Earnings Call Transcript - TTGT Q1 2022

Operator, Operator

Hello, everyone, and welcome to the TechTarget First Quarter 2022 Conference Call and Webcast. My name is Daisy, and I’ll be coordinating today’s call. I will now hand the call over to your host, Charlie Rennick, General Counsel to begin. So Charlie, please go ahead.

Charlie Rennick, General Counsel

Thank you, Daisy, and good morning. Joining me here today are Greg Strakosch, our Executive Chairman; Mike Cotoia, our Chief Executive Officer; and Dan Noreck, our CFO. Before turning the call over to Greg, I’d like to remind everyone on the call of our earnings release process. As previously announced, in order to provide you with an update on our business in advance of the call, we posted our shareholder letter on the Investor Relations section of our website and furnished it on 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. 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

Great. Thank you, Charlie. We are pleased to report that we exceeded our forecast in Q1, and we are raising our annual guidance. Additionally, we have repurchased 206,114 shares for approximately $14.2 million since our last earnings call. Today, we are announcing a new stock repurchase program of $50 million. I will now review our Q1 results. GAAP revenue grew 29% to $68 million. Adjusted EBITDA grew 39% to $26.6 million. Longer-term revenue grew 16% to $28.7 million representing 41% of revenue. Free cash flow was $24 million, representing 35% of revenue. The midpoint of our new higher annual guidance represents 20% revenue growth and 40% adjusted EBITDA margin, which equals the rule of 60. I will now open the call to questions.

Operator, Operator

Our first question comes from Justin Patterson from KeyBanc.

Justin Patterson, Analyst

Two if I can. First, could you talk about how the content to close model has changed your conversations with customers, how we should think about that growth rate persisting in a unique macro environment like we’re in currently. And then secondly, just on Priority Engine. I noticed you called out traction with small customers during this quarter. Any way to think about how we can envision the small opportunity playing out over the next months and years?

Mike Cotoia, CEO

Justin, this is Mike. In terms of the content to close, this is the capability that we have and we’ve launched and really focused on by looking at how buyers are really engaging with how they research information online. So there are two parts to this. Buying teams want to make sure they have a very self-service method to get information and access to relevant information when they need it. They leverage content, whether it’s editorial content that we produce, vendor content from our vendors, custom content, market data-backed content, and unique content that’s relevant throughout the entire buying cycle. When we made some acquisitions over the last two years, one of the key acquisitions we made was ESG, Enterprise Strategy Group, which was focused on creating market research-driven content for vendors to engage with their buyers. As part of the ESG offering, they were getting into accounts very early at different buying centers than TechTarget historically had done. If you take a look at how we have historically done our business, we work with our customers to execute on the program. They’ll come to us with content, we execute the program, we tie it into the Priority Engine, we integrate it with our other purchase intent-driven solutions, and we help our customers prioritize and mobilize against accounts and active prospects. With the ESG offering, we can now engage with our customers early in their cycle, whether it’s with their product group, with their chief content strategists, their C-level executives who are shaping their positioning, messaging, and overall content formulation. They’re looking to create relevant content that’s going to help engage by leveraging our technical validation, market validation, and economic validation types of content. So it seamlessly fits when we help our customers position their products or companies early on. It dovetails right into a strategy to put together and execute a 360 campaign through our content syndication and our demand generation as well as our integrated products around brand and qualified sales opportunities with Priority Engine. This helps our customers prioritize, mobilize, rank, and thus increases their probability of closing deals. This entire process is crucial. When you look at the attendees or the constituents of the buying teams, people want information on their schedule. They want a self-service model and access to relevant information to make acquisition decisions with their respective companies and the technologies they plan to buy. Integrating the content strategy with the ESG offering throughout the campaign execution and the prioritization of accounts and individuals provides an end-to-end solution that no other vendor can produce or supply. This comprehensive approach has created a competitive advantage for us. Regarding Priority Engine, we have seen success with 20% growth and a lot of traction from companies under $50 million in revenue. We identified about 18,500 potential customers and prospects, and we are currently under 3,000, indicating ample room for growth. We expect continued success because last year, we focused significantly on developing the Priority Engine solution around sales use cases. Smaller companies might not have extensive marketing resources, technologies, or automation tools, but a constant for all these companies is having a sales force. This sales force requires valuable first-party data at both the account and individual prospect levels, including insights on the buying centers. This sales use case has proven to be beneficial, and we anticipate ongoing growth.

