Earnings Call Transcript - TTGT Q1 2023

Operator, Operator

Good afternoon, ladies and gentlemen, and thank you for attending today's TechTarget Report First Quarter 2023 Financial Results Conference Call. My name is Danielle, and I will be the moderator for today's call. All lines will be muted during the presentation portion of today’s call, with an opportunity for questions and answers at the end. It is now my pleasure to hand the conference over to our host, Charlie Rennick, General Counsel. You may proceed, Charlie.

Charlie Rennick, General Counsel

Thank you, Danielle, and good afternoon. Joining me here today are Greg Strakosch, our Executive Chairman; Michael Cotoia, our Chief Executive Officer; and Dan Noreck, our Chief Financial Officer. Before turning the call over to Greg, 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 our business in advance of the call, 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, 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 filings 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 efforts accompanies our shareholder letter. With that, I'll turn the call over to Greg.

Greg Strakosch, Executive Chairman

Great. Thanks, Charlie. GAAP revenue was approximately $57.1 million, a decrease of 16%. Adjusted EBITDA was approximately $17.6 million, which is 31% of revenues. Longer-term revenue was 41% of total revenue. Free cash flow was $14.7 million, which represents 26% of growth. The technology market continues to be besieged by weak demand, widespread layoffs, and budget costs. If that wasn't challenging enough, the leading technology bank failed in the quarter, which we believe increased negative sentiment among our customers. Our results reflect this challenging macro environment. I will now open the call to questions.

Justin Patterson, Analyst

Great. Thank you very much. Two, if I can. First, in the letter, you teased out some of your thoughts on AI a bit. I'm curious, when do you think we can start seeing some of the benefits from AI flowing into the business? And just kind of frame some of the investments that you're making into it right now. And then secondarily, just thinking about EBITDA guidance for the year, you noted that reinvestment is one of the few areas you can’t control in this market right now. How should we think about just the guardrails around annual EBITDA guidance? Thank you.

Michael Cotoia, CEO

Great. Justin, this is Mike. In terms of the AI benefits and framework around some of our AI initiatives, we've been working with AI technology for quite some time, but we see an opportunity in the business. We recently announced the appointment of Paul to run our AI strategy. And we see several key areas that we'll see opportunities to help really accelerate the business. And I think it's important to note that there's a lot of announcements right now around AI. And what you're going to see is a lot of content being disseminated across the entire web, very thin content, not really specific addressing current concerns and needs. So there's going to be, call it, content dilution, and that's going to be out there in the market. But for publishers and strategic content providers like TechTarget, we believe it's a competitive advantage. We have a lot of insights, relevant insights, relevant content, that we supply to technology buyers to help them do their research day in and day out. So we've been in business for 25 years, coming up next year, providing technology buyers really strong content to help them when they're doing their research. Out of the content that we've invested in, we've extracted and we've been able to maintain and gather really valuable insights at the buying level, at the account level. And so what we see is the opportunity to help our customers act upon the insights that we can deliver, a, in the product portfolio and the product suite. So as you know, for years, we've been at the mercy of our customers to act upon the data and the deliveries that we provided to them in their campaigns. But now we'll be able to have a very strategic, insightful next steps to help them action and trigger very specific email outreach, phone conversations, and in content strategies. As you know, our content enablement business is a very strong opportunity for us, and it's something that we've made some investments in around ESG and BrightTalk and TechTarget together. We have the content provided from our editorial and the analyst side. Well, also, our customers need to have an effective content strategy and be able to leverage that content strategy from our capabilities and pilot with AI as well and will help them provide that effective content strategy to engage with those buyers. And we've talked about this before, that buying key demographic continues to change. I think we mentioned this in our last earnings call that over 50% of technology buyers wanted a seamless experience, which means they really rely on content to make all decisions about six, seven, eight-figure acquisitions. They can't be fooled by thin, broad-based, irrelevant content that's not recent and relevant. So being able to help our customers tie in those insights to help power and empower their content strategy will be an effective place for us as a publisher and as a community with proprietary first-party data insights. So we're excited about that opportunity. In terms of EBITDA margin for the year, it's really important. We understand that the technology market is really challenged right now. I think you can see that through all the announcements on the layoffs and budget cuts; it's just throughout. And then you tack on the collapse of Silicon Valley Bank that had over 30,000 customers, all technology-focused, many of them VC-backed, so it's challenging on that front. But in terms of EBITDA, we still need to make sure that we've managed downturns in the past. We have a very effective playbook, and we believe there's still a really good opportunity to make the right investments in the right areas, one of which I just mentioned around AI. We can talk about some other areas we have in the call around some of the product enhancements and what we're doing. So we want to make sure that we're being opportunistic. We will manage our discretionary spending like we have as part of our playbook for 24 years, and we will do a good job on that. We have a track record on that. In terms of margins, we're assuming about a 30% EBITDA margin going forward. That’s the right ballpark to assume with the updated guidance and the go-forward strategy.

