Earnings Call Transcript - TTGT Q4 2021

Operator, Operator

Hello everyone. Welcome to the TechTarget Q4 2021 Earnings Release Call. I will now turn it over to your host, Charlie Rennick of the General Counsel, to begin. Charlie, please take it away.

Charlie Rennick, General Counsel

Thank you, and good morning. 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’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 the business in advance of the call, we’ve 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’ll turn the call over to Greg.

Greg Strakosch, Executive Chairman

Thank you, Charlie. 2021 was a banner year for TechTarget. We successfully integrated acquisitions, enjoyed healthy revenue growth at over a $100 million in adjusted EBITDA, and strengthened our balance sheet to strong free cash flow and a $400 million convertible debt offering that we completed in December. We remain optimistic about 2022 and beyond, as we have four tailwinds in our favor. The first tailwind is a healthy IT environment. The second tailwind is the modernization of the sales and marketing organization through the use of data. The third tailwind is growing compliance and sensitivity to privacy issues, which we benefit from because of our first-party data and permission-based audiences. And the fourth tailwind is the acceleration of the migration of face-to-face budgets online. Today we're releasing four annual metrics to demonstrate that our strategy is working and that we’re executing at a high level. We are also releasing today annual guidance for 2022 with expected revenues between $300 million and $315 million and adjusted EBITDA between $120 million and $125 million. I will now open the call to questions.

Operator, Operator

Our first question comes from Justin Patterson of KeyBanc.

Justin Patterson, Analyst

You discussed how Priority Engine is no longer the primary source of revenue growth. Could you highlight some of the key products where you're seeing momentum? And can you provide insight into the growth rates there? And then second, just diving deeper into Priority Engine. Could you compare and contrast the revenue opportunity for the marketing version versus the sales version? Additionally, how should we think about the pace of that sales product scaling out? Thank you.

Michael Cotoia, Chief Executive Officer

In terms of Priority Engine, what we're seeing is really strong growth across all of our product lines. As we noted in the shareholder letter, the Priority Engine revenues grew 20% year-over-year, and that represents about 25% of our overall revenue. Some of the other products that we talk about are our purchasing data-driven demand generation solutions, which represent about 40% to 50% of our overall revenue and are growing at a very healthy clip. The reason why we're seeing that growth is because of the tailwinds that Greg mentioned in the introduction. Having a permission-based audience amidst all privacy concerns and compliance issues, our customers really want to engage and capture trusted and verified IT buyers in the IT decision-making process. Because of our owned and operated sites and content across all major enterprise technology categories, our members come in and they’re often permission-based. We understand what they're doing based on the content they're reading. That’s very relevant for our customers because they want to know who's actually engaging with content and how to follow up with them. We're seeing everything across the board grow, and everything we do across all our suite of products is driven by our first-party data. Now, regarding Priority Engine, we've historically sold in the marketing departments. There are two different use cases. The marketing departments leverage our data for specific marketing initiatives like ABM strategies and competitive positioning. What we noticed over the last couple of years was that the data our marketers were receiving from Priority Engine was being used by sales teams to identify which accounts to target. Now, the data is very similar, but the way it’s used is different. What we did was launch an updated release in November that focused on the sales use case, with an updated user interface so sales reps can see which individual prospects are engaging with specific content at specific times. This allows them to capture that information and manage their territory, enabling them to enter prospects into their CRM and understand which accounts and prospects within their territories are engaging on their vendors' websites. Therefore, we expect to see growth in revenue on both the marketing and sales sides, as being able to provide consistent data across both helps to create synergy that has been missing between sales and marketing for years. This is a significant focus for us, and we believe it will drive growth across Priority Engine. I want to clarify that this shouldn't be misconstrued—Priority Engine is still our lead product offering and our biggest growth opportunity. While we’re seeing strength across the board in all products, Priority Engine remains our largest and most significant growth avenue.

Charlie Rennick, General Counsel

The next question comes from Aaron Kessler. Aaron, your line is now open.

Aaron Kessler, Analyst

Just maybe a couple questions on the customer metrics. I appreciate that. Can you provide a bit more detail around organic growth? Some of those customer metrics would be helpful, and then just the guidance seems relatively in line with expectations, though Q1's guidance seems to be a bit lighter than expected. Can you discuss the sequential decline for Q1? Is that primarily due to advertising products being seasonal, and do you expect that to snap back in Q2? Thank you.

