Earnings Call Transcript - TTGT Q1 2021

Operator, Operator

Good day and welcome to TechTarget's First Quarter 2021 Earnings Release Conference Call. All participants will be in a listen-only mode. I would now like to turn the conference over to Charlie Rennick, General Counsel. Please go ahead.

Charles 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 our business in advance of the call, we posted our shareholder letter on the Investor Relations section of our website and furnished it on an 8-K. Following Greg's introductory remarks, the management team will be available to answer your questions. Any statements made today by TechTarget that are not factual, including during the Q&A, may be considered forward-looking statements. These forward-looking statements, which are subject to risks and uncertainties are based on assumptions and are not guarantees of our future performance. Actual results may differ materially from our forecast and from these forward-looking statements. Please refer to our risk factors in our most recent public reports filed with the SEC, including in our annual report on Form 10-K and our quarterly reports on Form 10-Q. These statements speak only as of the date of this call, and TechTarget undertakes no obligation to update them to reflect future events or circumstances. 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 accompanies our shareholder letter. With that, I'll turn the call over to Greg.

Greg Strakosch, Executive Chairman

Right. Thank you, Charlie. The momentum we had at the end of 2020 has carried into 2021 as we continue to benefit from strong execution and some significant tailwinds, producing the following positive results. Adjusted revenue grew 85% to approximately $59 million. Adjusted EBITDA grew 123% to approximately $19 million. Adjusted EBITDA margin was 33%. Adjusted gross margin was 75%. Longer-term contracts represented 42% of revenue, an all-time high. Free cash flow was $12.6 million, representing 66% of adjusted EBITDA. Based on the momentum we are experiencing, today, we are raising our annual guidance. We expect adjusted revenues between $245 million and $250 million. We expect adjusted EBITDA between $80 million and $85 million. I will now open the call to questions.

Operator, Operator

Our first question is from Jason with Craig-Hallum. Please go ahead.

Bailey, Analyst

This is Bailey on for Jason. Just wanted to say congratulations on the quarter, and I appreciate you taking the question. One thing we notice is it seems like you guys are starting to see an opportunity, emerging and long-term subscriptions. Just wondering if you might be able to talk through what you're hearing from customers. And what gives you confidence in the acceleration in Priority Engine revenue?

Michael Cotoia, CEO

Great. Thanks for the question. This is Mike. One of our primary objectives over the past few years has been to enhance our long-term revenue metrics as a percentage of total revenue. When we introduced Priority Engine several years ago, that was the main aim. It is crucial for our customers to remain engaged with their potential customers and prospects throughout the entire Priority Engine. In 2020, we experienced a slight downturn due to the COVID pandemic, which led customers to reduce their commitments to long-term contracts. However, the need for our customers to connect with prospects and existing customers remains incredibly strong, supported by the first-party purchase intent data we provide. We concluded last year with 4% growth, and in Q1, we observed a 7% increase in Priority Engine revenues. We are experiencing improved conversations and bookings across Priority Engine, and we anticipate that long-term contracts associated with Priority Engine will grow by over 15% in the next quarter, with expectations for continued growth throughout the year. As you mentioned, we achieved a record high, with 42% of our long-term contracts contributing to our overall revenue. We are excited about this progress and believe that the positive momentum in the overall market will benefit us. Therefore, we see significant potential for growth in that area.

Bailey, Analyst

Excellent. Well, really appreciate that, and that's great news. And if I could get another related to BrightTALK. Now that you guys own it for a full quarter, just wondering if you might be able to provide any kind of tangible customer feedback on that acquisition based on what your customers are saying.

Michael Cotoia, CEO

Yes, our customers are really enthusiastic about the chance to collaborate with TechTarget and BrightTALK as a unified entity. BrightTALK offers a distinct advantage in the market that we didn't have prior to the acquisition. Their extensive content and webinar platform present a great opportunity to engage permission-based members registered in the BrightTALK community, while also allowing us to gather first-party purchase intent data that our customers can utilize. TechTarget traditionally focuses on text-based content syndication and lead generation, so combining that with video webinars, summits, and virtual trade events is highly complementary. It's vital to capture purchase intent signals throughout the entire buying process for every member of the account buying team. We've observed an impressive average watch time of over 30 minutes on BrightTALK webinars, summits, and webcasts, which is crucial for generating strong purchase intent signals. Our customers are eager to see everything consolidated under one umbrella, and we share their excitement. We have numerous collaborative initiatives underway to ensure we deliver the right information, with a focus on relevant content, registered opt-in audience members, and first-party purchase intent data. This is the core value we bring together under one umbrella.