Operator, Operator

Our next question comes from Aaron Kessler from Raymond James.

Aaron Kessler, Analyst

A couple of questions. Maybe first just on the upside to the quarter and the increased guidance for the year. Can you just call out any particular areas that are driving that? Is that kind of the sales use case or is that more across the board? And then last quarter, you also mentioned strength in content syndication and branding. Maybe just an update there. Is there any concern that as the economy weakens, advertisers would pull back on advertising as we’ve seen historically? And maybe a couple of follow-up questions.

Mike Cotoia, CEO

Great, Aaron. Yes, we’ve had a strong Q1, which we previously reported. We raised our overall annual guidance regarding both revenue and adjusted EBITDA. We are observing strength across all our products in all regions right now. If you take a closer look at the trends, we’ve noted in the market, there’s a healthy and competitive enterprise IT market, companies are modernizing their sales and marketing departments, and the shift to online privacy is advantageous for us with our content and permission-based audience. Companies are investing in their digital transformation due to the shift from face-to-face events to online and digital. We expect to see continued growth as a result. While we remain mindful of volatility in the market, including high inflation and interest rates, we have not yet seen adverse impacts. The trends I just mentioned should remain favorable for us in both the short and long term. On the content syndication and branding, we reported 20% growth in Priority Engine. Priority Engine is our flagship product. First-party purchase intent data at the account and individual prospect level continues to perform well in the market. It’s important to note that Priority Engine supports and catalyzes all our other products. When customers analyze their capabilities, they assess their share of voice, competition regarding their content, branding, and engagement. In today’s market, especially during market volatility, customers focus on quality and ROI to capture share of voice and market share. Priority Engine stands out as a standalone solution, but it also integrates well with our other offerings to show customers where they stand, where they’re lacking, and where they’re excelling.

Aaron Kessler, Analyst

Got it. Great. And just anything you’re seeing in terms of U.S. vs. international trends? Are they fairly consistent?

Mike Cotoia, CEO

Fairly consistent. We’ve seen growth across North America as well as outside the region, and again, across all the products.

Operator, Operator

Our next question is from Pinjalim Bora from JP Morgan.

Unidentified Analyst, Analyst

This is congrats on the quarter and the detail you guys provided. Appreciate that. First question is for the guidance you guys provided for Q2 and for the full year as well as the results. It looks like the second half will be a bit slower than the first half. Is that just conservatism or indications of customers tapering their investments? Can you explain the dynamic there, please?

Mike Cotoia, CEO

Sure. That’s consistent with our historical seasonality in business performance. What we focus on is the overall annual guidance, which is a 20% increase, along with an EBITDA margin set at 40%. Many investors are also interested in our free cash flow, which is projected at $100 million. As mentioned in the opening, we are a Rule of 60 company, performing well both on the top line and with expanded margins and cash flow. The projections reflect our historical performance patterns.

Unidentified Analyst, Analyst

Understood. And then you touched on inflation and wages. Are you seeing any uplift from your Priority Engine and BrightTALK offering? Also, on your end, how is hiring going given the tight labor market?

Mike Cotoia, CEO

Good questions. For Priority Engine and BrightTALK, we recently integrated our offerings to provide customers with access to valuable purchase intent insights. This capability has been advantageous for us and our clients. Regarding hiring capacity, we, like many companies, face challenges, but we’ve successfully brought in talented individuals across key areas such as product development, product marketing, sales, and technology. The environment is indeed competitive, but we’ve managed to maintain a strong tenure, which bodes well for us.

