Earnings Call Transcript - TTGT Q3 2023

Operator, Operator

Good afternoon. Thank you for attending the TechTarget Reports Third Quarter 2023 Conference Call and Webcast. My name is Alexis and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call. There’s an opportunity for questions-and-answers at the end. I would now like to pass the conference over to Charles Rennick. You may proceed.

Charles Rennick, Moderator

Thank you, Alexis, and good afternoon, everyone. Joining me here today are Greg Strakosch, our Executive Chairman; Mike Cotoia, our CEO; and Dan Noreck, our CFO. Before turning the call over to Greg, I'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'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 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. As stated last quarter, we feel like we are bouncing along the bottom of the sales cycle. While we haven't seen material signs of improvement yet, we also haven't seen material cycles suggest further deterioration is on the horizon. We exceeded our guidance range for Q3 and are maintaining our 2023 full year guidance. We are pleased that an extremely difficult year in the technology market, we expect to produce a 30% adjusted EBITDA margin. Our philosophy is to use our leadership position and strong balance sheet during the downturn to prepare for a future recovery in demand through investments in the value we provide to our technology buyers and our product offerings for our customers. Our experience tells us that these investments will be rewarded when spending returns to more normalized levels. I will now open the call to questions.

Operator, Operator

Absolutely. We will now begin the question-and-answer session. The first question comes from Justin Patterson with KeyBanc. You may proceed.

Justin Patterson, Analyst

Hi. Great. Thank you very much. I wanted to tease out a little bit more about the roadmap of additional product improvements. You noted that you've significantly increased R&D investments over the past two years. As we head into a macro that isn't necessarily getting worse but hasn't necessarily thawed out, how should we think about just the micro-level growth vectors from these product initiatives that have the potential for reigniting revenue growth into next year? Thank you.

Mike Cotoia, CEO

Great. Thanks, Justin. As we've said throughout the year, as we've navigated this choppy environment, it's really important for us to put the right investments against the right priorities. And under those key investments around our product as well as our content strategy, I'll focus on the product side. When we announced the July launch of our updated Priority Engine, we added some key focus areas. One of them was our Salesforce sync and integration so that we can get our first-party data aligned with our customers' first-party data, as well as being able to sync and leverage the data with any third-party platforms that they are choosing. And that's really important because that creates stickiness and better uses of our data, which was something that we didn't have before. When we look at that in the long-term roadmap because we eventually will see an uptick in the market, the more that we can get our data in front of our customers and as part of that July release, which also shows our account journey visualizations, which can highlight and show attribution in terms of what our customers are spending with us and how that's impacting their marketing and sales spend. That's a positive thing. I understand the short-term challenges when the market is down, but when the market comes back, there's going to be a keen eye towards the quality of data, quality of investment, and ROI against every marketing dollar spent. We just released as you saw in the announcement yesterday, our IntentMail AI. So this is part of our personalized assist AI-driven product strategy. We see a really strong competitive advantage when it comes to generative AI types of roadmaps and technologies and offerings because of our prospect level opt-in level of intent insights. So we know that sellers need to spend more time selling and they need to be laser-focused on personalized engagement with buying team members. So when we launched IntentMail AI, our focus is on three areas: relevance, efficiency, and precision focus that will enable our customers' sellers to be able to personalize their outreach based on leveraging TechTarget's proprietary first-party profit level intelligence for more effectiveness, efficiency, and ultimately for goals to generate more pipeline and close more business. Those investments that we're making today are pertinent not only for today and tomorrow but when the market picks up, because we want to make sure we're putting ourselves in the best position to capture that upside.

Justin Patterson, Analyst

Thank you.

Operator, Operator

Thank you for your question. The next question comes from the line of Bhavin Shah with Deutsche Bank. You may proceed.

Bhavin Shah, Analyst

Great. Thanks for taking my question and nice to see the stabilization in the demand environment. Can you just elaborate on what you're seeing just with your customers, both existing and new customers? Are existing customers changing their buying behavior upon renewals, downsizing, expanding and kind of invoicing behavior? Are they thinking about longer-term contracts? Any more insight there would be appreciated.