Bailey, Analyst

That's fantastic color. I really appreciate that. I don't want to normalize the line, but one last thing on mobile IDs and third-party cookies. That's a topic we talked about, and industry is somewhat fixated on as relate. Just curious how much this becomes a topic with customers and potential customers? I mean are we at the point where customers evaluating these privacy standards and purchasing decisions? Or do you see that becoming a key component of the conversation?

Michael Cotoia, CEO

Yes. That's a great question. I'm going to really focus on one of those metrics here. First of all, privacy and compliance continues to be an ever-evolving focus for not only our customers, but their prospects and their customers that are members on our sites. Google announced last year that they would eventually eliminate the use of third-party cookies. And they have followed up with that announcement, and that is projected to end next year. That bodes very well for TechTarget because we own and operate a massive amount of communities, over 141 enterprise technology-specific sites with over 20 million registered members, BrightTALK with over eight million registered members who are information-seeking, third-party cookies being eliminated; our customers really value the first-party data, the permission-based audience members. So that is actually a very favorable competitive advantage and tailwind for us, and we expect that as one of the three major tailwinds when we talk about customers modernizing their sales and marketing efforts and leveraging first-party information, first-party data and purchase intent data. The announcement of Google eliminating the use of third-party cookies and then overall a budget shifting from face-to-face events to online and digital and data-driven, this all bodes well for us, not only in the short term but in the long term.

Bailey, Analyst

Thank you very much. I think that's all we had from our corner. Congratulations again, and appreciate it.

Operator, Operator

The next question comes from Aaron Kessler from Raymond James.

Aaron Kessler, Analyst

I have a couple of questions. Firstly, regarding the sales adoption, I know you've seen some positive traction with that product. Can you provide an update on what you're observing with the sales adoption of Priority Engine? Also, an update on Priority Engine Express would be helpful. I assume we'll see it start to gain momentum as companies return to the office more frequently. Finally, regarding the events landscape, how do you expect it to develop throughout 2021? Do you anticipate that most events will continue to be digital and this will lead to a permanent shift, or do you foresee any challenges as in-person events resume?

Michael Cotoia, CEO

Great questions, Aaron. I'll address them in order regarding sales adoption. As you recall, at the beginning of this year, we released several updates to Priority Engine aimed specifically at improving sales adoption. We continue to collaborate closely with marketing teams, who want to ensure they can target accounts effectively and enhance their account-based marketing strategies to generate new business. However, in terms of sales adoption, feedback from our customers indicated they wanted access to data in a more personalized way, integrated into their workflows, and tailored to specific territories. We're placing a strong emphasis on this, and we've observed a positive trend in adoption and usage numbers increasing each quarter. The most significant improvement we've made is in prospect-level intelligence. Previously, Priority Engine ranked accounts by region or technology segment at the account level, but now sales reps can see what specific members of buying teams are engaged in and their areas of interest within their territories. For example, within a large enterprise account, sales reps can identify that Mike Cotoia is interested in identity and access management while Dan Noreck and Aaron Kessler are focused on threat management and email security. This capability allows for more personalized engagement with prospects. We're continuing to enhance integrations and APIs into our customers' workflows, with a strong emphasis on increasing sales usage and adoption in the coming quarters. We will leverage the account-level data from our BrightTALK audience to help expand our reps' territories based on intent signals. We're also concentrating on inbound conversion, focusing on traffic data from visitors to our clients' websites to gather detailed insights about their activities on key product pages. These developments are yielding positive feedback from our customers. Regarding Priority Engine Express, this product faced significant challenges last year due to the impact of the pandemic, particularly among our SMB customers in North America. As businesses adjusted to remote work, many were hesitant to commit to longer-term contracts. However, we are beginning to see an increase in bookings and interest as companies navigate through these changes. While we are not entirely out of the pandemic yet, there is a noticeable upswing in bookings contributing to our 7% growth in Q1, which we anticipate will exceed 15% for the remainder of the year. Concerning the events landscape, I expect a gradual return of events in 2021, primarily in digital format, with a potential mix of hybrid events in 2022. Our experience at TechTarget over the past 22 years has shown that being born online and digitally focused allows for better understanding of the audience, data, and delivery at scale. There will be face-to-face events, but companies attempting to shift online without the right platforms, audiences, and expertise may struggle. Therefore, in 2021, I believe the events landscape will remain predominantly digital, and if hybrid events become prevalent in 2022, we will be well-positioned to succeed.

Operator, Operator

The next question comes from Justin Patterson with Keybanc Capital Markets.

