Earnings Call Transcript - TTGT Q4 2022

Operator, Operator

Hello and welcome to the TechTarget Reports Fourth Quarter and Full Year 2022 Financial Results Conference Call and Webcast. My name is Lauren, and I will be coordinating your call today. I will now hand you over to your host, Charlie Rennick, General Counsel, to begin. Charlie, please go ahead.

Charles Rennick, General Counsel

Thank you, Lauren, and good morning. Joining me today are Greg Strakosch, our Executive Chairman; Mike Cotoia, our CEO; 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 our business in advance of the call, we posted our shareholder letter on the Investor Relations section of our website and furnished it on a Form 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 these forward-looking statements. Forward-looking statements involve a number of risks and uncertainties, including those discussed in the Risk Factors section of our filing 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 effort, accompanies our shareholder letter. With that, I'll turn the call over to Greg.

Gregory Strakosch, Executive Chairman

Great. Thank you, Charlie. For the full year 2022, GAAP revenue grew 13% to approximately $297.5 million; adjusted revenue grew 9% to approximately $299.2 million. Net income was approximately $41.6 million, an increase of 4,285%; adjusted EBITDA grew 16% to $122.4 million; net income margin was 14%; adjusted EBITDA margin was 41%. GAAP gross margin was 74%; adjusted gross margin was 77%. Longer-term revenue grew 18% to $123.5 million, representing 41% of total revenue. Cash flow from operations was $90.7 million; free cash flow was $76.7 million. For Q4 2022, GAAP revenue was approximately $73 million, a decrease of 5%; adjusted revenue decreased 7% to approximately $73 million. Net income was approximately $7.2 million, an increase of 145%; adjusted EBITDA decreased 9% to $29.5 million. Net income margin was 10%; adjusted EBITDA margin was 40%. GAAP gross margin was 73%; adjusted gross margin was 76%. Longer-term revenue grew 5% to $29 million, representing 40% of revenue. Cash flow from operations was $19.8 million; free cash flow was $16.6 million. I will now open the call to questions.

Operator, Operator

Our first question is from Justin Patterson from KeyBanc.

Justin Patterson, Analyst

Two, if I can. First, just with respect to the macro environment, you've been through cycles before. So could you give some context on just how the current environment compares to past periods of anxiety and elongated sales cycles that you've seen? And how long do you think that could last and pressure some of the KPIs that you said deteriorated a bit in Q4? And then secondarily, I just wanted to talk about efficiency. I saw the head count reduction in there. You alluded to some other potential savings on excess office space. So kind of walk through what savings is contemplated in the guide today and where you think you have some further opportunities over the course of the year.

Michael Cotoia, CEO

Great. Yes, Justin, regarding the macro cycles, we've witnessed significant and rapid layoffs across many companies recently. We began to notice these trends shortly after our Q3 earnings call in November, but it became particularly noticeable from mid-December onward, with deep and widespread cuts. Historically, I don't recall such substantial and swift reductions occurring in previous cycles. There's a behavioral aspect where when companies reduce headcount, they often become hesitant to allocate budgets, leading to quick decisions to conserve resources. Our brands are observing discussions with customers, partners, and even competitors indicating that Q4 performance deteriorated, particularly at the end of December, making it worse than Q3. As a result, Q1 has started slowly due to this behavior. This situation is likely to prolong sales cycles, as well as budget reviews and approvals. Regarding efficiency, we reduced our workforce by about 5% in December. As we move into this year, we've implemented a 90-day hiring freeze and a budgeting freeze, allowing only essential business travel for customer and employee engagement. We are also evaluating our office space, including potential leases and subleasing. We believe we are in a strong position; it's crucial to remain opportunistic about key priorities, as we've historically benefited from this approach, allowing us to capture market share through strategic investments. Therefore, we've adjusted our overall EBITDA margin guidance to 35%. While we believe we could have maintained it at 40%, opting for a lower margin aligns better with our short-term strategy to leverage current opportunities for long-term growth. The trends we've discussed over the past three years remain consistent. Our customers need to modernize their sales and marketing departments and are keen on utilizing first-party data. Access to genuine first-party data, both at the account and individual prospect levels, is essential for our customers.

Operator, Operator

Our next question is from Aaron Kessler from Raymond James.

Aaron Kessler, Analyst

Maybe a couple of questions on kind of the guidance as well. Just in terms of kind of the reduction in spend, is that kind of across all client types, all sizes? And second, any product areas you would call out specifically where you see more pressures, more in the advertising side versus Priority Engine, et cetera?