Mike Cotoia, CEO

Yes. Thanks, Bhavin. Customer behavior, both existing and even prospect behavior is very consistent with what we reported in August. I think it's no surprise that most enterprise B2B technology companies are navigating through a very uncertain environment. We're still seeing cost-cutting. We're seeing customers really trying to streamline their expenses and headcount. And so that also changes the mindset in terms of when they purchase and how. We've seen a great six to seven-year run towards building long-term contracts based on long-term revenue. However, similar to when we entered into COVID periods, we are now seeing a pullback, where many of our customers are trying to navigate on a short-term quarterly viewpoint. What we've done as an organization over the past three-plus years is important in terms of some of the acquisitions we made in the depth and breadth of our product offerings, ensuring that we are aligned with our customers to engage with them. If they can't commit to long-term deals, we need to find ways to provide value. Through our ESG and BrightTALK acquisition, it’s about content and positioning strategy for how they want to promote their products. We have the opportunity to pivot and talk about top-of-funnel, mid-funnel, lower-end funnel strategies, confirmed projects, and contextualized brand positioning. There are still many customers signing up for long-term deals, but not as much as they were pre-pullback. We want to discuss our first-party level intent at the prospect and account levels to set a priority engine. We’re pivoting with our customers. We're staying engaged as they navigate, and we want to make sure we are in the best position through the investments we're making for when the overall market picks up.

Bhavin Shah, Analyst

Super helpful. Just one follow-up on IntentMail AI. Can you just talk about the opportunity to monetize that over time? Is that something you're going to look to do? And then just in terms of the impact on the margin profile of the business, that would be appreciated. Thank you so much.

Mike Cotoia, CEO

I'll begin with the second question. We have made investments in our product development and engineering teams, and we've maintained this focus throughout Q2 and significantly in Q3 as we approach Q4. As we ramp up, we are utilizing the same approach that has always guided us in delivering our products, whether it's our lead Demand Generation driven by Intent, Priority Engine, or qualified sales opportunities. The margin profile will remain stable, and when the market improves, we will see expanded margins. Currently, our main focus, along with many of our customers, is on retention and usage. We want to ensure that our customers have compelling reasons to engage with our platform, understand the data we provide, and increase sales usage. As mentioned in our press release, we currently have 35 major customers with 500 representatives utilizing our platform. The feedback shared in that release highlighted our intentions. Our aim is to broaden that engagement and make it more widely available to all customers using Priority Engine by the end of the quarter. Engaging our customers, boosting their usage, and revisiting the initiatives we launched in July will be critical as they integrate our data into their workflows, whether through sales or marketing, all contributing to our long-term vision.

Bhavin Shah, Analyst

Great. Thanks for taking my questions.

Operator, Operator

Thank you for your question. The next question comes from the line of Bryan Bergin with TD Cowen. You may proceed.

Zachary Ajzenman, Analyst

Hi. Thanks. This is Zach Ajzenman on for Brian. First question on Priority Engine just kind of a follow-up on the renewals question. So renewals are usually weighted towards the end of the calendar year. So just trying to get a feel for what your sense is on the upcoming renewal cycle for Priority Engine and what assumptions are embedded in the Q4 view? Does the IntentMail AI going GA potentially offset some of the broader headwinds here into year-end?

Mike Cotoia, CEO

So I'll start with the Q4 renewals. Everything that we've baked into our forecast has everything to do with what we've reported for our guidance and ties in the current renewals' impact in Q4. In terms of IntentMail AI, that's really a 2024 and beyond impact. I would say, Zach, the initial impact is really well aligned with our customers, focusing on better visibility, better usage, and leveraging our data to ensure they have a better experience, not only in marketing, which is our traditional strength, but also on the sales side, which is crucial right now for both marketers and sales. So you won't see a revenue impact either way, up or down, based on what we report and what we're launching.

Zachary Ajzenman, Analyst

Got it. Okay. And the follow-up just one on the long-term contract revenue. It looks like some further declines here in Q3. I believe roughly half that bucket is Priority Engine. But can you shed a little more light on what comprises the other half of long-term contracts and whether the performance here is in line with or better or worse than what we’re seeing on the overall long-term contract revenue line?