Justin Patterson, Analyst

Great. Thank you, Mike.

Rob Morelli, Analyst

Hi, this is Rob Marelli on for Josh. Thanks for taking the question. Continuing on with the topic of Silicon Valley Bank, how should we think about the impact from SVB influencing confidence among your customer base? And then can you remind us of the exposure to venture-backed startups? And have things improved subsequent to the quarter-end on trends with these customers? Thanks.

Michael Cotoia, CEO

Yes, great question. In terms of Silicon Valley Bank, as you know, they were 100% focused on the enterprise-type market. And many of the customers they serve, which I believe is over 30,000, were VC-backed firms. Our business has evolved nicely over the last several years in terms of our customer segmentation. If you look at our business 10 years ago, close to 40% of our business was guided through the top 10 global accounts. And today, that's below 20%. We have 3,000 customers, and our customer base spans across all sizes and segments on the enterprise B2B side. The economy, and by that I mean the technology-specific macro environment, was challenging as it was. We noted that in Q4, we started in Q1; there are no surprises on that. You can see by the layoffs and the budget cuts, which continue into Q2. The collapse of Silicon Valley Bank added another amount of uncertainty and jitteriness to the market. So if you can imagine the customers we serve, we have a good size of our customer base that serves those smaller VC-backed software-based organizations. They went through a very challenging period. There's a lot of uncertainty and hesitation here. I don't think you see a lot of the VCs right now ready to hand over another check; they want to ensure these companies are making the right decisions regarding expenses, discretionary spending, and making line item cuts. As we are a premium player in the market and always want to strive to be that premium player because of our content investment and first-party purchase intent data, those line items get scrutinized across all segments of our customer base, including the VC-backed firms. So we believe that this caused a negative result to the economy, and I think we've all seen that through everything you've read and observed in the technology landscape. So we're dealing with that and working with our customers to navigate these challenges. I would also say that we talk about the enterprise tech market, which is indeed the strongest performance sector right now, and it is likely the most sound long-term sector in the market. If you talk to 100 investors, I think 100 out of 100 would say the long-term outlook of the enterprise B2B tech sector is very strong and something they would invest in. So that's important for us. So yes, we're managing through a downturn in the market. Our business is 100% aligned to enterprise B2B tech, so we are experiencing that pain. I think others we talk to probably feel it a bit worse as well. But when that market turns around, we also capture the upside, and that's why we're making those investments I mentioned earlier.

Rob Morelli, Analyst

Got it. Thanks. And then, as you kind of mentioned, there are layoffs within the tech industry. Have you started to see some of those impact land as new opportunities? And have they started bringing you guys in as they were champions of your products at their last jobs in sales and marketing? Thanks.

Michael Cotoia, CEO

Well, some of those people are still looking for jobs, so that makes it very challenging. And then the people who’ve stayed at the company and weren't caught in the layoffs are very hesitant. Again, this whole environment of uncertainty makes everyone cautious about spending, even the budget that they have. So you might see some pickups in some pockets, but the mood is very focused on uncertainty. That said, we have really good relationships and a strong brand recognition with our customers. Typically, if someone does get laid off and goes to another customer, and this has happened, they will call us to bring us in. And I can tell you, that is happening. The thing that you just want to ensure is that some of those people haven't landed jobs yet; they're still looking. The folks that have remained in their jobs, that weren't part of the layoffs, are very hesitant to make that additional spend or investment right now, until we see more clarity and visibility into their jobs and the market.