Dan Noreck, Chief Financial Officer

The sequential decline in Q1 is typical due to seasonality, which has been consistent with previous years. Q1 has the lowest revenue since IT vendors don’t finalize their budgets until later in the quarter. Then you'll see a ramp-up in Q2, followed by Q3 remaining relatively consistent with an increase from Q2, and Q4 being the largest quarter. Historically, the sequential decline from Q4 to Q1 is roughly 13% to 15%. Regarding the annual numbers that were laid out, we started reporting these last year and noted that our net revenue retention was up 80%, with a significant increase in the number of $100,000 spenders up 80% as well as million-dollar customers up over 70%. These annual numbers reflect our aim to validate our thesis regarding the acquisition of BrightTALK. We observed healthy organic growth alongside acquisition growth, confirming the rationale behind this acquisition. We're selling to the same customers with complementary products. On TechTarget's side, we have content syndication and tech-based solutions, while BrightTALK focuses on webinars and virtual events. By engaging existing customers, they become more invested in our entire portfolio and spend more on our combined offerings, resulting in healthy margins, as evident in this quarter at 40%. Our organic and acquisition growth seems well balanced which substantiates why we made that acquisition.

Aaron Kessler, Analyst

And maybe quickly on the healthcare IT acquisition you made recently, just any updates on the progress with integration?

Michael Cotoia, Chief Executive Officer

We closed that on August 1st and have tackled some initial operational tasks, but we’re allowing Xtelligent to operate independently for now. Our plans for that will include launching new products into that market and leveraging some of our channel products on the BrightTALK side to enhance audience and lead generation opportunities in Xtelligent. The integration will continue throughout the middle and latter part of this year as we operationalize and launch those new products.

Operator, Operator

Our next question comes from Bhavin Shah of Deutsche Bank.

Bhavin Shah, Analyst

Could you elaborate on the insights you've gathered from BrightTALK, specifically in terms of the cross-sell opportunities available? What areas are driving that, and what’s resonating with customers?

Michael Cotoia, Chief Executive Officer

If we look back at the rationale behind the acquisition, there were several reasons: their permission-based audience, their content strategy, and the ability to generate valuable first-party purchasing intent data. The complementary product offering is also significant. At TechTarget, we focus on tech-based whitepapers that fuel information captured by our editorial teams, which integrates into our Priority Engine platform. BrightTALK delivers webinar and virtual-based content, where participants spend 20, 30, or even 40 minutes engaging with content. This creates many synergies. In 2021, we allowed both organizations to run separately; however, we began identifying accounts that engage with BrightTALK and those that engage with TechTarget. We initiated introductions between each sales force to offer a complete solution: tech-based and webinar-based engagement to deliver intent and prioritize within the Priority Engine platform. Customers clearly want mixed media strategies, and we have identified those spending with either or both platforms. The new content closure strategy allows our analysts and market experts to engage with clients earlier in their journey to help refine their messaging and strategic position using content, executed through webinars, tech-based initiatives, and the Priority Engine to aid in close opportunities.

Dan Noreck, Chief Financial Officer

There are dozens of vendors competing for these deals, and most are filtered out without a chance to showcase their offerings. To counter this, vendors produce a considerable amount of content, which is evident on vendor websites filled with whitepapers and webinars. TechTarget has led in distributing vendor-produced whitepapers, while BrightTALK is the top distributor of vendor webinars, making for a natural fit with healthy cross-selling potential.

Bhavin Shah, Analyst

Given the early success with BrightTALK, how do you view the potential for future M&A or are you more in a digestion period with BrightTALK and Xtelligent?

Michael Cotoia, Chief Executive Officer

We are optimistic regarding M&A activities and are having regular discussions. The criteria we've discussed previously remains consistent. We look at content strategies, relevant content, permission-based audiences, and the capacity to generate first-party purchasing intent data, alongside complementary product lines. We are actively examining opportunities, but there's nothing to report today.

Bhavin Shah, Analyst

In terms of your guidance for ’22, how do you view the possibility of marketing budgets shifting back towards face-to-face events? Could that pose a headwind even while online solutions remain viable?

Michael Cotoia, Chief Executive Officer

The major shift has been from face-to-face events to online and digital. While some face-to-face events will persist, the shift towards digital is significant. Sellers want to meet clients face-to-face, and such events will still exist. An analogy is the newspaper business: Most information is consumed online, but physical newspapers still have their place. I think face-to-face events will endure but on a smaller scale. It's challenging to revert once you shift from analog to digital since the latter allows for larger scales, better measurement, and is more cost-effective. There might not be a tailwind pushing us back toward face-to-face events, but there will be some presence.

Operator, Operator

Our next question comes from Greg Burns of Sidoti.

Greg Burns, Analyst

Looking at the guidance, the midpoint of the EBITDA margin is around 39%. Previously, you mentioned a target of over 40% EBITDA margins. Can you comment on what’s implied in the guidance and whether this is due to a change in the revenue mix?

Dan Noreck, Chief Financial Officer

At the exact midpoint, it is 39%, with the high in the range at 40%. Based on the Q4 results where we achieved a 40% EBITDA margin, we believe we can attain that for the year in 2022. The margin percent is part of a small range based on the $315 million figure—historically, this range has been quite accurate. Therefore, it's merely rounding.