Mike Cotoia, CEO

Yes. The majority of the long-term revenue is tied to Priority Engine. The other components include customers signing up for long-term programs with content syndication, our integrated product offerings, branding studios, and our channel through our BrightTalk offering. A lot of that is included in there. As I mentioned earlier, the percentage of our overall revenue being 36%, which was down, aligns directly with what's happening in the market. A lot of our customers are trying to navigate the next quarter, let alone the next year. However, returning to why we made those acquisitions and the products we now have to introduce or engage with our customers—whether it's strategic content for a new product launch or a new company positioning—gives us a better opportunity to so engage and provide value, even reaching new personas we hadn't engaged with before. So that's our playbook as we continue to navigate the uncertainty in the environment.

Zachary Ajzenman, Analyst

That's helpful. Thank you.

Operator, Operator

Thank you for your question. The next question comes from the line of Bruce Goldfarb with Lake Street Capital. You may proceed.

Bruce Goldfarb, Analyst

Hi, thanks for taking my question. Congrats on the quarter. Just a few questions. Do you have visibility into 2024? Do you expect to grow in 2024?

Mike Cotoia, CEO

Bruce, we're actually right now think the best approach is to provide guidance on 2024 during our February call. We've all seen a lack of visibility. It does nobody favors to announce what we see in 2024 as things continue to change quarterly. Like I said, before we feel like we're navigating at the bottom of the cycle. It's not a matter of if, but a matter of when it turns. But I think we'd be a little ahead of our skis to start announcing that right now.

Bruce Goldfarb, Analyst

Okay. And then how is the activity at BrightTALK versus the historical?

Mike Cotoia, CEO

Everything is now integrated in terms of our product offering. We don't break that down in terms of our BrightTALK product vs. TechTarget product. Our goal over the last two years was to integrate all our offerings to provide a content strategy. That content strategy turns into a program strategy, which turns into an insights capability that can be delivered back to our customer sales and marketing departments. I would say, in terms of what we're doing across all these channels, as well as in the healthcare market, we're working against the plan and making sure that we're doing the right things on that.

Bruce Goldfarb, Analyst

Thank you. And what's the M&A pipeline look like? Are you still seeing opportunities?

Mike Cotoia, CEO

Yeah. I think we’re consistent with years. We’re very opportunistic in terms of M&A. We always look for areas where it’s a good content strategy, audience strategy, or additional capability strategy that aligns with our overall offerings and long-term goals and revenue. We’re consistently in conversations, and that has been consistent throughout the last couple of years.

Bruce Goldfarb, Analyst

Okay. And then lastly, do you think expenses will come down in 2024?

Mike Cotoia, CEO

Well, we do a good job of managing expenses. As I mentioned, we are making some investments in areas that we need to ensure we capitalize on the uptick. Some of those investments we are looking at, what I would call investments, are in product, content, and engineering sides. Now with that being said, we have a really good track record of managing our discretionary spending and our hiring. If someone leaves and we don’t need to backfill, we might not. If we have a major initiative, we might realign resources internally. Our sales force has a strong skill set and can adapt as needed. We manage the business this way, and I don't have visibility if expenses will go down, but we will continue to prioritize the right investments versus the right opportunities.

Bruce Goldfarb, Analyst

Great. Thank you. Congrats on the quarter and congrats also on IntentMail AI. It sounds really interesting.

Mike Cotoia, CEO

Thank you.

Operator, Operator

Thank you for your question. The next question comes from the line of Jacob Staffel with Goldman Sachs. You may proceed.

Jacob Staffel, Analyst

Hi guys. Thanks for the time today. It's good to hear that there is a little bit of stabilization that we're seeing near the bottom of this macro pressure cycle that we're in. Just one quick one for me, and I apologize if this was touched on earlier, but another company that you are familiar with—Definitive Healthcare—noted that they see a lot of strong top-of-funnel activity. It's just a function of converting that top of funnel to bottom of the funnel. Can you talk about the top-of-funnel activity? And maybe how those conversion rates to bottom of the funnel have trended this quarter, 3Q thus far and 4Q against 2Q and prior periods?

