Earnings Call Transcript - TTGT Q2 2021

Operator, Operator

Good day and welcome to the TechTarget Second Quarter 2021 Earnings Release Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Charlie Rennick, General Counsel. Please go ahead.

Charlie Rennick, General Counsel

Thank you, and good afternoon. Joining me here today are Greg Strakosch, our Executive Chairman; Mike 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 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. Forward-looking statements involve a number of risks and uncertainties, including those discussed in the Risk Factors sections of our filings with the SEC. The company 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. 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 will turn the call over to Greg.

Greg Strakosch, Executive Chairman

Thank you, Charlie. We continue to enjoy positive momentum from multiple tailwinds, which is translating into broad-based strength across all products, customer segments, and geographies. Revenue grew over 80% in the quarter year-over-year. We are growing faster than we originally forecasted and today, we are raising our annual forecast for the second time this year. The revised upward range is included in our shareholder letter that we released today. Also today, we are announcing the acquisition of Xtelligent Healthcare Media, which is a natural extension into an important adjacent vertical technology market. I will now open the call to questions.

Operator, Operator

And the first question comes from Aaron Kessler with Raymond James. Please go ahead.

Aaron Kessler, Analyst

Hey, thanks, guys, and congrats on the nice upside. A couple of questions. First, any insights you can give us – I didn’t see it in the shareholder letter, maybe it’s in the 10-Q, North America versus international performance? And then maybe on the Xtelligent acquisition, if you can talk a little bit about the monetization plans? I think you said you're kind of plugging that into your platform, but just a little bit more detail on how you maybe integrating that given it’s kind of a different vertical within healthcare? Thank you.

Mike Cotoia, CEO

Great. Thanks, Aaron. This is Mike. Thanks for the question. Across the globe, both in North America and international, we saw outpaced performance than we had originally guided to. The real tailwinds that we talked about in the shareholder letter and the momentum in the industry: one, the transition from face-to-face events. On the international side, face-to-face events were pretty dominant in the market pre-COVID. A lot of field marketing dollars were being allocated to face-to-face events, and that has shifted quickly and that’s going to continue to move to digital, always-on, and first-party purchase intent data-driven. There are also a lot of privacy regulations and compliance across the globe, but particularly on the international side. Having an opt-in permission-based audience through our own registration, through our own content vehicles, our customers really see the value in that, and that value continues to increase. Google’s announcement of eliminating third-party cookies has really brought a spotlight on this, again, to enhance the privacy concerns and the opt-in and people wanting to deal and engage with first-party content. I would say that we have seen really good growth across all of our products, so our demand generation as well as our Priority Engine numbers. Priority Engine grew 20% year-over-year, across the customer segmentation, our Global 10 as well as all others and again across all the geographies. Regarding your second question on the Xtelligent side, this acquisition checked all the boxes: original content, opt-in permission-based members, and a large amount of first-party purchase intent data. We see the opportunity right now to monetize our purchase intent data into our Priority Engine subscriptions. I would expect that we will be rolling out new segments in this market, where healthcare intersects with IT, software, and hardware. We have a really good untapped opportunity right now to grow that first-party purchase intent data that Xtelligent brings with the acquisition.

Aaron Kessler, Analyst

Got it. Great, thank you.

Operator, Operator

The next question comes from Joshua Reilly with Needham. Please go ahead.

Joshua Reilly, Analyst

Hey, guys. Thanks for taking my questions. Congrats on the strong quarter. So I think if you look at the strong increase in the guidance for the second half of the year here, how much of that is balanced between the Xtelligent acquisition, the core TechTarget business kind of outperforming, or maybe even greater strength than you anticipated in BrightTALK?

