. But wanted to see if you had any updates there as far as how that pipeline has continued to progress over the last few quarters. Any specific feedback you've gotten from some of the early users?

Michael Cotoia, CEO

Yes. The feedback we've received has been extremely positive. Sales reps want to get relevant information into their workflow, so what we provide to them is a very important part of our overall value proposition and use case. However, the data needs to fit into their sales force or any CRM system. Now sales reps have sales-enablement platforms like SalesLoft, Outreach IO, and others. They require a cadence that works with those systems. Our focus is ensuring that we maintain this momentum of sales rep usage, providing those who identify themselves as sales reps through our data access to information relevant to their territories and individual prospect levels in their workflows, whether it's with sales force or a sales-enablement platform. That’s a big focus for us to ensure we continue our tight integration into what works well for sales teams and marketing departments.

Jason Kreyer, Analyst

Perfect. Last one for me. Just on the BrightTALK acquisition specifically. It seems like there's a lot of opportunity for revenue synergies there. Can you talk about how you expect to layer that in and impact the model throughout 2021?

Michael Cotoia, CEO

Yes, great question. We're really excited about the BrightTALK acquisition. First thing I'll say is that many organizations acquire others with a focus on cost synergies. That's not our focus right now. BrightTALK and their team have done an excellent job, and our goal is to help support and accelerate that momentum. There are many low-hanging fruit cross-sell opportunities. Consider what BrightTALK does: they provide not only content to create talks, webinars, videos, and summits, but they also have a registered membership audience. TechTarget, on the other hand, has the combined team purchase intent data and an engaged audience. We'll examine the best opportunities for cross-selling and upselling to our customers initially. Later on, we will look at how to leverage our audiences and the intent data from the BrightTALK platform to integrate it into Priority Engine. We want to drive membership and intent within the BrightTALK community because they have an active and engaged audience. These are the things we are focusing on. In the short term, we are keeping that momentum going. We're engaged with both teams to identify which customers present cross-sell opportunities and provide world-class customer service.

Jason Kreyer, Analyst

All right. Thanks, guys.

Operator, Operator

Our next question is from Eric Martinuzzi from Lake Street. Go ahead.

Eric Martinuzzi, Analyst

Yes. I wanted to make sure I understand the guidance for 2021. So I'm going to refer to that part of the shareholder letter. I noticed you used an upper case adjusted revenue expression. Should we anticipate seeing GAAP revenue plus a non-GAAP adjustment leading to adjusted revenue each quarter throughout the year?

Michael Cotoia, CEO

Eric, I'll have Dan, our CFO, answer that.

Daniel Noreck, CFO

Yes. Eric, you can expect to see that reconciliation done in the future shareholder letters.

Eric Martinuzzi, Analyst

Okay. And that will ripple through to the adjusted EBITDA?

Daniel Noreck, CFO

Correct.

Eric Martinuzzi, Analyst

Okay.

Daniel Noreck, CFO

In the letter, we stated $5 million for Q1 and $11.5 million for the year. That's the current schedule for the deferred revenue that we're under GAAP not allowed to recognize.

Eric Martinuzzi, Analyst

Yes. And from my experience with this, it kind of tapers quarter-by-quarter, with each successive quarter being less than Q1. Is that the correct way to think about it?

Michael Cotoia, CEO

That's a fair assessment on how to look at it, yes.

Eric Martinuzzi, Analyst

Okay. Now, you guys talked about the acquisitions covering a lot of bases. One of the things I looked for was incremental profitability. I see you finished out 2020 with adjusted EBITDA margins in the 34% range. If I do the math on the guidance for 2021, I come up with something less than that. Help me understand that decrease in adjusted EBITDA margin.

Daniel Noreck, CFO

Yes. Both acquired businesses had margins a little lower than TechTarget's. Over time, we believe their margin structure will align with TechTarget. In the meantime, these acquisitions focused on revenue synergies rather than expense synergies, which we have not been able to achieve yet, and we do not have big plans for that. However, some expense synergies may develop over time. For example, this quarter, we're paying three CFOs, which won't be a long-term situation. But if you look out over the next couple of years, you will continue to see margin expansion in line with historical TechTarget margin expansion.

Eric Martinuzzi, Analyst

Okay, that's helpful. And then, I don't know if you can disclose it, but I'm curious to know if we have revenue numbers for either BrightTALK or ESG? I wouldn't expect them to be audited, but any idea on revenue numbers for 2020 for either company?

Daniel Noreck, CFO

We've disclosed a BrightTALK revenue number in the convertible debt offering, approximately $50 million. ESG has not been disclosed and it's not required to be disclosed, so we're not going to for competitive reasons.

Eric Martinuzzi, Analyst

Okay. And lastly, historically, price increases would have happened in Q4 and impacted your long-term contract commitments. What can you tell us about either the percentage of the price increase or what percentage of the Priority Engine customers that revenue kind of impacted? How much more can we benefit from the price increase on the legacy business?

Michael Cotoia, CEO

We implemented a double-digit price increase with additional features and functionalities focused on sales use cases. We've received a lot of positive feedback on that. Organizations are trying to become data-driven in their sales and marketing, and they understand our first-party purchase intent. We don't encounter a lot of pushback on the price, Eric, so we expect that trend to continue. We are also looking at additional features, functionalities, and integrations down the road, so we believe we have pricing power as we move both in the near and long term.

Eric Martinuzzi, Analyst

But as far as, if I look back on 2020, we had revenue of $148 million. I know your price increase doesn't impact 100% of that base. Can you help me understand what percentage of the revenue base is impacted by the price increase?

Michael Cotoia, CEO

Yes. I would estimate that about one-third of the revenue is impacted by that price increase. As you know, customers sign up at different times throughout the year for long-term contracts. If all our customers start in January, you would recognize, even if it were one-third, about one-third of that revenue would be from price increases. Customers sign up in February, March, or later, so you get a pro-rata amount affecting the increase. But I would say a rough estimate is about one-third.

Eric Martinuzzi, Analyst

Okay. All right. Thanks for taking my questions, and congratulations on the very busy Q4.

Michael Cotoia, CEO

Thank you.

Operator, Operator

This concludes our question-and-answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.