Greg Burns, Analyst

What percentage of your customers utilize the Priority Engine for a sales use case? I'm trying to gauge how much of your business ties to that use case.

Michael Cotoia, Chief Executive Officer

In prior periods, sales teams were using Priority Engine without a seat license type of arrangement, which is new for Q1. There was usage, but we weren't monetizing it through a module approach until now. As we move through the year, we'll continue to monitor adoption. The appetite exists for sales teams to access the data we previously delivered to marketing departments, and developing this module has been beneficial for customers. Often, clients want insights for both their marketing and sales teams. This demand for tailored data for various teams in a unified approach will provide significant tailwinds for us.

Greg Strakosch, Executive Chairman

We are excited about the opportunity to sell the sales version to all our marketing use case customers with this separate module. Historically, we focused on the largest 1,500 IT organizations that had sophisticated marketing services. With this sales use case, we believe we are now opening up to around 18,000 software companies, unlocking a huge market opportunity by offering this separate sales module. However, it’s still early days.

Operator, Operator

Our next question comes from Jason Kreyer of Craig-Hallum.

Jason Kreyer, Analyst

Continuing on the same theme, can you provide any early feedback on the platform upgrade from November? Also, could you outline the selling process when engaging with marketing teams versus sales teams? Are there unique challenges or benefits to targeting the sales teams separately?

Michael Cotoia, Chief Executive Officer

In terms of the selling process, we often work with marketing to include their sales counterparts. When marketing and sales align on an investment, it’s a win for all parties. Our sales teams engage with marketing to demonstrate the utility of the data from Priority Engine and how it meets both seller and client needs. If marketing doesn't want to invest, our teams can continue engaging directly with sales leaders separately. The collaborative approach fosters strong results as both teams see how our platform meets their respective KPIs. Regarding the sales use case, we’ve only witnessed early indications of uptake since our Q4 launch, showing an increase in usage and engagement. We’ll monitor sales reps' activity in the platform closely. Overall, feedback has been very favorable.

Jason Kreyer, Analyst

As you look at the process longer term, do you envision some of your reps being equipped to sell both the sales and marketing approaches? Do you see potential for greater success targeting these opportunities?

Michael Cotoia, Chief Executive Officer

Yes, our representatives will sell both solutions. Getting both teams together in these discussions creates effective dynamics. Our teams will work closely with marketing and client sales, aligning their messaging for both objectives. That collaborative sales approach is our playbook moving forward.

Jason Kreyer, Analyst

Could you elaborate more on your 'content to close' strategy and how that go-to-market process works?

Michael Cotoia, Chief Executive Officer

Our offerings in this area are quite unique, and I believe no one else can offer this. Through our analysts and publications, we've started engaging with accounts at various organizational levels from the onset. These companies are trying to position themselves strategically in the market, which necessitates relevant content. Our experts help them craft a comprehensive content strategy, evolving into a purchase-intent-led sales and marketing enablement program. We can assist our clients with virtual events, webinars, case studies, and comprehensive campaigns that engage and identify the accounts and buyers they should focus on to optimize closing. By fostering tighter integration into our customer workflows, we’ll facilitate a bidirectional flow of data, enriching their pipeline with a closed-loop reporting process capable of addressing their past successes and failures. This strategic approach integrates everything from content creation to generating stronger leads through our platform.

Jason Kreyer, Analyst

Since this 'content to close' strategy is implemented earlier in the lifecycle, how do you plan to monetize this solution?

Michael Cotoia, Chief Executive Officer

We will charge our clients for these custom content strategies, recognizing that generating effective content is challenging for them. Our advisors craft the strategy, making the process less daunting and providing immense value. As this high-quality content is produced—often in multi-format formats—we facilitate its execution through campaigns, enabling BrightTALK and TechTarget to work together while leveraging our proprietary audience to bridge the intent and execution phase. This cycle helps our clients improve attribution and boosts their ROI.

Operator, Operator

Our next question comes from Bryan Bergin of Cowen.

Bryan Bergin, Analyst

Can you provide an update on efforts to expand your international presence? What regions are priorities for you, and are there any significant barriers?

Michael Cotoia, Chief Executive Officer

Currently, we are present throughout EMEA, Singapore, Sydney, Latin America, Mexico, and India, and we have observed considerable room for growth in these areas. One reason for acquiring BrightTALK was their presence in similar regions. We are witnessing significant transitions from face-to-face events, especially in the international market, regarding field marketing dollars. Our international business is growing steadily, and we will persist in investing in these regions, enhancing our sales and marketing efforts. By launching Priority Engine and focusing on sales use cases internationally, we can leverage growth opportunities and have budgeted accordingly for additional sales support in these regions.