Justin Patterson, Analyst

Great. Two, if I can. First, appreciate the new metrics in the shareholder letter. You called out over 10,000 prospective customers. What investments do you make to really accelerate the pace of adoption within that customer base? And then secondarily, what do you see as the key factors to add more customers that are spending over $100,000 annually?

Michael Cotoia, CEO

Thank you, Justin. When we look back at the company five years ago, we didn’t have the right product solutions to enhance adoption and attract new customers effectively. We recognized this and now have 1,585 customers, presenting a significant opportunity for growth, particularly with new clients. Our focus has shifted to expanding our reach with offerings like Priority Engine, Priority Engine Express, BrightTALK seminars, webinars, and events, allowing us to cater to a wider range of customers from small businesses to enterprises. We highlighted that we have 1,585 customers, indicating potential for growth. We've identified around 10,000 other technology companies as potential business partners. As we refine our products and foster collaboration across departments, we see promising opportunities ahead. In our communication, we also noted that 225 customers spent over $100,000 each, demonstrating our ability to effectively engage customers, understand their needs, and align our marketing strategies with targeted audiences within our extensive community. This approach fosters strong relationships, allowing us to grow these accounts into six-figure clients. Additionally, 25 customers have exceeded $1 million in spending, showcasing our successful track record in scaling customer investments. Our various divisions and marketing strategies, along with alliances and channels, present new revenue opportunities. We are committed to ensuring that once a customer comes on board, we excel at nurturing and expanding that relationship. I’ll now have Greg provide some additional insights.

Greg Strakosch, Executive Chairman

Yes. The main point is that, as Mike mentioned, we're selling to various groups within the organization. We're cross-selling products and expanding into new geographies, which is how we're achieving growth for customers over $100,000 and over $1 million. Regarding our investments to reach more companies, we are focusing on two areas. First, we are hiring more sales personnel to pursue these targets, and second, we are enhancing our self-service options at the backend to better support these customers. These investments are relatively incremental and will not significantly alter the margin structure of the business.

Operator, Operator

Next question comes from Joshua Reilly with Needham & Company.

Joshua Reilly, Analyst

Great, so starting off, are you seeing customers increasingly willing to make annual commitments on Priority Engine? Or how should we think about the activity of customers buying quarterly versus annual subscriptions? And then second, on the kind of the same point you mentioned in the shareholder letter that small customers' interest in the sales use case was pretty strong. How should we think about the applicability for both SMB and large enterprise to be buying those additional sales seats?

Michael Cotoia, CEO

Good question. Yes, we are seeing an increase in customers interested in making longer-term commitments. As we navigated through the pandemic, Priority Engine grew slowly, initially starting strong before declining due to the pandemic's effects. During that time, small to mid-sized companies, and even some larger ones up for renewal, shifted their focus to lead generation. Smaller companies that were ready to invest held back during March, April, and May as they sought clarity on the pandemic's outcome. However, we noticed a pickup at the end of Q4, which continued into Q1 with a growth of 7% for Priority Engine. We expect this number to grow in the mid-teens or more throughout the year, as conversations remain positive and customers are beginning to commit longer-term. Regarding small and medium-sized businesses (SMBs) versus enterprises, SMBs differ because they typically lack sophisticated marketing technology. They tend to rely on their sales teams to generate new opportunities. While they do have capable marketing departments, their main focus is on developing sales teams and equipping them with effective tools. We provide insights on which prospects to target based on first-party purchase intent data, which is beneficial. On the enterprise side, there's a great opportunity for collaboration between marketing and sales departments. Often, these areas can become disconnected, but our tools, including Priority Engine, help bridge that gap. We're seeing some enterprises significantly increase their sales team's usage of our platform, expanding from around 30 or 40 representatives to 200, leading to great success. Our strategy is to ensure that they effectively utilize Priority Engine and our integrated marketing platform to build technology segments within the same geographic area and expand into others while connecting the dots between different teams.

Joshua Reilly, Analyst

Okay. Great. Just one more for me. So what are you seeing in demand from the kind of the global 10 vendors? We know the concentration is down pretty dramatically to roughly 20% of revenue. But they've been kind of showing some signs of life actually recently in their results. I'm just curious, how is that impacting their spend with you guys in the last couple of quarters here?