Michael Cotoia, CEO

Yes. We're seeing reductions across all customer bases, from SMB, mid-market to enterprise. Like I mentioned in the previous answer, it's been really quick, really wide, and really deep. We've seen this across the board. I think customers are trying to reset their costs, manage their budget, and figure out what's going on. I've seen probably the highest level of uncertainty than I've seen in previous downturns. In terms of product mix, yes, we actually see a mix in product spending and product mix. The first thing that will absolutely get pulled back is brand marketing. We've talked about this in the past; it's less than 10% of our overall business, really hard to measure for companies, and they pull that back. When markets get better, that's probably one of the first things they come back on, and they will increase their brand investments on that side. We also see a reallocation. We'll find that some long-term contracts, which might be on Priority Engine, might get reallocated to short-term product needs. We have qualified sales opportunity (HQL)-type products where our customers are trying to win any deal that they can see right now, and they want to have more from the funnel-type product mix that they can use. I've talked to some customers who allocated for appointment setting for the short term. What I would say on that is it's really important for customers to manage their pipeline because this is what we typically see. Customers will retreat, leverage their own data right now, and try to orchestrate it in a very organized way. They are looking at a pipeline that they appear to be healthy, but if that pipeline doesn't progress over the next quarter or two and it doesn't progress into closed deals, they realize that they still have numbers to hit. They have to quickly build that pipeline back up. Historically, and we've predicted this will happen again, there's a quick flight back to quality. Our first-party intent data, not only at the account level but at the prospect level, is the quickest path and the truest path to our company's next deal as well as our customers' opportunities to land the next deal.

Aaron Kessler, Analyst

Got it. Great. Can you provide more detail about the investments in the Content Enablement Services and the Content to Close concept?

Michael Cotoia, CEO

Yes. We believe that this is still a really good growth area, and we're seeing that part of the business continue to grow. We talked about the dynamics and demographics of today's buyer. Today's buyer, we've seen in multiple studies and in our own research, a majority of those buyers want a rep-less experience when they're dealing with their next purchase or opportunity. What does that mean? They want to engage with relevant information, relevant content, project-based content that really helps guide them without having to take a call from a sales rep. We made the acquisition of ESG a couple of years ago, and we really focused on ensuring that our customers have a good content experience that helps them position their product and overall company's value proposition against the competitive set. Particularly in times like this, there's economic validation; why should you be buying my solution right now in a downturn? Our customers are really craving that, saying we need to make sure we take advantage of the downturn to capture market share as well. So that's all part of this end-to-end Content to Close concept: helping our customers build, create, and execute the right content and messaging strategy, putting that content into the right executable programs to engage the right buyers, and then helping prioritize those buyers and accounts back into their sales force through our Priority Engine and other platforms that we can help them close more deals quickly.

Operator, Operator

Our next question is from Joshua Reilly from Needham.

Joshua Reilly, Analyst

The Q1 guidance implies below normal seasonal trends that typically include a sequential decline in revenue of roughly 10%. What does this imply for the normal seasonal pattern for the business in 2023, where Q2 and Q4 are typically your strongest quarters? Do you still expect that dynamic to play out in 2023 just off of an overall lower revenue base, implying that revenue should improve sequentially in Q2?

Michael Cotoia, CEO

Yes. Good question, Joshua. Based on what we see right now, the pattern should stay pretty consistent. In Q1, as you see, it's lower than our normal seasonality. That's because, as we talked about earlier, the end of December and the start of January, we're seeing a lot of customers really trying to navigate their budgets and their cost cutting, and obviously, that's in light of massive layoffs we've seen. But we expect Q2 to grow. Q3 would be relatively consistent with Q2, maybe slightly up, and then Q4 would be our biggest quarter. Comparing this year's numbers to last year's comps, we still believe that pattern will hold for 2023.

Joshua Reilly, Analyst

Got it. That's super helpful. And then if you look at the customer additions of 539 in 2022, that's a really strong and impressive number. Given the lower outlook here for 2023, does the slower spending include these new customers that you just brought on in the last year, spending less as well? Or can you give us any color on either the profile of the customers that you added in terms of technology vertical or size? And how are they going to spend in terms of your expectations this year?

Michael Cotoia, CEO

We have added new customers across all segments, including many small customers, some mid-sized ones, and a few larger clients. This acquisition occurred throughout 2022, and we are currently evaluating our guidance based on our knowledge and observations of market behavior. These new customers will face decisions regarding their budgets, managing expenses, and assessing their pipelines. We are confident that many will remain with us; however, some may reduce their spending or delay it. Our experience during past downturns indicates that when customer pipelines stall, they tend to rely more on their existing data and resources, which often leads them to favor quality solutions. The timing of this shift is uncertain. In the past month and a half, the market has experienced substantial changes, including frequent announcements of significant layoffs, which we anticipate will influence 2023.

