Good day, and welcome to the TechTarget Q3 Earnings Release Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Charlie Rennick, General Counsel. Please go ahead.

Thank you, Lexie. Before turning the call over to Greg Strakosch, our Executive Chairman; and Mike Cotoia, our CEO, I want to remind everyone on the call of our earnings release process. As previously announced, in order to provide you with an update on the business in advance of the call, we have posted our shareholder letter on the Investor Relations section of our website and furnished it on an 8-K. Also joining us on the call today is Dan Noreck, our CFO. Following Greg and Mike's remarks, the management team will be available to answer your questions. Any statements made today by TechTarget that are not factual may be considered forward-looking statements. These forward-looking statements are based on assumptions and are not guarantees of our future performance. Actual results may differ materially from our forecast. Please refer to our risk factors in our annual and quarterly reports filed with the SEC. These statements speak only as of the date of this call, and TechTarget undertakes no obligation to update them. We may also refer to financial measures not prepared in accordance with GAAP. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures accompanies our shareholder letter. With that, I'll turn the call over to Greg and Mike.

Great. Thank you, Charlie. We had an excellent Q3 with double-digit revenue growth and 25% adjusted EBITDA growth. Revenues were $30.7 million in Q3, up 10%. Adjusted EBITDA was $7.7 million, up 25%. Revenues from Priority Engine grew 38%. 35% of our revenues in Q3 2018 were derived from longer-term contracts, up from 23% in Q3 2017. Adjusted EBITDA expanded to 25% of revenue in Q3 2018, compared to 22% of revenue in Q3 2017. Our preliminary 2019 forecast calls for double-digit revenue growth and over 20% adjusted EBITDA growth. We will give further details about our 2019 forecast with our next earnings release in February of 2019. Today, we are announcing a new $25 million stock repurchase plan. I will now open up the call for questions.

Thank you. [Operator Instructions] Your first question comes from Brian Fitzgerald with Jefferies. Please go ahead.

Thanks guys. You highlighted in your letter that you saw some cautiousness on the behalf of largest customers, and that was kind of resonating through the model a little bit and that was also tucked into the Q4 guidance. I wanted to know if you could maybe unpack that a little bit. You highlighted there was a GDPR in there, there were tariffs and midterm elections. Post-yesterday, do you see that opening up? Any questions around that, guys, would be great – any comments around that would be great.

Sure. Brian, this is Mike. Yes, in terms of cautiousness and some uncertainties, we have seen that with some of the larger accounts. And we really see that when it comes to the core investment, and we will see a little bit with the cautiousness as it relates to IT Deal Alert as well. Just like when the markets are flowing and everything is rolling forward, that core investment which is lead gen and brand, those pickets get turned on pretty quickly. And when they encounter some short-term uncertainty or cautiousness, they'll ratchet that down fairly quickly. On the mid-term elections, that was one of them. I would bucket into three areas like we did in the shareholder letter: Number one, in the mid-term elections, there was some cautiousness based on how the results would end up and what impact the tax regulations would have if anything was going to get peeled back. So I'm not commenting on Democratic-Republican, but I will say that is over, and I believe that will provide some clarity moving forward and I think you saw some of that in the markets today. So that showed some sign. We also have seen with our larger accounts, a lot of talks around the tariffs, happening across the globe, where their cost of sales could rise and their ability to sell into those regions could be more challenged. So there is some uncertainty that will continue to be a topic of discussion and it will impact more of those larger global accounts. And then lastly, we are seeing some cautiousness around data regulations, and in particular, GDPR. So a lot of our larger global accounts are taking a very cautious approach with these regulations, which results in a pullback on the lead generation efforts as well as some of the data efforts. As we've mentioned in the last two earnings calls back in May as well as in August, we believe we're in a very good position and it's a long-term competitive advantage for TechTarget. We have a consent-based opt-in policy, where everything has to be tick-and-tied accurately, when subscribers engage with us and with our customers. However, we're seeing is that our largest customers, who have offices around the globe and then throughout EMEA, are having some additional policies that their own privacy and legal are governing and that would include an additional opt-in. So after we have our opt-in, they are requesting an additional opt-in and that will drive a pullback in overall lead generation efforts. It can also create a cost in fulfilling some of those programs. Again, as we head into 2019 and there's more clarity on the compliance laws, we hope that, that's a sizable bit with the larger accounts. But for now, that's what we're experiencing.