Michael Cotoia, CEO

Yes. As you can see, we observed an increase in their spending as well. Some of the global 10 are in stronger positions than others, though I'm not going to name them. Those who have successfully transitioned to a cloud and SaaS-based strategy are performing well, while others are trying to catch up. Many of these companies were previously focused on face-to-face events, not just in North America but across other regions too. Their shift to online and digital strategies has been expedited; what they anticipated taking three years has now happened within the past year, and we are beginning to see the global 10 focus more on digital initiatives. They are adopting an always-on strategy more than before, although it may still be a bit inconsistent. The concentration of this segment is about 20% of our overall business now, down from over 40% a decade ago, which was concerning because it made us vulnerable to their unpredictability and sudden changes in spending. We are pleased with the progress we are making in acquiring new clients and targeting the mid-market, including the upper end and low enterprise, maintaining that 20% concentration rate overall.

Joshua Reilly, Analyst

Great. Congrats on the quarter.

Michael Cotoia, CEO

Thank you.

Operator, Operator

The next question comes from Bryan Bergin with Cowen.

Zack Aisman, Analyst

This is Zack Aisman speaking for Bryan. I have a couple of questions. To start, regarding the legacy business, it has seen acceleration in recent quarters, largely due to customers engaging in short-term marketing arrangements, which is well known. This has also contributed to strong top line performance. How should we consider the sustainable growth rate for the non-Priority Engine business as we move forward and these exceptional growth rates begin to slow down?

Michael Cotoia, CEO

Thank you for the question. In regards to the recent short-term growth, it's important to consider several factors. Firstly, many businesses are reallocating their budgets in both North America and internationally from in-person events to online formats. This change is significant and likely irreversible, similar to how challenging it is to revert from digital to analog once that shift occurs. The online approach offers greater scalability, flexibility, and significant cost savings for customers. As they transition away from traditional events, many customers are becoming more familiar with intent data subscriptions that they weren't previously aware of. Initially, they relied on lead generation, but now they understand the need for it to focus on their own sites that provide first-party purchase intent data. With Google moving to eliminate third-party cookies, our customers are eager for assurance that we know our audience based on permission-driven first-party intent data. This shift leads them to embrace digital strategies that utilize data effectively. We guide them toward an integrated approach using our Priority Engine for purchase intent, supplemented by content marketing and brand messaging aligned with their owned sites that generate first-party intent data. This is our strategy to elevate lead generation and ultimately increase long-term deals from 40% to our target of over 50% in the coming years. This is our roadmap for future growth.

Zack Aisman, Analyst

Got it, makes sense. And just a follow-up on Priority Engine, historically, there's been some annual feature and functionality enhancements, including some last year around enhancing the sales use case. Can you provide any notable enhancements that may be observed for this year?

Michael Cotoia, CEO

Yes, that's a good question. So we had some of those sales use cases that were enhancing sales effectiveness and usage. We've updated our alert system, so sales reps can get alerts within their specific territories. One of the biggest things that we did was make sure that we customize and personalize everything to a sales rep's territories. Before, it was a big batch stop. It was more set up for marketing, so we want to make sure we transition it to sales. As I mentioned earlier in the call, the prospect level intelligence. Sales rep, if you look through the life of a sales rep. On Monday, they have a call list, and they have their 25 accounts in their territory, and maybe they have 50 accounts in their territory. And they can actually go out there and rank their accounts right in Priority Engine, but a lot of reps want to rank their prospects, the actual people. A prospect maybe works in account one that's like number one, the first account. But number two could be the most active individual prospect could be working for account rank two and 22nd. It's really important for reps to have that ease of use and the functionality to identify and prioritize at the prospect level as well as the account level. Better integration in the sales force has been very important. One of the things that our reps have come back, meaning our customers' reps, have come back is that we'd love to actually have more insights at the account level as well and at the individual prospect level. We have a really good opportunity with the BrightTALK account data that we can start integrating it into our sales use cases, so the reps can have more entry points while they are using Priority Engine into their territory based on the account intelligence.

Greg Strakosch, Executive Chairman

Yes. Historically, we've introduced one to two significant enhancements or upgrades each year, and you can expect that trend to continue. We're still in the early stages of this major trend where companies are digitizing and modernizing their sales and marketing operations, which means there's plenty of innovation ahead. Our customers are driving innovation, and by observing their specific activities, we can integrate these insights for all our customers. Additionally, we continuously engage with customers to gather feedback that leads to new innovations. Therefore, you can anticipate a couple of upgrades each year, and we have a very strong product roadmap moving forward.

Operator, Operator

Our sales and marketing organization is focused on innovation in two key ways. First, we observe what specific customers are doing to drive their innovation, and we incorporate those insights for the benefit of all our customers. Second, we engage in constant dialogue with customers, which leads to new innovations based on their feedback. Therefore, you can expect to see several upgrades each year, supported by a strong product roadmap.