Bryan Bergin, Analyst

Hi, guys. Good afternoon. Thank you. I wanted to ask a question on the outlook and kind of your visibility to it. I'm curious, can you comment on the macro assumptions that you've embedded here in the outlook through the second half of this year? Just any insights around your current visibility relative to where you typically would be at this point of the year? And I guess, how much in that '23 outlook is so signed versus a qualified pipeline or work you have to go get still? Thanks.

Michael Cotoia, CEO

Yes. Thanks, Bryan. As we look at Q2, and as you mentioned, the second half, we evaluate what we have booked right now. We have visibility into it. We analyze all those dynamics. We're also taking into account the current environment and the behavior that we're seeing with customers. Now, if that turns more positive, yes, there could be some upside in those numbers. But every time that we think there’s going to be improvement, as noted, nobody counted on the collapse of Silicon Valley Bank, right? They were 100% aligned to the enterprise tech space. We are also 100% aligned to the enterprise tech space, and we see that. In terms of conversations we're having and insights for the second half of the year, typically, you've seen that Q1 and Q3 are pretty even, while Q2 and Q4 ramp up. However, right now, it’s very hard to determine where we’ll be six months out as a lot of our guidance reflects what we see now, as it changes quickly. But over the last five to six months, the consistency of the tech market pullback hasn’t changed, so it's challenging for me to provide a clear timeline as to when things will get better.

Bryan Bergin, Analyst

Okay. No, understood. It makes complete sense. And then just a follow-up. The shareholder letter talks about new product capabilities for Priority Engine. So I think it’s focused on some integrations with other platforms and related workflows. Can you just kind of tease that out a bit more regarding what you're working on there?

Michael Cotoia, CEO

Yes, absolutely. We’ll be making some announcements over the next month and a half to two months in terms of what we're doing. Let me provide some feedback on the ongoing developments. A lot of our focus is on tech-enabled integrations that will allow our customers to leverage our proprietary first-party intent data at both the prospect and account levels. This is not just within their CRM and marketing automation platform but also within other platforms, whether it’s homegrown solutions or third-party integrations that power other sales and marketing campaigns. It's essential we ensure our customers have access to our proprietary data, whether in the Priority Engine platform or other applications they utilize for their marketing. We will also be releasing features that will enhance Priority Engine as a direct workflow tool, including improved email alerts that will help sales and marketing with precise and timely information on what actions they can take. For example, being able to inform a marketing team that a specific organization was on their website and what pages they visited can trigger appropriate workflows for targeting those organizations with relevant messaging. This is crucial for marketing and sales teams, not only to recognize activities but also to engage with potential buyers effectively. We've talked about our tighter Salesforce integration within our customers' CRM around marketing automation with bidirectional data analysis and workflow as well. Why we’re emphasizing this is to ensure we’re closely tied to opportunity data, which we can identify prior to opportunities arising in our customers' Salesforce systems. After an opportunity is created, we can also show how we've accelerated that opportunity right in front of our customer sales and marketing departments. This information will provide meaningful metrics for our customers. Finally, we’re enhancing our visualization tools around talent activity dashboards and timelines to show our customers the effectiveness of their investments in TechTarget. In summary, our product investments will enable customers to leverage data across their platforms, boost usage, and see results as well as attribution and ROI. Those are our three focus areas for Priority Engine.

Bryan Bergin, Analyst

Okay. I appreciate all the detail on that. Just a follow-up on it: are you at a point where you can leverage the investments you've made here potentially into next year regarding margin?

Michael Cotoia, CEO

Yes. Our goal is to make these investments now, particularly in a downturn economy where everyone is facing challenges; some worse than others. By focusing on product and content strategy investments, especially now, we expect these actions to help us improve our long-term growth margins. The enterprise B2B tech market remains strong in the long term and we believe that modernizing sales and marketing departments will greatly expand our margin opportunities going forward.

