Earnings Call Transcript - TTGT Q4 2023

Operator, Operator

Good afternoon. Thank you for joining the TechTarget Reports Fourth Quarter and Full Year 2023 Financial Results Conference Call. My name is Matt, and I will be your moderator for today. I would now like to hand over the conference to our host, Charles Rennick, with TechTarget. Charles, please proceed.

Charles Rennick, Host

Thank you, Matt, and good afternoon, everyone. The speakers joining us 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, we 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've posted our shareholder letter on the Investor Relations section of our website and furnished it on an 8-K. You can also find these materials with the SEC free of charge at SEC's website at www.sec.gov. The corresponding webcast as well as a replay of this conference call will be made available on the Investor Relations section of our website. Following Greg's introductory remarks, the management team will be available to answer 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 most recent periodic reports on Forms 10-Q and 10-K. These statements speak only as of the date of this call, and TechTarget undertakes no obligation to revise or update 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 effort, accompanies our shareholder letter. And with that, I'll turn the call over to Greg.

Greg Strakosch, Executive Chairman

Great. Thank you, Charlie. Well, the big news since our last earnings call was the announcement we made on January 10. We entered into a definitive agreement with Informa, combining TechTarget with Informa's tech digital business. The combined company will have increased scale with over 8,000 customers in over 20 countries, first-party purchase intent data from over 220 leading digital brands and a permissioned audience of over 50 million people. The combination increases our TAM by over 10x as we will enter 18 new vertical markets with a unique end-to-end solution across the go-to market. The combination creates companies with a strong financial profile, and we expect 2024 pro forma revenues to be over $500 million. Within 5 years, we expect revenue to grow to over $1 billion in revenue and at least 35% EBITDA margins. We structured the deal so our shareholders will get some immediate benefit by receiving an $11.79 per share in cash and long-term benefit by providing the opportunity for shareholders to participate in value creation through a 43% stake going forward. In regards to the current environment, we came in slightly ahead of the high end of our Q4 guidance. This reflects the macro technology environment, where customers remain cautious regarding their sales and market investment levels. We expect this dynamic to continue throughout 2024 because of uncertainty surrounding inflation, interest rates, the presidential election, and geopolitical issues internationally. I will now open the call to questions.

Operator, Operator

The first question is from Jason Kreyer with Craig-Hallum.

Cal Bartyzal, Analyst

This is Cal Bartyzal on for Jason. First one for me, I was just wondering if you could just talk a little bit on the AI capabilities across TechTarget and Informa, if there's any kind of differences in approaches between the two companies and how complementary those capabilities can come together.

Mike Cotoia, CEO

Great Cal. This is Mike. I'm going to focus on the AI capabilities with TechTarget right now because we've been working with generative AI capabilities and road map for the last year plus, so I really want to focus on that. And I see there's really four areas that we see the benefits of generative AI in creating measurable impact on the business. The first side, I'd say, would be on our product side. In Q4, we launched our IntentMail AI, which is under our Personalize Assist product suite. And what that does is hyper-personalize and auto-generate emails for sales reps to leverage for outreach, sales reps who work for our customers. So what we're doing in that, it leverages AI to blend TechTarget's prospect level, purchase intent insights and behavior, along with what we call recent product aligned customer information, to personalize our reps' outreach. And what this does is increase response time, reducing the time to create the emails. And as part of that product suite, we also have different entry points or points of interest at the individual prospect level, so a rep can build a cadence that has multiple entry points to engage with a prospect that he or she is targeting. We've seen good adoption in terms of reps leveraging that, reducing their time to create emails and leveraging the first-party prospect-level intelligence. We've also seen internal leveraging across our internal functions within TechTarget. We have a content marketing department whose goal is to help promote customers' content to our audience and to their prospects. And everything that we do is 100% indexed by topic, by content, we rate the performance, the promotions. So what we've done on that is we've built a model that now instead of hiring more junior copywriters, we're taking on more experienced copywriters to help train the models to help do the promotion and subject lines for the white paper and webinar assets that we want to promote to our customers. So we've taken that. We've seen success on that. And now we're evaluating and rolling out generative AI for internal procedures and processes across four or five other different functional areas. I think in terms of member and audience, and clearly better user experience for our members who come to our sites. We've built a private LLM driven out of our own content and first-party data, which is all behind the firewalls, to provide what I would call a micro experience, which will be driven by prompt intelligence. So when a user or a member visits our sites, we can then prompt them to find out what other information would be relevant for them, for their research, and then guide them to our knowledge base of content, whether it's editorial content, vendor content, or analyst written content, to ensure it's a better user experience. And as we create a better user experience for our members, we also gain relevant first-party purchase-intent signals. And then I would say, whenever there's a disruption or evolution in the market, that benefits TechTarget quite well. We're celebrating our 25th anniversary; we came into the business. We have storage; this big virtualization became a big mover, cloud, now AI. And if you look at the content that we produce, we have 1,000 number one rankings around the topic of generative AI. Vendors and customers need to cut through the noise because there's a lot of confusion about how to leverage it, what are the regulatory concerns, how it works in enterprise tech, and it's been beneficial and a driver for our TechTarget business. So those are the four areas I would say that we implement it and continue to evolve around the business.