Operator, Operator

Our next question is from Bhavin Shah from Deutsche Bank.

Bhavin Shah, Analyst

Great. Congrats on the great start to the year. Just following up on several questions regarding the macro impact on IT spending. Your shareholder letter indicated no effects thus far. However, have you noticed any changes in spending patterns or user traffic in March and April? Additionally, are you observing a shift in spending from brand solutions to Priority Engine?

Mike Cotoia, CEO

Right. Bhavin, regarding month-to-month macro observations, we haven’t seen any significant changes. Our bookings and revenue remain strong across the board. While we acknowledge ongoing market challenges like inflation and rising interest rates, the trends that matter still hold true. In the IT space today, it would be tough for companies to reduce their IT budget as they are increasingly reliant on technology for their operations. As things tighten, there may be increased scrutiny on purchases, leading to more research as companies want to ensure justifying expenditures. This is beneficial for us as it enhances the need for quality, permission-based data and first-party purchase intent signals. Should a shift occur, we might see changes from some branding efforts to increased investments in demand generation or Priority Engine offerings. The beauty of our business is that all products hinge on purchase intent, which is supported by content and first-party data. As we support our customers with this, we feel very well-positioned. Turning to the health care IT market, we have implemented several operational efficiencies regarding campaign fulfillment and execution. This business is on track, and we're excited as our plans include developing the Priority Engine segments further and leveraging the BrightTALK channel for our health care and IT customers, which we believe will provide a competitive advantage.

Operator, Operator

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

Jason Kreyer, Analyst

Two for me. First, in the shareholder letter, you discussed client conversations about inflation and other economic issues. While you’ve indicated that this hasn’t impacted fundamentals, could you elaborate on how these conversations have progressed? How do you foresee this manifesting in the business over time? Following that, any updated remarks on the sales use case and its progress in the last quarter?

Mike Cotoia, CEO

Yes. In discussions with customers, most of them recognize the health of the enterprise IT market. During volatile periods, their focus shifts to quality and ROI. There is a tendency to want a solid understanding of where their investments are going as they begin examining their expenditures closely. This trend has been a part of TechTarget’s model for 23 years, particularly with the competitive landscape formed by ESG and BrightTALK. Customers appreciate our ability to provide quality content and access to first-party purchase intent insights. This advantage will likely strengthen as privacy measures and the elimination of third-party cookies create more scrutiny around non-permission based data in the future. Our trends support that IT firms will be more cautious about investments, which aligns with our offerings. In terms of the sales use case, it has been working effectively. When Priority Engine was first launched, the focus was primarily on marketing. While that aspect remains crucial, we are seeing increased adoption within sales departments using the permission-based audience data. Now that we deliver account and individual prospect-level intelligence, we see a significant competitive advantage. We invested considerably to ensure integration with various marketing operations. Our goal is to provide a unified system that caters to both marketing and sales, enhancing our analytics and dashboards. This is essential to elevate how marketers engage with their respective strategies.

Operator, Operator

Our next question is from Joshua Reilly from Needham & Co.

Joshua Reilly, Analyst

Congrats on the strong execution. Curious about the trends with QSO reports, primarily quarterly agreements that performed well during COVID. As customers transition from QSO reports to adopting Priority Engine, do you see them retaining QSO reports moving forward? What insights can you provide?

