Earnings Call Transcript - TTGT Q2 2022

Operator, Operator

Good morning, and welcome to today's TechTarget Reports Second Quarter 2022 Conference Call and Webcast. My name is Candice, and I will be your moderator for today's call. I would now like to pass the conference over to our host, Charlie Rennick, General Counsel. Please go ahead.

Charlie Rennick, General Counsel

Thank you, Candice; and good morning. Joining me here today are Greg Strakosch, our Executive Chairman; Mike Cotoia, our CEO; and Dan Noreck, our CFO. 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 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

Thank you, Charlie. Good morning. We are pleased to report we exceeded our revenue forecast and adjusted EBITDA forecast in Q2, and achieved a 43% adjusted EBITDA margin in the quarter. In addition, we are reaffirming our annual revenue and adjusted EBITDA guidance today. For Q2 2022, GAAP revenue grew 24% to approximately $78.9 million, adjusted revenue grew 19% to approximately $79.4 million. Net income was approximately $12.4 million, an increase of 142%, adjusted EBITDA grew 33% to $33.8 million, net income margin was 16%, adjusted EBITDA margin was 43%. GAAP gross margin was 74%, adjusted gross margin was 77%. Longer-term revenue grew 24% to $32.8 million, representing 41% of total revenue. Cash flow from operations was $20.9 million. Free cash flow was $17.3 million. I will now open the call to questions.

Operator, Operator

Our first question comes from Justin Patterson of KeyBanc. Your line is now open. Please go ahead.

Justin Patterson, Analyst

Great. Thank you very much and good morning. I was hoping you could talk about just some of the trends you're seeing from customers so far. Obviously a very strong quarter, more recurring revenue these days, enterprise IT is different, but I'd love to hear anything about just trends you saw throughout the quarter and what you're seeing quarter-to-date. Thank you.

Mike Cotoia, CEO

Great. Justin, yes, first of all, thanks for the compliment. I'm proud of the team and also grateful to our customers, who continue to modernize their sales and marketing departments with a focus on high-quality first-party purchase intent data solutions. In terms of the trends, we've seen strong growth, as we reported in the numbers for Q2, as Greg just mentioned in the introduction, across all of our purchase intent lead data solutions. We also understand that we can't ignore the noise about the economy. We all see the high interest rates, inflation, consumer confidence, everyone talking about whether we're in a recession or not in a recession. So I think it's pretty safe to say that many customers are probably spending more time scrutinizing their budgets. We have some customers that might extend some of their sales cycles as they expand and navigate through this macro. But on the other hand, we have other customers that are very opportunistic and aggressive with incremental investments, wanting to take advantage of this volatility to gain market share. So it's hard to really put a blanket statement on these sets of customers. What I will say is that over the last couple of years, we have seen customers spending a lot of money trying new tactics or solutions in the market. I think as the market tightens and becomes a bit more volatile, those investments will be highly scrutinized. Customers who really want to focus on quality and ROI will find that TechTarget solutions hold up pretty well based on our first-party purchase intent data, as well as our permission-based audience members. We do discuss the trends in the Shareholder Letter. The IT environment remains fairly healthy. Furthermore, the other three trends involve modernizing sales and marketing departments focusing on data and automation, sensitivity to privacy regulations, which is advantageous for us given our permission-based members, and the ongoing transition of budgets from face-to-face events to online channels for improved measurement, scale, and efficiencies. These trends are not as economically sensitive, and I believe they will continue to bode well in the long term. So in summary, we have a mix of customer behaviors, some being aggressive, while others are scrutinizing their budgets. We certainly do not wish for a recession, but based on the quality of our data and our audience, we are better positioned than most.

Operator, Operator

Thank you. Our next question comes from the line of Aaron Kessler of Raymond James. Your line is now open. Please go ahead.

Aaron Kessler, Analyst

Thank you and congrats on the quarter. First, just on the Priority Engine made for sales teams, if we can get an update there, just kind of what type of traction you're seeing with this product? Also just, obviously, a lot of companies have reported somewhat lower brand advertising budgets, but I'm curious about what you're witnessing on the brand advertising side of the business as well in this environment? Thank you.