Mike Cotoia, CEO

Thanks, Josh. In terms of the Xtelligent side, it really doesn’t factor into this guidance that we are doing. At the beginning of the year, we provided some guidance because we are operating and reporting under one number. BrightTALK and TechTarget are selling to the same customers, same accounts. We have very similar offerings. They complement each other, but we are reporting on one number. We originally gave modeling guidance of 20% growth for BrightTALK and you have the numbers from last year and low to mid-teens growth in TechTarget organically. We are just seeing us accelerate across those original guidance or forecast measures. We are seeing that across all the product sides. Priority Engine, which was single-digit growth last year at this time, is now 20% growth in demand generation. So that’s where we are seeing the growth based on what we originally forecasted.

Joshua Reilly, Analyst

Okay, great. And then just a follow-up on Google delaying the third-party cookies removal from Chrome for a year. My sense is that’s not going to cause any direct loss of business in the near-term. But did you have any pipeline building from customers that were looking to switch their intent data providers that are maybe going to reevaluate the timeline of when they were going to make the change? Thanks.

Mike Cotoia, CEO

Yes, great question. First of all, we see this as a very strong competitive advantage, and Google delaying it a year we see that as okay, because customers really need to plan what their overall marketing strategy is going to be around intent data using third-party cookies versus first-party cookies. I would say, it has shown a bright spotlight on this topic. We are having a lot of conversations with customers, and they will continue to migrate from the use of third-party cookies to first-party purchase intent data, contextually relevant and aligned marketing programs, and that bodes well for us over the next year to 1.5 years until it fully transitions. Hello?

Joshua Reilly, Analyst

Thank you.

Mike Cotoia, CEO

You’re welcome.

Operator, Operator

And the next question comes from Bryan Bergin with Cowen. Please go ahead.

Zack Ajzenman, Analyst

Hi, thanks. This is Zack Ajzenman on for Bryan. A couple of questions. First on Priority Engine, certainly, it seems like the trajectory is stronger than what was contemplated last quarter when there was guidance on 15% growth in the second half. Can you maybe give us some more color on expectations for the second half? And then on that note, maybe talk a little bit about Priority Engine Express and an update on sales adoption there and any data points you can share as it relates to progress on Express?

Mike Cotoia, CEO

Great. Yes, Zack. If you look at our Priority Engine, we saw a lot of pullback in terms of customers committing to long-term contracts when we entered into the COVID arena. But what customers started quickly doing was shifting their face-to-face event budget to demand generation, content syndication. They wanted really tight contextual alignment with relevant active opt-in first-party members. As we grew the demand generation list of clients and revenue throughout Q3 and Q4 of 2020 and then throughout the first half of 2021, one of our playbooks was to engage with those customers, make sure they are seeing value and the ROI from their demand generation efforts and investments with TechTarget and slowly migrate them into longer-term subscriptions, annual subscriptions being powered by Priority Engine. When we spoke back in May, we expected this to be 15% plus growth. We exceeded that. Our customers are doing the migrations from shorter-term demand generation to more integrated long-term subscriptions. In terms of the second half, I expect it to be very similar in terms of numbers and pretty consistent with what we have seen in Q2, high-teens to 20%. I would also say that not all of our customers are back in terms of migrating from short-term demand generation programs to longer-term subscriptions, so we are very bullish in the second half on that and we continue to execute and do well against the playbook. In terms of Priority Engine Express, as we mentioned, we are very early in the launch of Priority Engine Express. We’ve seen some good momentum. On a percentage wise, it’s very high. In overall dollar amount, it’s still building its base in terms of customer revenue and insertion order count. So we are really bullish about that, but it’s really confirming that we have a good opportunity in that SMB market that are really focused on sales use cases, a lot of those small companies do not have elaborate, sophisticated marketing teams or marketing systems, but they all have inside sales force, inside sales reps, outside reps and they really want to identify which accounts and which contacts within those accounts that they should be mobilizing and prioritizing their sales efforts against.

Zack Ajzenman, Analyst

That’s helpful. Thanks. And just a follow-up, looking at the P&L, operating leverage this quarter was pretty impressive. Actually, SG&A and product dev were essentially flat quarter-over-quarter, looks like on an absolute basis. How should we think about investments here going forward in just leverage? I know, you gave some guardrails on guidance in Q3 and Q4 kind of back into things, looks like Q3 will stay flat and Q4 expenses might pick up a bit. Can you just talk a little more broadly about leveraging the model and how should we think about this going forward?