Mike Cotoia, CEO

We don’t break out revenue by product, but I can share that our purchase intent-driven solutions, including QSO reports, continue to perform well. Customers adopt an integrated strategy, increasingly leveraging Priority Engine alongside content syndication and branding. Viewing this distinctly, Priority Engine identifies active accounts and individual prospects. It ranks them based on their first-party purchase intent behavior and the type of content they’re engaging with. QSO plays a vital role as it engages buyers nearer to the end of their purchasing cycle. We have found client revenues, which previously focused primarily on Priority Engine, are engaging more with integrated solutions, translating into long-term contracts. This trend indicates clients prioritize ongoing engagement with their content marketing and strategies. As we focus on long-term contracts, we reported that 41% of our revenue this quarter was from derived contracts. We are optimistic about achieving more than 40% in this area this year. We are taking the right steps, and it’s not just about Priority Engine—our other products will contribute too. I hope this clarifies things.

Operator, Operator

Our next question is from Eric Martinuzzi from Lake Street.

Eric Martinuzzi, Analyst

You mentioned indicators of healthy IT spending. Can you share how much organic traffic increased year-on-year?

Mike Cotoia, CEO

I don’t have that exact figure, but our organic traffic remains strong, consistently over 90%. We have not observed any decline. Recently, Google’s algorithm changes have favored us positively as they tend to favor quality and relevant content.

Daniel Noreck, CFO

We observe robust double-digit growth in our organic site traffic. Therefore, regarding IT spending activity, we’re not observing any slowdowns; in fact, we see very healthy growth in our traffic levels.

Eric Martinuzzi, Analyst

That's helpful. You discussed content syndication. Are there any specific numbers indicating strong demand from ESG services?

Mike Cotoia, CEO

We see strong growth in all our products. The robust demand for content syndication shows that our clients recognize their challenges in producing impactful and relevant content. By leveraging ESG’s analytical capabilities, we can provide strategic, market research-driven content aggressively, getting clients involved from the early stages of the sales cycle. Our clients want to generate compelling content and ensure it engages the right prospects. Our role is vital—helping customers interact with them effectively. While we don’t disclose specific numbers, we definitely see strong opportunities with the content-to-close strategy, assisting our clients to navigate their campaigns to align them with their strategies and increasing their closing rates. That indeed is our fundamental objective. Now, regarding your Global 10, they typically represent about 18% to 20% of our revenue. I can confirm that this ratio remains consistent with historical patterns.

Operator, Operator

Our next question is from Bryan Bergin from Cowen.

Bryan Bergin, Analyst

Can you comment on your growth outlook for Priority Engine for the rest of 2022?

Mike Cotoia, CEO

Yes, Bryan. We project overall growth for the year to be 20%. Priority Engine is our flagship purchase intent product, and that 20% is critical. Looking at TechTarget’s business profile—before COVID we were seeing high single to low double-digit growth, and now we’re experiencing 20% growth, which is exceptional. The Priority Engine is more than just a statistic to us; it’s instrumental in showing our customers how they stack up in the competitive landscape. We can illustrate to our clients their active accounts based on relevant content. If they’re not engaging, we can recommend strategic content improvement to influence the behaviors of those prospects effectively. Thus, we see 20% growth in Priority Engine; however, we prioritize long-term partnerships through contracts. This evolving relationship builds the foundation for our continued success.

Bryan Bergin, Analyst

Understood. I also want to touch on BrightTALK. What are your expectations regarding the volume of activity that BrightTALK will facilitate this year? Any quantification or user flow insights?

Mike Cotoia, CEO

That’s an excellent question. We've introduced several new products on the BrightTALK platform, merging efforts with TechTarget and ESG. Recently, we launched our Analyst Original series featuring ESG analysts discussing market-relevant topics. We're planning episodic content to keep our audience engaged throughout the year. Additionally, summits will allow customers to either host their own events or incorporate expert insights and discussions. We’ve also created solutions like the App Summit, intended for industry events featuring both in-person and hybrid models. These events extend our platform reach while providing engaging content for prospective attendees. Hence, we expect to see a surge in BrightTALK activity that is well integrated with ESG on the analytic side and our editorial endeavors.

Operator, Operator

Thank you. This is all the questions we have today. This concludes our call. Thank you all for joining. You may now disconnect your lines and have a lovely day.