Mike Cotoia, CEO

Sure. In terms of the Priority Engine sales use case, that was a major focus heading into 2022. Historically, we have focused on marketing buyers who use it for their ABM strategy, nurturing strategy, and building on their new account and prospect databases. For the sales strategy, we've witnessed really good traction. The information that marketers have is important for sales use cases. We are very focused on territory management, ensuring that we provide the right prospect-level intelligence. When customers use it for their sales cases, they begin leveraging the reps to use Priority Engine. We successfully engage with the representatives—whether they are BDRs, SDRs, inside sales, or outside sales—to train them on how to use the data effectively. We are seeing good adoption regarding how to utilize data, the accounts in their territories they should focus on, and which individual prospects within those accounts they should contact. This is made possible because they have all the research information at their fingertips, including insights into which competitors are influencing those accounts and key entry points of research. We're focused on enhancing our training capabilities, investing heavily in customer success and sales enablement to empower the reps to leverage the data optimally. We are also prioritizing tighter bidirectional integration into Salesforce and other sales and marketing technologies. We expect continued traction as we integrate our data into our customers' Salesforce workflows. Regarding the brand side, one advantage we hold is first-party data, where our branding or ad revenue is high quality and of high value, which also comes at a premium price. We have seen continued momentum on the brand side; you may observe some accounts pulling back a bit on brand spending while focusing more on data and demand generation. However, our brand revenues have fared well and are growing. The anticipated elimination of third-party cookies by Google will bring additional attention to our offerings, encouraging customers to evaluate their brand strategies. Lastly, branding represents a very small portion—10% or less—of our overall TechTarget revenue.

Greg Strakosch, Executive Chairman

Yes. I would just add in that branding is 10% of revenue or less. The second point I would add is that the B2B branding world is very different from the B2C branding world. The business models are essentially opposites; consumer branding often deals with unlimited web inventory at low prices. In the B2B landscape, especially in IT, we benefit from a scarcity of inventory. There is a finite number of $1 million purchases happening at any moment. In the big picture, we are dealing with low quantity and very high-quality premium pricing. Therefore, we are insulated compared to consumer brands, and our branding numbers in Q2 showed very healthy growth.

Operator, Operator

Thank you. Our next question comes from the line of Bhavin Shah of Deutsche Bank. Your line is now open. Please go ahead.

Unidentified Analyst, Analyst

Good morning. Thanks. This is Dan on for Bhavin. I wanted to just touch quickly on the guidance regarding the macroeconomic environment. I know you mentioned some deal cycles elongating or perhaps greater scrutiny on deal cycles. It’s encouraging to see you reaffirm the full-year revenue guidance. Could you help us understand what's embedded in that guidance concerning the continuation of these trends or additional conservatism that you have factored in, should the macro situation worsen incrementally throughout the rest of the year?

Mike Cotoia, CEO

Yes, good question. We're closely monitoring the overall macroeconomic conditions. We have many conversations with our customers. As I mentioned earlier, some customers might extend their budget scrutiny. However, there are still many customers who are opportunistic and accelerating their spending. As I indicated earlier, this is not a one-size-fits-all situation at the moment. We are considering various factors and understand that changes can happen quickly, whether positive or negative. Over the past six months, there has been a prevailing sentiment about a potential recession, which influences customer behavior. When people talk about a recession, they start scrutinizing every aspect of their budgets. So we will observe how things turn out, and while there could be some negative impacts, there may also be some positive changes. We provide guidance based on our historical performance against our guidance, and we believe reaffirming our annual guidance for the year is appropriate.

Operator, Operator

Thank you. Jason, please go ahead.

Jason Kreyer, Analyst

Okay. Thank you. So, I have two questions. Firstly, any commentary on international markets? I know we've heard that Europe has been a tough market recently, but it seems you have bucked that trend this quarter. Any commentary there? Secondly, can you share any usage rates around video or webinars? As face-to-face events return, I worry that people might utilize video less. Do you have any metrics to validate increased usage on that platform?