Cal Bartyzal, Analyst

Perfect. Thanks. And then just the last one for me, it looks like the guide implies something like a double-digit decline in Q1 but flat or better for the year. Is there anything that you would call out that indicates you could see spend free up a little bit in the second half?

Mike Cotoia, CEO

Yes. So I'd say Q1 is always historically the lowest, and you align this to the technology market. Q1 is always the smallest revenue quarter for the year. It aligns with the technology market. When you see Q4 to Q1, over the history of our business, it's typically between a 10% and 13% decline from Q4 to Q1 and we predict in between 9% and 10%. I think, as we mentioned in the shareholder letter, there are not a lot of big catalysts in the market right now. We've seen the high interest rates, the inflation, we have geopolitical situations going on, and we have an upcoming election. But what we also are seeing is our customers are spending a lot of money in R&D. And there's always going to be pent-up demand when that shift goes from cost cutting to growth because there will be pent-up demand for technology as well as for marketing and sales, typically a flight back to quality. And we've seen this through several downturns over the course of 25 years. And we're seeing some, again, very consistent with our November call, like pretty stable and no surprises right now. So as we've seen that stabilize versus last year going into Q1, we saw a big dip. We saw some signs that the market stabilized a little bit, and when the pent-up demand is there, there'll be a flight back to quality, and we're putting ourselves in the best position to take advantage of that flight back to quality and focus on the recovery.

Operator, Operator

Next question is from the line of Kunal Madhukar with UBS.

Kunal Madhukar, Analyst

A couple, if I could. One is on the permissioned audience. So what percentage of your traffic in any given month is permissioned audience? And how much of the permissioned audience have you potentially lost because of all the layoffs? That's one. Second is with regard to the guide, I wanted to understand seasonality and what's going into your guide in terms of the 1Q that you've done exquisitely and the 4Q. What are the quarter-over-quarter trends in revenue that you're anticipating?