Mike Cotoia, CEO

Yeah. We don't really disclose the conversion rates on top of the funnel to bottom of the funnel. But let me give you a little color. What you see in the market right now, even on customers across the enterprise tech space, deals are being elongated. What was six months is now 12 months or nine to 12 months, sometimes even 18 months. You can see that in terms of people conducting their research tied to their customers, who are pushing off deals because they're also trying to navigate uncertainty. However, it really goes back to what our main focus is, and that's on the content strategy. Today's buyers' demographics continue to change, and they want a seamless experience with relevant and trusted information as they make large deals. One aspect to mention is our organic traffic was up 20% year-over-year, coming off a 50% increase in the previous year. Our goal is to make sure we’re turning those page visits and new network members into the most relevant content to draw clear intent signals to help our customers—drive top-of-funnel, have the right conversations, and ultimately close those deals. That’s our focus. However, you can see deals have taken longer, and that trend has been apparent throughout 2023. I expect that to continue into 2024, but we’re doing all the right things around our content and product offerings to ensure we are in the best position to capture that uptick.

Jacob Staffel, Analyst

Thanks so much.

Operator, Operator

Thank you for your question. The next question comes from the line of Kunal Madhukar with UBS. You may proceed.

Kunal Madhukar, Analyst

Hi. Thank you for taking the question. One on the total customers—that’s the number that you disclose annually. It’s been a while, but can you talk about trends around total customers and how that translates into the number of seats per customer or average spend per customer and how that has trended over the year? And then it was interesting that you mentioned COVID. When we look at the high watermark in your revenue, which was last year, as we think of the growth coming out as the macro improves, how should we think of that within the overall macro outlook, which may be more capital constrained with higher costs of capital and increased focus in your enterprise customers on profitability? Thank you.

Mike Cotoia, CEO

In terms of total customers, it's in the Q that we have around 2,900 total customers. Some of our customers are spending on our marketing and their branding go-to-market strategy for their content creation and positioning strategy—not every customer is a Priority Engine customer, so we don’t disclose seat numbers. Regarding the macro and outlook, yes, we see what you're seeing around the cost of capital and high inflation rates, with a significant focus on profitability. These are critical areas that many customers focus on. However, it reaches a point where our customers' pipeline does not support the revenue targets they must hit. During a pullback in the market, customers may decide to handle this independently, reducing costs and data expenses. However, those decisions often revert to a formula where an inadequate pipeline compromises revenue targets. We've typically seen a flight back to quality. We are in a unique position in the market, serving both technology sellers and buyers. It's vital that we continue to support both our buying community and our selling community effectively.

Kunal Madhukar, Analyst

Got it. Thank you.

Operator, Operator

Thank you for your question. The next question comes from the line of Andrew Marok with Raymond James. You may proceed.

Andrew Marok, Analyst

Great. Thank you for taking my question. Kind of more from a theoretical perspective, do I have it right that you would benefit more if a more complex or confusing area in IT arose and there needed to be better clarification of information around it? Just thinking, for example, like generative AI right now, especially given that there are so many vendors competing for mind share with their solutions.

Mike Cotoia, CEO

Yeah. That’s a good way to look at this. I wouldn’t say theoretically that we’d be perfect across the board, but we indeed bring significant value around complexities in the market. I would say that like any major technology initiative among enterprise B2B tech, we are positioned to deliver value to technology buyers due to our comprehensive content investments. This investment is critical, including editorial content, analyst content, and our vendor content, which we capture from the BrightTALK community. Our proximity and understanding of these specific markets allow us to provide clarity to buyers exploring technology options. For example, on generative AI, we rank very well and currently rank number one organically for over 1,000 GenAI terms. Our strong position on search results allows us to assist buyers seeking transparency with their research journey.

Andrew Marok, Analyst

I did just Google Generative AI and you are number one organic. So thank you for the color.

Mike Cotoia, CEO

You bet.

Operator, Operator

Thank you for your questions. There are currently no further questions in queue. So that concludes the TechTarget Reports Third Quarter 2023 Conference Call and Webcast. Thank you for your participation. You may now disconnect your lines.