Greg Strakosch, Executive Chairman

Yes. So, this is Greg. OpEx will go up gradually in the second half versus the first half. About half of our employee base gets reviewed on compensation increases in July and about half are in January, so that will increase some response. But in terms of long-term operating leverage, it’s a great model. There is very little incremental cost of sales, so it’s a model where most incremental revenue on a gross basis drops to the bottom line. We target at least a 50% incremental to EBITDA margin. This allows us to reinvest half the incremental revenue. So, it’s a model where we can reinvest at a healthy rate and expand margins at the same time. What you see in this quarter and will see this year is consistent with what you've seen with us for the past several years and what you can expect to see going forward. As we continue to scale revenue, 40% adjusted EBITDA margins are what we expect in the near term. Long-term, as we scale the revenue, we believe that 50% adjusted EBITDA margins are achievable.

Zack Ajzenman, Analyst

Great. Thank you.

Operator, Operator

The next question comes from Patrick Colville with Deutsche Bank. Please go ahead.

Unidentified Analyst, Analyst

Great. Thanks so much. This is someone on for Patrick. Congrats on the strong performance in the quarter. Michael, in your shareholder letter, you mentioned that some early cross-selling efforts with BrightTALK are going well. Can you elaborate on this a bit? Where are you seeing some success today and what remains on the product side to drive additional revenue synergies?

Mike Cotoia, CEO

Right. Yes, in terms of the cross-selling efforts, as I mentioned, the acquisition of BrightTALK made complete sense for all the reasons that we talked about earlier: content, the audience, and the first-party purchase intent data. More importantly, the complementary product offerings. They focus on webinars, videos, and talks. They create a platform where customers can generate their own content, promote it, as well as create a demand generation system engine within that platform. Our reps – and we’re all one organization, but our reps are walking the BrightTALK reps into accounts where they are spending with TechTarget but might not be spending with BrightTALK at a material level. The BrightTALK reps continue to do a great job of walking TechTarget reps into those accounts that are spending on the BrightTALK product but maybe not as heavily on the TechTarget solutions. There is a huge high value factor from customers. They want to ensure they have the right mix of media, content, and vehicles to engage with active buyers throughout the entire research process, and this combination is working well. It’s working in North America. We’re doing it throughout EMEA, and we’re rolling this out in APJ as well. We’ve seen good success. What was – I’m sorry, what was the second question you had on the product side?

Unidentified Analyst, Analyst

Is there anything left on the product side to really drive additional synergies in terms of any new product features that you need to come out with?

Mike Cotoia, CEO

Yes, very good. So there are a lot of synergies on the product side that we are looking at in the short-term as well as the long-term strategic product roadmap. Again, BrightTALK has just launched their BrightTALK Central platform, which I would refer to as an all-inclusive content creation and demand gen vehicle for the marketers. We obviously have our Priority Engine platform that works across marketing and sales. Recently, we announced in Priority Engine that we are integrating account level intelligence from the BrightTALK members into Priority Engine. We did this really to focus on a sales use case, and what that has been able to accomplish in the short-term has allowed our customers' sales force to have double, on average, 2x the amount of accounts that are active within their respective territories that they can engage with. Now, you have more reps within our accounts, calling on more accounts with a near territory that have active first-party purchase intent signals, which creates larger engagement and consumption model of the TechTarget data and the BrightTALK data coming together. We are keeping that on the account level right now. We are working on future roadmap strategies in terms of the platform, as I mentioned, from the Priority Engine as well as BrightTALK Central. Teams are working closely together, and we are really excited about both short- and long-term on that.