Mike Cotoia, CEO

Okay. I'm going to talk on the permission-based audience side. I would reflect that to our organic traffic. And so we saw an increase of 14% year-over-year of organic traffic, Kunal. And that's actually coming off a high-water mark for 2022, Q4 2022, where we saw 51% growth in the previous year. So in terms of permission-based audience, whenever we run a program for our customers in terms of lead gen or delivering prospect-level intelligence, 100% of our audience is permission-based. In terms of the layoffs, we're seeing the layoffs more at the vendor side, not necessarily at the buying team side. So the announcement that you continuously see throughout 2023 and even into Q1 of 2024, tech vendors did a lot of layoffs around sales and marketing because of their numbers and the demand that they have, and that doesn't really impact what we see in terms of the traffic on a permission-based audience. On your second question in terms of seasonality, let me go back to historically what we see, and you can go back into our financials for the last 16 years, 17 years of being public, is that Q1 is typically the smallest revenue quarter. Vendors are not done finalizing their budgets. A lot of vendors have December year-end, so budgets might not get finalized until February or March. And so in terms of their world, that's typically the lowest revenue quarter. In Q2, it ramps up. You see a lot of product releases and updates being presented by customers. You'll see them at more trade shows in April and May. Q3 levels off with Q2, typically; you have some of the summer months, especially in Europe, where people are taking vacations. And then Q4 is typically our largest revenue quarter, both for us, TechTarget, and that directly aligns with the enterprise tech market as well. So we're starting to see some signs where that's coming back slowly in terms of those patterns, and that's what we're focused on in terms of our investments and the opportunity to get back to.

Operator, Operator

Next question is from the line of Justin Patterson with KeyBanc.

Justin Patterson, Analyst

Two if I can. First, just going back to guidance. When you think about just kind of the bit of recovery over the course of the year, is that driven primarily by customer growth within there? Are you making some assumptions in terms of just pricing impacts around Priority Engine and the rest? So that's question number one. And then question number two, just philosophically, the product portfolio you have today is very different than what you've had in the past coming out of downturns, whether it's ESG or even just the BrightTALK asset. So if you look at TechTarget that exists today, how do you think an enterprise recovery might differ today versus what you've seen in the past? Thanks.

Mike Cotoia, CEO

Great. Justin, I'm going to start with your second question first because you bring up a good point. The product portfolio today is much different than it was 3 years ago, 5 years ago, or even 2 years ago. And that's been part of our strategic roadmap. It's very important, and what we've been very conscious about is making sure, whether it's through our organic capabilities and launches on our product side or through acquisitions, we want to be the premier provider to help our customers with their end-to-end go-to-market strategy. So when the recovery comes back, you're going to have customers that are going to increase their demand all around content marketing. They need relevant content to talk about the technical or economic validation and positioning within the market to engage with the right buyers. So now getting into that end-to-end go-to-market strategy earlier with not only the ESG capabilities but the BrightTALK capabilities through multimedia format, ensuring we can do this through webinars, PDFs, infographics to help our customers earlier in their go-to-market stage, then being able to take that content and put it into effective programs that will be delivered and put in front of prospect and buying teams that we know who they are. We have their permission base, and we know everything that they're looking at, enabling us to capture all that intent to deliver both on the sales and marketing organizations to help them prioritize not only accounts but the individual prospects within those accounts. So combining that together and then being able to plug into the healthcare vertical with Xtelligent and create additional peripheral content, that's been really important for us and is a big focus. So when you have an opportunity to play in the whole end-to-end go-to-market strategy for a vendor, you put yourself in a really good position. In terms of your first question, how we see the modest growth, I think it's a combination. So like we reported, the number of customer count was down and that reflected in terms pretty close to the decline in revenue for this year. We started seeing the overall revenue per customer level up, and it was actually up a little bit. And I think it's a combination between, yes, there will be some customers that are coming back to net new. I think there's some pricing capabilities that we have on our technology. I also think some of the new products that we'll be launching as part of our roadmap with Priority Engine, some extensions of what we're doing, and having some of these regions that may have been consolidated into a global spend on North America. If the market starts picking up, probably later in the second half, that there's more budget being allocated to field marketing. We mentioned in the last two earnings calls, whenever we see a pullback, budgets get centralized. They tend to take them out of the region. They want to consolidate them typically in the U.S. and then they allocate some dollars on that. Well, the reason is they have numbers to hit; they have sales, they have field marketers down there. So between increasing customer count, some pricing, and new product solutions, that's the approach that we see for 2024 and, more importantly, for 2025 and beyond.

Operator, Operator

Next question is from the line of Josh Reilly with Needham.