Bruce Goldfarb, Analyst

Hi, thanks for taking my call. Just a question: in the shareholder letter, you highlighted strategic investments. Are there certain technologies or areas that you have sort of a shopping list for your targeting?

Michael Cotoia, CEO

In terms of investments, what we discussed previously regarding investments in the Priority Engine platform and capabilities around integrations, usage, and tracking ROI is one of them, Bruce. We're also seeing concentrated investments in our content and content enablement services. The business trends indicate that today’s buyers, specifically enterprise B2B technology buyers, prefer spending less time interacting with sales reps and vendors, and want more time to research relevant content on their terms. Therefore, making sure we have the right content to attract those buyers while helping our customers develop an effective and thoughtful content strategy through investments with ESG, BrightTALK, and TechTarget is key. Furthermore, leveraging the insights we've talked about regarding our AI capabilities will help accelerate our customers' access to relevant content that will engage with buyers at the right time. Vendors lacking a robust content strategy will miss out, as technology buyers prefer trusted information. We also continually evaluate our M&A capabilities and prospects across content, data, and technology-enabled audiences, and we will continue to work in that area.

Bruce Goldfarb, Analyst

Great. Thank you. And then how would you compare same customer sales metrics, sort of on a same-store sales basis, for this year versus last year?

Michael Cotoia, CEO

Well, what we do is we disclose that on an annual basis. So that was in our February numbers, and we will report on that next February as well. So we do it on an annual basis.

Jacob Staffel, Analyst

This is Jacob on for Kash. Thanks for taking the question. I'm a little late to the party, so I apologize if this has been touched on already. I wanted to address the growing use and implications of generative AI, especially as its use cases have become more apparent. Are there implications for TechTarget? Are you implementing it into your product offerings? And how do you view it as a competitive differentiator or something that might close the moat of what TechTarget offers? Can you provide any insights around that?

Michael Cotoia, CEO

Yes, absolutely, Jack. Yes, we brought this up earlier, but I'm happy to readdress this. Regarding AI, we've leveraged AI in our workflows and investments for several years. Companies like TechTarget, publishers of relevant, thoughtful content and origination of content, actually have a competitive advantage in this market right now. Yes, there are other content providers out there who may employ quick strategies to gain attention; however, that’s not our focus. We believe publishers with a longstanding commitment to quality and thoughtful content and who attract a highly engaged audience have a powerful competitive edge. Leveraging our first-party purchase intent insights will help our customers, as we will embed those insights into our products. For example, we’ve traditionally relied on customers to utilize our data effectively, but we can now leverage our insights to provide actionable recommendations. We can inform a sales rep specifically regarding engagement with a buyer based on very personal insights. It is crucial to provide relevant, insightful information as technology buyers invest significant amounts in their purchases. We possess the relevant data and speaking to our customers’ needs within their workflows will lead to mutual benefits. This will also accelerate our content enablement services; our customers need a content strategy that works on marketing, product marketing, and field marketing sides. We can help generate personalized, targeted content for technology buying teams effectively. Trustworthy sources of content will prevail, and we maintain a strong reputation in that space.

Jacob Staffel, Analyst

Okay. I guess just a quick follow-up from my perspective: if a customer can perhaps more easily generate their own unique content using generative AI and related technologies, does that sort of phase out the business area that TechTarget operates in? How should we be thinking about that, if that makes sense?

Michael Cotoia, CEO

Customers are not publishers of content; they produce technology. We don't have the insights into 29 million up professionals looking for the most relevant and specific content around 100 market segments while also pairing that up with vendor content and peer-to-peer content. Our BrightTALK community actively engages with audiences that no one else could reach effectively. As a result, you cannot fool technology buyers; they seek relevant, authentic, and trustworthy content. Therefore, strategic publishers and content providers that invest in high-quality independent content will thrive in this space.

Operator, Operator

There are currently no additional questions registered at this time. So that will conclude our Q&A and today's call. Thank you for participating. You will now disconnect your lines.