Bryan Bergin, Analyst

What growth catalyst do you anticipate for Priority Engine in your 2022 outlook? And how would you gauge normalized growth in the non-Priority Engine business?

Michael Cotoia, Chief Executive Officer

For Priority Engine, we anticipate growth in line with our overall targets, projecting high teens or 20% growth. As for the non-Priority Engine business, we analyze similar metrics here, as all our products leverage first-party purchase intent data. Thus, we also expect growth to hover around 20% for non-Priority Engine initiatives.

Bryan Bergin, Analyst

Regarding margins, can you clarify what is needed to achieve that 40% EBITDA margin while considering mix and overall operational leverage?

Michael Cotoia, Chief Executive Officer

Margins remain consistent across our entire product set, driven by revenue growth. The operational leverage should allow us to reach our 40% threshold if we meet our revenue targets. Should we exceed those projections, it will likely lead to even better margins.

Operator, Operator

Next question comes from Joshua Reilly of Needham.

Joshua Reilly, Analyst

We've seen strong results from both legacy tech players and newer cloud vendors. Does this align with what you're observing in your customer segments? Additionally, what insights are you gathering about customer spending and growth potential in light of the current economic uncertainties?

Michael Cotoia, Chief Executive Officer

Reflecting on our larger client base, our legacy global 10 accounts, while not our top clients, comprise about 17% to 20% of our business each quarter and are experiencing decent growth. The remainder of our 2,600 customers exhibit a good balance across the spectrum, including VC-backed, large SaaS-based organizations. Overall, I would summarize that we’re seeing solid growth across our entire clientele and exceeding expectations thus far. Regarding concerns about growth amidst economic instability, our operating structure is not severely impacted as of now. Some clients might experience budget constraints, but thus far, we’ve noticed no slowdown in demand for our intent-driven marketing solutions. Customers acknowledge the ongoing necessity of effectively reaching audiences. Over the last decade, our customer base has shifted considerably: previously focused on on-premises hardware, our current clientele predominantly entails cloud-based, SaaS organizations. This transition has been advantageous for us, given the evolution of the enterprise IT sector. As such, I don’t see any immediate pullback, and all indicators suggest it will be a fruitful year based on the guidance we have provided.

Joshua Reilly, Analyst

Considering the annual net revenue retention rate of 150% for 2021, particularly attributed to BrightTALK, can you share a more sustainable NRR figure moving forward? Should we anticipate another strong year considering BrightTALK’s still being integrated into your core customer base?

Michael Cotoia, Chief Executive Officer

On the NRR front, the 150% mark reflects the strengths of the acquisition—existing customers are increasingly engaged and spending more on our combined solutions. This aligns with our strategy, and moving forward, we anticipate seeing stable numbers around the 120% mark akin to prior years, though we expect healthy engagement either way. However, the 150% figure underscores the success of our BrightTALK acquisition.

Operator, Operator

Our next question comes from Eric Martinuzzi of Lake Street.

Eric Martinuzzi, Analyst

A clarification first; can you provide an update on revenue guidance for Q1 or 2022?

Michael Cotoia, Chief Executive Officer

No, that's all GAAP revenue.

Eric Martinuzzi, Analyst

Curious about headcount; where did you finish at the end of 2021, and what are your hiring plans for 2022?

Michael Cotoia, Chief Executive Officer

Our headcount was approximately 1,000. I don’t have the exact figure, but we expect to see a 10% increase in headcount this year.

Eric Martinuzzi, Analyst

And what will primarily guide this hiring effort?

Michael Cotoia, Chief Executive Officer

Product development, customer success, and sales.

Operator, Operator

Our next question comes from Pinjalim Bora of JP Morgan.

Pinjalim Bora, Analyst

Most of my questions have been answered, but I have one about organic growth calculations. I know you don’t detail inorganic contributions; however, the guidance suggests about 18% growth, a decline from the mid-20s organic growth last year. Considering your new sales product and the four favorable trends you've outlined, is it plausible organic growth could approach the mid-20s by the year-end? Or would you attribute this to the low of larger numbers?

Michael Cotoia, Chief Executive Officer

We do not break out organic versus combined numbers. Looking at our business profile over recent years, we’ve seen growth transition from high single digits to low double digits—increasing to high teens to 20% growth now. Although we are moving larger figures, which imply some deceleration, this guidance reflects a range we feel confident in meeting. If market improvements occur and we successfully adopt our sales use case, it is possible to see some upside to these numbers. However, today is February 10th, and we must provide our best projections based on our growth strategy, considering the improved business profile and executing on those projections.

Operator, Operator

At this time, we currently have no further questions. Therefore, this concludes today's call. You may now disconnect your lines and have a lovely day.