Mike Cotoia, CEO

Right. Jason, on the international side, there was healthy growth in the quarter. Regarding the secular trends, particularly around privacy regulations such as GDPR and other European privacy laws, this works favorably for us both in the short and long term due to our permission-based audience members. Additionally, we recognize that international markets are likely somewhat behind North America in transitioning to online and data-driven approaches. Hence, we are focused on long-term secular trends that benefit both us and our customers. Moreover, it is true that before COVID, face-to-face events were heavily concentrated, but many switched to online formats during the pandemic. We are currently witnessing a short-term rebound in face-to-face events; however, as the market tightens, companies are moving towards digital transformation, leveraging online data-driven tactics for improved scalability, measurability, and ROI, which is advantageous for us. It is important to note that there are some short-term headwinds, particularly in EMEA, where we face tighter economic conditions due to macro inflation and geopolitical issues like the war in Ukraine. While there remains some hesitancy, we are still experiencing good growth overall. As for usage rates, we do not specifically track video and webinar usage against face-to-face events. Nonetheless, we have observed a rise in face-to-face events, even though many technology buyers are less enthusiastic about attending trade shows than vendors. Ultimately, we believe that although face-to-face events may see an uptick, today's buyers prefer conducting research and making decisions using online resources at their own pace. Therefore, we see a long-term opportunity for TechTarget in focusing on buyers who are comfortable leveraging data in their purchasing processes.

Greg Strakosch, Executive Chairman

We've noticed that the events held recently have been relatively poorly attended, especially when compared to pre-COVID levels. The trend shows that many buyers prefer to conduct their research as independently as possible, in contrast to the traditional face-to-face event model. While the $1 million purchasers will require engagement, they prefer to delay vendor interactions until as late in the purchasing process as they can. We do not perceive this shift towards face-to-face events as a threat to our business. Over the long term, we expect the business model to continue to decline, much like it was before the pandemic.

Operator, Operator

Thank you. Our next question comes from the line of Joshua Reilly of Needham & Co. Please go ahead.

Joshua Reilly, Analyst

Thanks, guys, for taking my questions and nice job on the quarter here. If you look at your mix of customers, it has shifted significantly towards cloud vendors, who, as we know, have raised a substantial amount of capital in the past five years and generally possess large net cash balances. Do you perceive this as a buffer against potential macro weakness, especially compared to prior downturns where exposure to larger global IT vendors exhibited more sensitivity to the strong dollar?

Mike Cotoia, CEO

Yes, Joshua, I believe that the current customer segmentations give us a competitive edge. The predominant trend encompasses significant IT spending and investments towards cloud and SaaS solutions. Today's IT departments are essential for businesses. In previous downturns, if you sold hardware like servers or storage systems, businesses could delay their purchases. However, modern IT infrastructure is crucial. Companies recognize that investing in technology constitutes a competitive advantage, which is essential for their operations. Hence, we feel positive about our customer segmentation and expect this trend to persist.

Greg Strakosch, Executive Chairman

Yes. Additionally, these companies are financially robust. Their business models are subscription-based, which differs from prior available data. We are witnessing stable subscription revenues throughout economic downturns. While it may be more difficult to secure new deals, existing revenue bases remain steady. Technology companies are continuously pressed to generate revenue, irrespective of economic conditions. Given stable revenues and the pressure to generate new revenue, we believe that companies will maintain investments in offerings like ours, which facilitate improved sales productivity through purchase intent data. We are convinced that our services are in a favorable position across various economic environments.

Joshua Reilly, Analyst

Okay. Great. I have two more quick questions. First, what are your thoughts on Priority Engine price increases this year? It seems you made several price increases in the last few years, yet they don't seem to match the innovations you've delivered. Secondly, are there revenue synergies between TechTarget and BrightTALK materializing as you expected? Thanks, guys.

Mike Cotoia, CEO

Regarding potential price increases for Priority Engine this year, we will assess that as we approach 2023. Currently, our priority is to expand our sales use case. This is the first year we have initiated charging a seat license for additional sales representatives. Our teams are committed to ensuring that sales reps leveraging Priority Engine derive maximum value from the tool. As we continue to achieve that goal, we should be able to sell additional seat licenses, which has not been done previously. Therefore, we will evaluate pricing adjustments at the end of the year. Regarding revenue synergies, we have achieved favorable outcomes, not solely in collaboration with BrightTALK and TechTarget but also with ESG, BrightTALK, and TechTarget. We have been adept at introducing each of our opportunities to other teams across the organization. Today, we possess various avenues for engagement with clients, whether web-based, video-based, text-based, or data-driven. Our representatives are well-equipped to identify and address customer pain points collaboratively with their resources across the organization.