Rob Morelli, Analyst

This is Rob Morelli speaking for Josh. Regarding the acquisition of Informa, the 2025 pro forma model forecasts approximately 500 basis points of EBITDA increase year-over-year for the combined company, based on an assumption of linear margin progression. Should we anticipate that margin progression will remain linear over the next few years? Could you elaborate on some of the key factors that will contribute to the expected margin improvement?

Mike Cotoia, CEO

Okay. So you were a little broken up on that. I think you were talking about the margin expansion over the years. And what I would say is TechTarget had a really good history of making sure that we manage our margins. When you have a $500 million, if you look at the numbers, it's a pro forma $500 million going into 2025. The ability to take on revenue growth, which we have shown improvement over the history of our time, we have a greater than 50% incremental EBITDA margin. A lot of that revenue ends up all in the bottom line, so we'll be able to expand the margins on that side. The real key on this is a lot of growth through cross-selling and upselling our platforms into new customers. Also, if you look at the two businesses, when they combine, there are over 8,000 customers that we have an opportunity to both cross-sell and upsell the solutions that we have respectively to get a deeper footprint into existing customers. In terms of the Omdia business, which I can't really comment on, that's a new product. But it really does align with our strategy that we're talking about, getting into our customers earlier to help them with their end-to-end go-to-market strategy. So pure revenue growth driving 50%-plus incremental EBITDA margins. If you do the math over the 5 years, you get to the 35% EBITDA margin. That won't be in year 1. That gets over a period of several years to the growth and opportunities that we have.

Rob Morelli, Analyst

Got it. That's helpful. And then regarding some of the products coming from Informa, Industry Dive brings nice diversification from an industry perspective, while Omdia is solely focused on the tech industry. Does it make sense to bring some of Industry Dive's 20 verticals into the business model of Omdia given it's a pure subscription and expand their business coverage beyond tech verticals?

Mike Cotoia, CEO

Yes, I cannot comment on the Informa business and each of the divisions on it. What I can comment on is what our strategy has been, and it's been publicly announced about getting into adjacent markets, making sure we have our content enablement services, making sure we have an end-to-end solution and having the platform to reach across all the opportunities, including adjacent markets. So that being said, that's been a vision that we've stated pretty clearly around permission-based audience, first-party insights, and a comprehensive end-to-end go-to-market strategy. So when we have the combination, when that's finalized and signed, we'll be able to dive into that a little bit more with the public.

Operator, Operator

Next question is from the line of Andrew Marok with Raymond James.

Andrew Marok, Analyst

I wanted to dig in on the customer count a little bit. So that decline seems like it accelerated in 4Q. It was down 100 in 3Q, down about 300 in 4Q. What do you think is the floor here? And how much of the decline over the course of '23 is involuntary, like companies going out of business versus voluntary cutbacks?

Mike Cotoia, CEO

So I would say the decline, if you look at the overall picture throughout the year, you had a lot of customers that may have signed annual deals in 2022. It was the second half of 2022, really in Q3 when we started seeing some of the decline. So you didn't have many organizations signing up for annual deals going into Q4 of 2022. That's when the market started sending signals that it was slowing down. So that's probably one of the reasons why Q4 was a little higher. People that signed annual deals up to May, June, and July, that expired were dealing with the macro. They pulled back. In terms of voluntary or involuntary, you got to understand, there's a couple of things. We're less than 1 year out from the Silicon Valley Bank collapse, and they are 100% focused on technology companies. So some of those companies went away. A lot of those companies are still in business, but they are navigating through the environment, and they have to manage their costs very closely. So if the market picks up, as we talked about, and the demand increases, which it will, it's not a matter of if, it's a matter of when, many of those companies will come back. Also, during the customer count, and I mentioned this earlier, you might have an organization that's spanning in North America, EMEA, and APAC. The APAC region may have cut back, and EMEA may have cut back, but North America was still going. That would decrease our customer count based on those regionals that we treat as separate businesses because we're working on separate contracts and agreements. When the market comes back, you typically see that centralized budget plus back into the field. So that's the color I could give you. I can also tell you, if you look at the total customer count panel, the revenue, I think the overall revenue per customer was actually up slightly in 2023 versus 2022. And again, it's another sign. When we talked about it in November, we said no major surprises right now. This is what we're seeing currently. We're navigating it, and we don't see things flaring up, and we don't see big catalysts sprucing up right now into the first half of 2024.