Unidentified Analyst, Analyst

Got it. That’s super helpful. And that segues nicely to my second question. Can you maybe just talk a little bit about the sales use case within some of your larger customers of Priority Engine? How has adoption been thus far relative to your expectations? Any data points that you can provide just to highlight some of the adoption you’ve seen thus far?

Greg Strakosch, Executive Chairman

Yes, that’s a good question.

Mike Cotoia, CEO

Use case is going well. Historically, this has been a marketing-focused use case platform where marketers would have insights into the accounts and the active prospects at the account level, by segment and by geography. Marketers that are looking to mobilize against an account-based marketing strategy want to increase their database. Sales represents a different use case, so we rolled out our prospect-level intelligence at the beginning of this year, where sales reps, if you think about their cadence, will come in, do a call blitz, and have a territory that they call into. Now, it enables them to rank at the individual prospect level who is most likely to be prioritized first. If I’m a rep coming on Monday morning doing a call blitz, I might have an active prospect identified in account A as number one to call into, followed by account B as number two versus just focusing on individual account level. This enables sales reps to customize and personalize their individual outreach, whether it’s email or phone conversation when they reach out to that individual buying team member, and that has seen really good adoption. We’ve seen sales uses increase by 2x, and we are focused on both the sales use case and the marketing use case, including features and functionalities on our next rollout or revision, which will come in the latter part of the year, in the fourth quarter.

Unidentified Analyst, Analyst

Got it. Super helpful. Last quick one, if I could squeeze in. Long-term revenue mix down-ticked slightly from Q1. Is there anything of note impacting the mix here or was it just strong performance on some of the managing side of the business?

Mike Cotoia, CEO

It’s two things. The overall number grew materially quarter-over-quarter, and if you look at the overall revenue dollars associated with the long-term revenue, they were up double-digits quarter-over-quarter.

Greg Strakosch, Executive Chairman

So it’s just really that the percentage is a little lower because the revenue was so much higher.

Unidentified Analyst, Analyst

Makes sense. Congrats again, guys.

Mike Cotoia, CEO

Thank you.

Operator, Operator

The next question comes from Greg Burns with Sidoti & Co. Please go ahead.

Greg Burns, Analyst

Good afternoon. What was Xtelligent’s trailing 12-month revenues and EBITDA?

Mike Cotoia, CEO

Greg, we don’t report that for disclosure reasons. I can tell you it’s – the main focus of this acquisition was on the content, the opt-in audience and the untapped monetization of first-party purchase intent data. In the press release, we mentioned that the CEO of Xtelligent is a former TechTarget employee. He spent 11 years here, focused on our member and audience acquisition methods and process. The focus on this number – the focus on this acquisition was around the content, the audience, and the ability to monetize productivity. We try to avoid any bid process, so what we see is value, again, around content, audience, and first-party purchase intent data. We try to keep that really close to the vest. This did not meet any materiality thresholds. We didn’t have to disclose it, but we also want to ensure we keep a competitive advantage, so our competitors aren’t seeing how we are trying to value potential organizations and we want to make sure it’s fair to our investors.

Greg Burns, Analyst

Okay. And was the healthcare IT vertical something that you had your eye on for a while? Are there any other kind of niche technology verticals that might be able to do the same thing, kind of plug them into your platform and expand the monetization opportunities?

Mike Cotoia, CEO

Yes, great question. In terms of the healthcare IT vertical, this is a vertical that we’ve been keeping our eye on for a couple of years, and the adjacent vertical where healthcare intersects with IT and infrastructure, security, hardware, and software just made all the sense in the world to us. We believe it’s going to open the door to new customers and opportunities. As I mentioned earlier, we have an untapped revenue opportunity with Priority Engine and bringing our purchase intent data onto the Xtelligent community. In terms of other verticals, there are some other adjacent verticals that are interesting and that we’re keeping an eye on. Even BrightTALK, when we acquired BrightTALK. They have some audience and verticals in the FinTech space, asset management space, so those are definitely something that we’re keeping an eye on now and moving forward.

Greg Burns, Analyst

Okay, great. Thank you.