Great. And then maybe we talked about – internationally talked about large accounts there. Last quarter, we were talking a little bit about small accounts and some churn there and then the ability to almost triage and fix that situation rapidly. And so any notable dynamic to call out with respect to small accounts this quarter?

Yes. So back in August, we announced that we saw a little bit of churn with our smaller accounts relating to the Priority Engine and some of the integration with the Core Online. In terms of the – and other two areas, our top 10 and our next 100, our revenue renewal numbers are greater than 100%. So our focus really has been on those smaller accounts. What we announced when we started to mobilize was a sales led combined with our client consulting team to engage with those smaller customers the moment they sign on for our longer-term subscriptions through Priority Engine as well as their integration with some of our core products. What we want to be able to do with those customers who have fewer resources, less infrastructure and a tougher time to really measure results, our teams will be getting there to make sure that they are onboarded accurately and consistently, identified the key use cases and the KPIs that we sold the program into and help them measure it along the way. We're going to couple that with some of our new product features that will be announced that will be waving the dashboard to help assist with a lot of these smaller accounts and help reduce the churn.

Great. Thanks Mike.

You’re welcome.

Thank you. Your next question comes from Marco Rodriguez with Stonegate Capital Markets. Please go ahead.

Good afternoon. And thank you for taking my questions. I wanted to kind of follow-up on the prior question of the slowdown that you're kind of seeing from some of your clients. Maybe we can specifically talk about the European with the GDPR, with the additional opt-in. Can you talk a little bit about your thoughts there as far as that impacting more of your Core Online or the IT Dealer internationally? Just kind of how are you thinking through that?

Sure, Marco. I would say it absolutely impacts the Core Online immediately, in terms of our larger customers trying to generate lead-generation programs – some lead-generation programs with us. Where to give you a little bit of background, what we have is an opt-in policy where they have to check a box to approve their data to get transition over to TechTarget, and then there's another box that they check that provides consent for TechTarget and our partners, which are our customers that we lay out and we have in the like, so that's visible for them to engage with. The global accounts, just taking a lot of them, not all of them, but most of them have taken a very conservative approach, where they want to have an additional opt-in. And we have to be very careful how we continue to e-mail our subscribers because they've already opt-in, they've already provided consent and they've done everything. So in those cases, when they ask us for that second opt-in, we have been investing in some tele-follow-up services to help obtain that additional opt-in. So that's helping us fulfill some of those programs, but they are definitely taking a pullback on the data – I mean, on the Core business. As it relates to the data business, we're starting to see that a little bit too as they navigate through these compliance laws and these regulations and they get it. They take a very conservative approach internally. I mean, the feedback that we get from a lot of our customers is, we understand your process, we understand your registration opt-in and your consent base, we agree with it, but these are our own policies as we navigate and make sure that we don't get ourselves into any issues. So we are seeing in the short-term a little bit of uncertainty with those folks. But as compliance rules and regulations become more clarified and people understand how our process lays out, we would hope that that would subside.

Yes. And our position is this is affecting everyone in the market. We're the best company positioned in terms of GDPR because we've always been opt-in base. Forrester just came out with a report putting us – labeling that as strength of ours. So it's kind of how it plays out in the short-term is you have more back-and-forth with customers to it delays some programs. Then when they want that second opt-in, sometimes it can make deals smaller because that decreases response rates when you do that. But like Mike said, it's kind of relatively new and that's shaking on and our customers are getting used to the new environment.

Understood, and so with this additional opt-in, just trying to get a little bit of some flavor here on the potential short-term impact. Theoretically holding everything else, kind of steady as far as geopolitical and tariff-type impacts, once you cycle through getting in touch with the customers or the end customer potentials that have already opted-in to your services. Are we talking just the Q4 type event, maybe bleed into Q1? And then after you've gotten in touch with everybody, are you basically done in terms of the double opt-ins, if you will?