Operator, Operator

Our next question is from Zack Ajzenman from Cowen.

Zack Ajzenman, Analyst

First question on guidance and visibility. Just curious about the macro considerations that you're embedding for the calendar '23 outlook. And what's the underlying Priority Engine growth assumption?

Michael Cotoia, CEO

I think the macro considerations that we're taking today reflect current reality. We are taking a close look at everything we've seen in the last 30 to 45 days, and that's what we've incorporated into our guidance. It's moved quickly in the last 45 days, as you can see from the announcements regarding the depth and breadth of cuts. We can only predict based on what we know and what we are experiencing right now. In terms of Priority Engine, I expect that to slow down this year because that's a commitment to long-term contracts. We’ve seen that in the past where people might slow it down. We might see a deceleration in revenue for the first couple of quarters on that. When things turn around, on both the business side and the product development side, we expect to see a pickup after navigating through that. So I think you will see it decline a bit during the year. We've observed customer behaviors at the end of December and the beginning of January, and that's really what underpins our analysis now.

Zack Ajzenman, Analyst

Understood. And then a follow-up on the same customer sales metric. It stood at 100% in 2022, which was roughly flattish. Can you provide a sense of where this metric stood after the first nine months of the year? I'm trying to gauge what changed in Q4 concerning the same customer sales metric and what the assumption embedded is for same customer sales in the 2023 outlook.

Michael Cotoia, CEO

We only disclose that on an annual basis. When we started providing these numbers two or three years ago, we decided on the annual basis. So we don’t disclose it on a quarterly basis. I will say, however, that there will be some pressure on that number in 2023. We monitor it closely, although it’s not disclosed each quarter, I just want to emphasize that there will be a bit of pressure given current customer behavior and the pullback on short-term budgets.

Operator, Operator

Our next question is from Bhavin Shah from Deutsche Bank.

Bhavin Shah, Analyst

Just one quick inquiry in terms of the different products you guys have. Completely understanding that brand marketing can shift quickly depending on the macro, but what trends are you seeing in solutions such as Priority Engine? Are customers being proactive here and maybe reducing spend as they're reducing headcount? Or is that something they might look to do upon renewal?

Michael Cotoia, CEO

Bhavin, I think you cut out for a bit. But regarding the brand piece and the Priority Engine, we're seeing some customers delay their renewals because they don't want to commit to the annual or multi-year deals. We’re seeing a shift on some of those, on the product shift from Priority Engine to some of our qualified sales opportunities (HQL) products because, again, customers will look at it. They have significant pressure to land the current pipeline. They want as much information as possible to help land those deals and identify new opportunities to close them within the next 30 to 45 days. We will continue to observe some of those shifts. I mentioned earlier that we've heard from some customers saying they are putting a lot of stuff on hold right now. They plan to come back in one or two quarters, and they're looking at appointment setting to see some short-term numbers. Not acting on that approach can severely impact your pipeline, and it's crucial to think beyond the immediate 30 or 90-day period. Customers might reallocate their budget, and we have several customers that want to stay with us concerning buying the content marketing, content syndication, and qualified sales opportunities. However, you will see a shift over the next quarter or two concerning tight or reduced budgets, leading to reallocations to immediate returns on investment. We have seen these patterns before, and eventually, the quality focus swings back. Customers will want to find where their prospects are when they’re not with them. The research available on the TechTarget sites and related communities, which our editorial and analyst teams produce, will once again prove valuable.

Bhavin Shah, Analyst

Got it. Super helpful. Just one quick follow-up. In terms of what you mentioned regarding content on your websites, what are traffic trends or changes in registered users looking like? Have you seen a decline as enterprises seem less inclined to make IT purchases, or are you seeing that remain stable?

Michael Cotoia, CEO

It's actually the opposite. We have experienced significant growth, with our organic traffic increasing by 50% year-over-year. This suggests that our customers and their prospects are using our sites for information. These deals may be extended or have longer timelines, similar to what we observe with our customers. They are actively researching because they recognize the importance of making the right technology choices at the right time, and they are utilizing our sites for that purpose. This increase is reflected in our Google Search rankings, where we rank first on Page 1 for 1.2 million search terms. The activity we’re observing supports the idea that both your prospects and existing customers are researching through TechTarget. This 50% organic growth in traffic and the 1.2 million key terms ranked on Page 1 demonstrate our relevance.

Bhavin Shah, Analyst

Got it. Super helpful. Just a quick clarification. That 50%, that’s an annual number. Any way to think about just what that trajectory looked like in Q4 or even what you're seeing in January?