Mike Cotoia, CEO

Yes.

Operator, Operator

The next question comes from Eric Martinuzzi with Lake Street Capital Markets.

Unidentified Analyst, Analyst

This is Kevin on for Eric. Thanks for taking my questions. Just on the acquisition, and I know you just touched on it briefly in the last question, but could you give us a little more color in terms of was this one of the larger players for content and audience in the healthcare IT vertical, or was it kind of the quality of the stuff they are putting out there? I know you had a relationship with the Founder and stuff, but what really maybe size up the market is what I’m trying to get to?

Mike Cotoia, CEO

This play was focused not on the size, but on the quality of the content and the audience and the untapped opportunity with the monetizing of the purchase intent data. There are a couple of big players out there. I think Becker Health and HIMSS are part of a nonprofit organization that has a big event every year. The reason why this fits so well is we know the folks over at Xtelligent. We know the type of content and the approach, which mirrors what TechTarget would do in terms of the enterprise IT market. We really value the opt-in, permission-based audience members. Again, we talk about eliminating third-party cookies, what’s going to happen with third-party data. We just see an opportunity to monetize the large amount of purchase intent insights that they can generate on their sites due to the quality and the targeted focus of the healthcare market.

Unidentified Analyst, Analyst

Got it. Thanks. And then just a bigger kind of question here. I know you touched on it in the letter, but the continued migration from in-person events to online. Do you see that going? Has there been a flurry of more in-person events? I know you mentioned international earlier in the call, but do you see any of that coming back anytime soon or no?

Mike Cotoia, CEO

I don’t see it coming back to where it was before or being anywhere near that. There are a couple of things that really – the analogy that we use internally is when somebody moves from analog to digital, it’s really difficult to go back to analog. But also when you go from face-to-face events to online first-party intent-driven type of opportunities, it’s more scalable, it’s measurable, and it’s less costly. I think CEOs of organizations are really done with sending 25 people to Las Vegas or wherever it is to have people out of the office for 5 days, set up booths, and incur all these travel costs. You’re seeing that while, we have to make this digital transformation, COVID accelerated that. We need to capitalize on that, but we can grow scale and measure that more effectively. So I really see this trend moving forward in a positive manner, and again, this bodes very well for what we’ve built as an organization.

Unidentified Analyst, Analyst

Thanks, guys.

Mike Cotoia, CEO

You are welcome.

Operator, Operator

The next question comes from Justin Patterson with KeyBanc. Please go ahead.

Justin Patterson, Analyst

Great. Thank you. Two, if I can. First, just on the M&A environment, how should we think about the pace of M&A going forward and opportunities available? Even after the acquisitions, you still have a lot of cash on the balance sheet and are still throwing off cash. Just curious, what that future pipeline looks like. Then secondly, Priority Engine growth is strong. We got the new businesses coming in. How should we think about just what the normalized growth rate for TechTarget should be going forward? Thank you.

Mike Cotoia, CEO

Right. Justin, in terms of M&A, there is a lot of activity going on in the market, and we’ve seen this for the last couple of years. We have a model that we look at, and we are very active in looking at organizations that fit that model. That model really focuses on content, opt-in registered members, first-party purchase intent data, and/or complementary solutions like BrightTALK. We will get a lot of organizations. We are very selective on what we’re going to choose, and it needs to fit that model. I would say for every acquisition we’ve done, we’ve probably looked at 40, and we’re going to continue to be selective on that. We’re not going to make a decision just to make a decision. It’s got to really fit in with our short and long-term strategy and what we’re focused on as a business. In terms of normalized growth, again, we provided that model of 20% BrightTALK and low to mid-teens in TechTarget. If the trends continue the way they are currently and we continue to execute on how we’re executing, I would say this would be mid-teens plus growth moving forward.

Justin Patterson, Analyst

Great. Thank you.

Operator, Operator

This concludes our question-and-answer session and concludes the conference call. Thank you for attending today’s presentation. You may now disconnect.