Earnings Call Transcript - TTGT Q3 2020

Operator, Operator

Good afternoon and welcome to the TechTarget Q3 Twenty twenty earnings release conference call, all participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by placing the stock followed by zero hours after today's presentation. There will be an opportunity to ask questions. To ask a question, you may press star one on your telephone keypad. To withdraw your question, please press star two. This event is being recorded. I would like to turn the conference over to Mr. Charles Rennick. Please go ahead.

Charles Rennick, General Counsel & Corporate Secretary

Thank you, Ashleigh, and good afternoon. Joining me here today are Greg Strakosch, our executive chairman, Michael Cotoia, our chief executive officer, and Dan, our CFO. Before turning the call over to Greg, I would like to note that some of us are joining you today remotely. I 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 the business, we 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 annual report on Form 10K and our quarterly reports on Form 10-Q 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

Thank you, Charlie. We are seeing a clear acceleration in our business, as evidenced by us beating our guidance in Q3 and forecasting almost 20 percent revenue growth in Q4. For Q3, 2020 revenue grew seven percent to thirty-six point two million. Adjusted EBITDA grew 12 percent to twelve point five million dollars. Adjusted EBITDA margin was thirty-five percent, up from thirty-three percent in Q3 2019. Long-term contracts represented thirty-five percent of revenue in the quarter, and adjusted free cash flow was nine point six million dollars, representing seventy-seven percent of adjusted EBITDA. For Q4 2020, we expect revenues to be between forty-two million and forty-three million dollars, with adjusted EBITDA expected to be between fifteen point six million and sixteen point four million dollars. We are optimistic about the future as we believe we are in the early innings of a very large opportunity as our customers focus on making the strategic transition to making their sales and marketing organizations data-driven. We are cautiously optimistic that the recalibration we are seeing as we close the year will continue into 2021. I will now open the call for questions.

Operator, Operator

Thank you. We will now begin the question and answer session. To ask a question, please press star one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star two. Your first question comes from Jason Kreyer with Craig-Hallum. Please go ahead.

Jason Kreyer, Analyst

Hey, gentlemen, good afternoon. Wondering if you can just spend a little bit of time walking through some of the enhancements that you've pushed out with the new prospecting product, and then is that completely rolled out to everyone or is that more of something that's going to be scaled out over time? And then I guess my follow-up there would be just on the pricing increases that you've implemented. Just wondering if you've gotten any pushback there or if people are seeing the incremental value in the platform.

Mike Cotoia, Chief Executive Officer

Right. Hey, Jason, excuse me. It's Mike. In terms of the new offerings, we're really excited about what we just rolled out for Priority Engine. I would say our September release was the largest update and rollout since the inception of the product. We previously discussed Priority Engine, where we really had a strong focus on working with corporate marketers, who have a very specific use case. One of the things we did in the September rollout was update the user interface, focusing on sales use cases. We've introduced account intelligence where we rank active accounts weekly. This allows our marketers to target accounts effectively, identifying active prospects within those accounts. This enables our sales teams to understand the intent signals that individual prospects send, helping them to rank and prioritize within their own territories. This transition from a marketing-focused tool to a more sales-focused application has been impactful. We have also seen page views within Priority Engine increase by 80 percent since the beginning of the year. Our integration with Salesforce has also improved, allowing sales representatives to easily access this valuable data. We have not had pushback on the pricing so far, which we see as a positive sign going into 2021.

Jason Kreyer, Analyst

Perfect, a lot of good color there. Just one more for me, wondering if you can unpack some of the commentary from the letter. You said that subscriptions offer a more resilient or predictable model in the downturn, but then we've kind of seen, you know, the Priority Engine growth over the last two quarters. So I'm just wondering if you can kind of unpack those two statements and give some more color on that.

Mike Cotoia, Chief Executive Officer

Yeah, OK. I think I want to break that down into two things. When we take a look at the overall enterprise environment, historically, our customers sold traditional hardware. Today, however, our customers are transitioning to a digital-ready environment. This has been beneficial because they are moving away from discretionary spending on singular products to ongoing solutions. This shift provides our customers with better visibility, making their spending less volatile. When it comes to Priority Engine and our business, we've identified a net new customer acquisition focus where smaller customers may be hesitant to commit long term due to current market conditions. We have been seeing significant increases in lead generation, which provides us with opportunities to transition those customers into long-term subscriptions once clarity returns to the market.

Jason Kreyer, Analyst

Got it. Thanks for all the color. Much appreciated.

Operator, Operator

The next question comes from Ryan Meyers with Straight Capital Partners. Please go ahead.

Ryan Meyers, Analyst

Hi, guys. Thanks for taking my question. So revenue came in above your guidance. So my first question is, what would you attribute most of that revenue to? Is it higher than expected spend from a global top 10 or any color? There would be helpful.

Mike Cotoia, Chief Executive Officer

Yeah, so we break it down. We saw a slight increase quarter-over-quarter in our global top 10 clients, although they are down about 15 percent from previous years. However, all other customers are up 17 percent and 11 percent respectively. The growth in international efforts continues to accelerate, and we're significantly benefiting from the increased digital focus of our clients. We are seeing a transition as customers move face-to-face event budgets into online and digital solutions, which is enhancing our revenue. Our lead generation campaigns in these markets are a robust area of growth, especially as we continue capturing new customers.

Ryan Meyers, Analyst

Okay, that's helpful. And then last one for me, so you said in today's prepared remarks that you continue to see smaller customers hesitant to commit to the longer contracts. Have you seen any sequential improvement in this area?