Michael Cotoia, CEO

We report it year-over-year. So that 50% was an increase from last Q1 in 2022, which indicates still positive trends.

Operator, Operator

Our next question is from Jason Kreyer from Craig-Hallum.

Jason Kreyer, Analyst

Just wondering, any comments on churn related to long-term contracts? I'm curious about the extent to which those are being paused or if there are any instances of outright cancellations.

Michael Cotoia, CEO

Yes. Jason, some contracts are being delayed. A few are being canceled at the beginning of the year due to budget cuts we've observed. Some contracts are getting reallocated to other products, while we still see ongoing purchases of long-term contracts. However, I think it comes down to the uncertainty we've seen in the last 45 days. It's a unique time frame; I've not seen such a sudden and dramatic shift within 45 days in the enterprise tech sector. This volatility makes predicting customer behavior with long-term contracts around Priority Engine particularly challenging.

Jason Kreyer, Analyst

In past recoveries, I know you guys have been really successful gaining share. It sounds like you're leaning into that opportunity now. Just curious about specifically what you can do or what are the key areas of investment that you think position you for more share gain on the other end of this kind of macro uncertainty.

Michael Cotoia, CEO

Yes. There are three areas that we are really focused on. Number one is the Content Enablement business, and we want to ensure we're investing in the right resources and functionality to serve our customers who need purpose-built, relevant, and impactful content. Without the right content, we will not engage with buyers efficiently. Many enterprise tech buyers are savvy; nearly 50% of them prefer a rep-less experience when engaging with vendors. We need rich, detailed, and relevant technical information such as ROI and TCO to engage effectively with them. We are committed to investing in this segment now. We've reallocated teams and technologies focusing on Content Enablement. We have a solid opportunity with our Priority Engine platform regarding integration into our customers' workflow. We have increased our development resources by over 40% in the last seven months, emphasizing better integration, automation, visualization, and attribution using our first-party data coupled with our customer data to enhance insights at both account and prospect levels. We are also focusing on enhancements for our BrightTALK channel platform. Our customers need to remain close to existing customers for retention and seek new deals. By leveraging episodic content through a webinar platform, we can keep them engaged while boosting conversion rates and providing insights, integrating that into our overall capabilities to assist them. These are the three key areas where we are concentrating to gain market share. You've followed us for a long time; when we've faced a dip, we typically act wisely, manage our cost structure, and seize opportunities, allowing us to emerge stronger on the other side.

Operator, Operator

Our final question comes from Eric Martinuzzi from Lake Street.

Eric Martinuzzi, Analyst

I wanted to get a little more detail on the geographic commentary. You talked about in Q4, EU up 9%; U.S. up 3%. Just as we look at Q1 and your guidance for a revenue decline of about 16%, how is that weighted between the geographies?

Michael Cotoia, CEO

We don't disclose how that's weighted, but I would tell you, Eric, that the international markets are in slightly worse shape than North America. We've seen that. You've noticed the news regarding EMEA over the last few quarters; it has been coming, and they’re feeling the impact more. I think North America will hold up a little better than the international markets, but the overall ratios should remain consistent.

Eric Martinuzzi, Analyst

Okay. And then the same issues in both geographies, the elongated sales cycles, budget cuts, and freezes?

Michael Cotoia, CEO

Absolutely. For those with regional budgets, they are still feeling the effects. Many regional field marketers, sales teams, and marketers are receiving directives from corporate offices, predominantly in North America, to cut back quickly. They will await the green light to resume. Ultimately, it all reverts to pipeline management, the progression of the pipeline, and the impact of their actions, followed by a flight back to quality. It doesn't matter if it’s a quarter or two; it will occur, and we are aware of that. Following this, the focus on quality will return, as will the haste to accelerate pipeline growth since they still have targets to meet across all regions.

Eric Martinuzzi, Analyst

Got it. Lastly, regarding the buyback. You announced a $200 million buyback in November 2022. That plan assumed, I believe, $100 million of free cash flow in 2023. Given the reduction in outlook for 2023, are we going to approach the buyback less aggressively? And what is the new free cash flow expectation for 2023?

Michael Cotoia, CEO

Regarding the buyback, we intend to remain aggressive and adhere to the plan we outlined. Historically, our buybacks have been very beneficial for shareholders and the overall organization. We’ve repurchased nearly 40% of our shares at attractive prices. We maintain a positive outlook on the business future and the potential we can achieve. In terms of free cash flow, I can't comment specifically, but you can make assumptions based on last year's numbers and this year's guidance to estimate our free cash flow.

Operator, Operator

Thank you. We have no further questions. This concludes today's call. Thank you for joining. You may now disconnect your lines.