Operator, Operator

Okay. Thank you. Our next question comes from the line of Bryan Bergin of Cowen. Your line is now open. Please go ahead.

Zach Ajzenman, Analyst

Hi. Thanks. This is Zach Ajzenman on for Brian. A couple of questions both on Priority Engine. The first one is, what was the growth in the quarter and is the expectation for the year still high-teens to 20%?

Mike Cotoia, CEO

The growth in the quarter was 20%. Yes, we are still maintaining our overall expectations for growth.

Zach Ajzenman, Analyst

Got it. As a follow-up on Priority Engine, how should we approach macro sensitivity here? We understand that there are structural tailwinds with increased utilization of data and insights during the sales and marketing process, but do you believe some clients might become more conservative amid macro uncertainties given the pricing and longer-term nature of the service?

Mike Cotoia, CEO

Yes, clients who grasp the value of not just any intent data but first-party purchase intent data, evaluating it at both the account and individual prospect level bring significant value. In challenging environments, IT companies must enhance revenue and market share, and if the market contracts, finding deals will be even harder due to their scarcity. Therefore, having a competitive advantage to identify and prioritize such opportunities should be beneficial. I have stated this in prior quarters: Priority Engine serves as a catalyst for all our first-party purchase intent data solutions. We can present the data on Priority Engine to clients—if they are not ready to make a long-term commitment, we align seamlessly with other offerings we provide, such as content enablement services and demand generation campaigns. It is vital to acknowledge that our products—all driven by first-party purchase intent—serve as a strong foundation for establishing connections and tailoring the right solutions for clients based on their immediate needs.

Operator, Operator

Thank you. Our next question comes from the line of Eric Martinuzzi of Lake Street. Your line is now open. Please go ahead.

Eric Martinuzzi, Analyst

Yes, I wanted to focus on the cost structure. The 77% adjusted gross margin was in line with my expectations, but could you remind us what your cost of revenue consists of and discuss any inflationary impacts on those costs?

Mike Cotoia, CEO

The cost of revenue primarily consists of salaries and headcount expenses related to our content producers. Dan, what else do we need to address?

Dan Noreck, CFO

It's mainly the cost associated with salaries and workforce.

Mike Cotoia, CEO

Regarding inflation impacts, we are all experiencing challenges, particularly with employee-related costs. It is indeed a competitive job market; we completed mid-year compensation reviews and strive to be as competitive as possible to reward our top performers. We are making targeted hires in key investment areas. In May and June, you will see a full cycle come to fruition, primarily aimed at enhancing our product development, engineering, customer success, and product marketing efforts. While salaries may be slightly higher than two years ago, we continue to make sound investments with our star employees across the various functions.

Eric Martinuzzi, Analyst

So, you are experiencing wage inflation, yet your retention rates are in line with historical norms?

Mike Cotoia, CEO

Yes, we are pressured with retention but are pleased with where we stand. Although wage inflation is present, we are effectively managing the business, as evidenced by our 43% EBITDA margin. We aim for balanced investments in the business while meeting our financial responsibilities.

Eric Martinuzzi, Analyst

Lastly, you mentioned gaining market share, with organic growth rates being one avenue for growth. What is the level of M&A activity you are seeing? Are there any near-term prospects given that valuations appear to be decreasing, or do you view it as a longer-term opportunity for share gain?

Mike Cotoia, CEO

We are evaluating several factors, including our cash reserves, which we secured through the convertible debt option in December, with a 0% coupon. We engage in ongoing discussions regarding M&A, focusing on a few aspects: their alignment with our content model, their fit within our permission-based audience model, and whether they can bolster our first-party purchase intent offerings. While we grasp that valuations are moving, particularly in private markets, the adjustments often take longer to manifest. Therefore, we are starting to see valuations align more closely with current public market conditions. Those discussions will continue, but it is crucial they benefit both buyers and sellers. We remain actively engaged in these conversations, and we will continue our buyback initiatives, which have historically benefited our shareholders. We aim to leverage our strong free cash flow to manage upcoming convertible debts in 2025 and 2026.

Operator, Operator

Thank you. Ladies and gentlemen, thank you for joining us on the TechTarget report second-quarter 2022 conference call and webcast. Have a great day ahead. You may now disconnect your lines.