Mike Cotoia, Chief Executive Officer

Yeah, I would say it remains largely the same. If you look back to Q2, a lot of companies froze as they reassessed budgets. However, we're beginning to see those customers recognize that they need to stay in front of their prospects and customers. Some have started to sign up for long-term deals, but our strategy remains to capture them in the interim through shorter-term options and transition them into long-term subscriptions down the line.

Operator, Operator

Your next question comes from Monica Rodriguez with Stonegate Capital Markets. Please go ahead.

Monica Rodriguez, Analyst

Good afternoon, guys. Thank you for taking my questions. I wanted to see what your thoughts were in terms of the guidance and the impact of parts of Europe that seem to be kind of getting ready to go down into some form of a lockdown again. How are you thinking about that and in particular impacting Q4?

Mike Cotoia, Chief Executive Officer

Right, thanks, Monica. We experienced this scenario in Q2, where we had lockdowns across the globe. Currently, as cases rise in Europe, we see that our customers who had previously allocated budgets for face-to-face events still need to engage with their customers digitally. Overall, we still have healthy projections for Q4, although some uncertainty remains.

Monica Rodriguez, Analyst

And then how should we think about that international business as it relates to the mix of your offerings there, whether it's the movement from event to digital priority engine and kind of branding? How should we be thinking about that?

Mike Cotoia, Chief Executive Officer

Yeah, I would say the international markets are still lagging behind the U.S. in terms of technology adoption. However, the pandemic situation is accelerating these transitions across the board, forcing companies to rethink their event versus digital strategies. We are well-positioned as we help companies shift from event-driven campaigns to more integrated online solutions. This long-term strategy looks promising, although there is still some uncertainty in the short term.

Monica Rodriguez, Analyst

And last quick question, kind of a high-level question here. One of your competitors recently announced an acquisition of a company that provides a high-powered buyer and data solution. Can you share your thoughts on that technology and how you might be thinking about this from a competitor standpoint?

Mike Cotoia, Chief Executive Officer

That competitor did acquire a small company that was a previous supplier. While I think it's a smart move on their part, it does not change our offering. We focus on providing real-time purchase intent signals to our clients through our extensive content network. Our approach emphasizes transparency, so our clients know exactly who the buyers are and their interactions with our content. This level of detail helps drive effective marketing strategies for our clients.

Operator, Operator

Your next question comes from Aaron Kessler with Raymond James. Please go ahead.

Aaron Kessler, Analyst

Great, thanks for the questions. First, just on the Q4 revenue guidance, we've been hearing about seventeen to nineteen percent growth. Obviously, that's a big acceleration from Q3. Can you expand a little bit on this? How much of this might be the shift from events that you talked about, price increases, and sales offering normalization?

Mike Cotoia, Chief Executive Officer

Yeah. I think definitely some of it is being driven by the shift from events to online, especially in international markets. There is also pent-up budget spending as our reps maintain close relationships with customers throughout the pandemic. We've been having fruitful conversations about leveraging end-of-year budgets for digital marketing solutions. Our clients trust us to effectively reach their prospects online, which should result in a nice uptick in revenue as the year wraps up.

Aaron Kessler, Analyst

Got it. Okay, great. Just a quick question on the additional sales features that you've added to Priority Engine. How should we think about how much this expands the TAM, and is there a go-to-market strategy to try to expand your relationships with the businesses? Any color on how many salespeople were using this versus marketing people previously as well.

Mike Cotoia, Chief Executive Officer

In terms of expanding the Total Addressable Market, we have a strong focus on the marketing side, but there is significant opportunity in sales as well. Our integration with Salesforce and training for sales teams within our customers are critical to success. We’ve seen a forty percent increase in sales professionals using the platform since the September release, and that trend is promising. Expanding these relationships will provide opportunities for bringing an even broader audience into our offerings over time.

Aaron Kessler, Analyst

Right. Just quickly, in the shareholder letter, you mentioned that Priority Engine views increased by 80 percent since the beginning of the year. Is that a market acceleration from what you're seeing maybe in 2019?

Mike Cotoia, Chief Executive Officer

Yes, the increase we have seen in page views since the beginning of the year indicates heightened engagement with the platform, particularly following our recent updates. This year has seen strong interactive growth with more diverse use cases being employed by our customers. We prioritize making the platform a part of their workflows, which should sustain our growth moving forward.

Operator, Operator

Again, if you have a question, please press star one. Your next question comes from Allen Cleeve with National Securities. Please go ahead.

Allen Cleeve, Analyst

Good evening. I wanted to focus on looking at Q3 versus Q4. What are your thoughts on a few things related to that? One, with the international segment, I heard you say that there's more people buying, but they're not buying Priority Engine as much. It's more other of your products. How do we gain confidence that that’s sustainable? Also, with your global top 10 customers, you noted that they’re up sequentially in Q3, and that you expect them to be up for Q4. Does that mean you expect them to be up year over year?

Mike Cotoia, Chief Executive Officer

Yes, the international business is really doing well, and we're seeing growth in both Priority Engine and lead generation. While individual customers may fluctuate, we plan to leverage every opportunity, especially as we continue to capture net new customers. For our global top 10, we expect both sequential and year-over-year growth in Q4. We've worked hard on diversifying our customer base to mitigate risk in case of any pullbacks, and we feel good about our current positioning.

Allen Cleeve, Analyst

Thank you. I heard you say that you thought the price increase from Priority Engine would be realized mainly in 2021 and 2022. Did the price increase come mostly in September, or will it be rolled out over time with different customers?

Mike Cotoia, Chief Executive Officer

The price increase will take effect as customers renew or sign up for new annual subscriptions. While we might see some recognition of these increases before year-end, most will come in 2021 as we enter the new fiscal year. The pricing strategy is part of our overall growth plan as we look to maximize value for our offerings.

Operator, Operator

Thank you for attending today's presentation. You may now disconnect.