Andrew Marok, Analyst

Really appreciate the color. That's very helpful. And one more, if I could. I mean, I understand that it's very early days right now, and this may not even be that much of a client-facing effort at this point, but has there been any meaningful feedback from your clients so far in terms of the reaction to the announcement of the Informa deal?

Mike Cotoia, CEO

No, not really. I mean, we're not allowed to discuss it in detail. However, we are focused on our usual business operations and ensuring we are making the right decisions for the company. From my perspective, I believe our M&A strategy over the last three years does not hold significant weight. We have been clear about our strategy to drive first-party purchase-intent data, establish a permission-based audience, and enhance our content. We have also been active in exploring adjacent markets, which we've publicly discussed as part of our roadmap strategy. The announcement we've made is open to interpretation, but we cannot share specific feedback.

Operator, Operator

Next question is from the line of Bruce Goldfarb with Lake Street.

Bruce Goldfarb, Analyst

With Google Chrome's new treatment of cookies, have you seen any increased lift in budget from longtime customers allocating more to TechTarget spend versus legacy cookie-driven spend?

Mike Cotoia, CEO

So as we all know, Google announced the phasing out of cookies starting in January and accelerating throughout the end of the year. It was just announced in terms of them putting that in action; it's definitely part of our playbook. I mean we are all first-party data, both at the prospect level and also at the account level. We're going to take advantage of that in terms of our go-to-market strategy and making sure that customers, and we believe even part of some of our product strategy, which you'll see us announce in Q1, will be in Q1, account-only insights. You got to remember, Bruce, most of our customers have always bought prospect-level intelligence from us, and we've identified the accounts that those prospects work in. We have a lot of accounts that buy, and a lot of our customers also want modeling, propensity modeling, ABM strategies with account-only information. So as part of our roadmap strategy and our product launches, you're going to see some announcements around our account insight fees, which would be at the account level only, and tying that into our first-party data versus Google phasing out third-party cookies. We see that as a pretty big competitive advantage.

Bruce Goldfarb, Analyst

I don't know if you can answer this, but post-Informa/Tech combination, should we expect a new Board Chairman to be elected from the post-close directors, or could it be a new director?

Mike Cotoia, CEO

I mean it could be a new director.

Bruce Goldfarb, Analyst

And then lastly, when do you expect demand in the legacy business to stop contracting? Do you think like Q2 or Q3 or Q4?

Mike Cotoia, CEO

Yes. I mean, like you said it, the numbers in the guidance we gave this year are relatively flat, up 2%. Heading into 2024, we still on the tech industry, on the enterprise B2B tech industry, still have high inflation, high interest rates, and a lot of layoffs right now. That's how they get settled. What I do know on this is we've seen pullbacks before. And we're seeing customers who spent a lot of money, investing a lot of money in R&D. We also see technology initiatives such as AI; we've seen it with virtualization and cloud and other things before that create pent-up demand. It's not a matter of if, it's a matter of when the market turns around, where customers shift from, 'Hey, I got to watch everything I do on cost,' to, 'I really need to focus on growth through sales and marketing efforts regionally and globally.' And when that turns, and I wish I had a crystal ball on that. I mean we've seen some signs like I mentioned in the last couple of quarters toward stabilization; when that turns, there will be a quick recovery, in my opinion, and we've seen that in the past. And when we see that recovery, whether that's Q3 '24, Q4 '24, or the beginning of 2025, our goal is to be ready for that recovery and to take the upside in that. As you can see, some of the investments we've made, the announcements that we've made, that is a real focus for us right now.

Operator, Operator

Thank you for your question. There are no additional questions waiting at this time. So that will conclude the conference call. Thank you for your participation. You may now disconnect your lines.