Well, I would say that we are preparing – this is definitely a Q4 challenge that we're working through with our customers. And I would see that in the short-term bleeding into Q1. And with a vendor of ours has a lead-generation program where we gather a lead and submit it over there, and they want us to get that double opt-in. We can do that and that person will be all set moving forward as it relates to that vendor. But if another vendor wants to have that person to be opted-in, we have to go out and tele call or tele follow up with that person to be able to get that additional opt-in. So there's a revenue pullback in the short-term, and there's also a cost of sales impact, because we're not going to hire a full team, a full staff to go tele follow-up. We're going to outsource that and moderate it and make sure as we look this going into 2019, we have the best, most effective and cost-efficient ways to do that and the ability to scale that across all the global accounts.

Gotcha, and then kind of switching gears here on IT Deal Alert, I guess, more specific to your Priority Engine. Can you maybe talk a little bit about your thoughts as we start to enter into fiscal 2019, kind of how you're looking at the opportunities there for growth and if you can segment that between North America and international?

Sure. So IT Deal Alert overall grew 19% year-over-year and Priority Engine grew 38%. So we saw a nice uptick in our overall IT Deal Alert customers from 675 – from 610, and we saw 43 net new customers in the quarter. We also saw a great sequential growth from Q2 to Q3 in the amount of $1.8 million. So we're very pleased with the progress and the growth of Priority Engine. And it's also the driver and the catalyst for our business model to become a revenue recurring business. So in terms of Priority Engine, I think, we're very well positioned here in North America as well internationally. What I would say for 2019, when we have been announcing and reporting on two product revenue models between Core and IT, that's becoming very blurred. And I think we mentioned that in the shareholder letter. When we first launched Priority Engine, we sold that as a standalone product. So we reported a data number as well as a Core number. However, our intent data has been infused to all of our products, to all of our IT Deal Alert products toward our Core brand and our lead generation. So, now as we are selling and how we are packaging our products in Priority Engine and new products releases, everything is being fully integrated. And because of that, as we get into 2019, we plan on reporting on two numbers. We plan on reporting on one total online growth number, which will be inclusive of all IT Deals are in Core. And then we'll report on the amount of revenue within the Core to derive from long-term contracts versus non-long-term contracts. And we'll break that down by North America as well as international.

But in terms of the trends that we've seen with our customers in terms of demand for purchase intent data and their desire to continue to become more data-driven, that trend is continuing. We know that trend will continue into next year and that will definitely drive growth for us. As you know – as you saw in the shareholder letter, our initial 2019 revenue forecast is for double-digit revenue growth. And that's really being driven by our customers demand for data.

Got it. And last quick question just kind of a housekeeping item. The refinancing that you're expecting here to close by year-end, are you anticipating any sort of non-cash charges or anything of that nature that will flow through the income statement?

No.

Got it, thanks a lot guys. I appreciate your time.

Thank you.

Thank you. Your next question is from Mike Malouf with Craig-Hallum. Please go ahead.

Hi, guys, great. Thanks for taking my question.

Hey Mike.

I’m wondering if you could just talk a little bit about the cadence of the quarter. When you reported in August, it sort of sounded like the core business was actually doing a lot better than what happened for the quarter. So did it really slowed down at the end, and are we seeing that continue pretty hard into October, November, and that's sort of why the EBITDA guidance reflects that?

Yes. Mike, this is Mike, couple of things on the Core. First of all, our second half comps are a lot higher than our first half comps in 2018. Recall last year in Q3 – starting in Q3, a lot of these global accounts started coming back and spending with us and spending on IT Deal Alert, but they were also spending on the Core. And in Q1 and Q2 of this year, things have really come along. The tax regulations were just passed, their customers are going to be able to expense capital expenses in year one. Results are coming out in terms of IT spending. So very quickly, they turned up there, and we've talked about this in the past, they can very quickly turn up their brand and their lead generation investments. They have the brands, they have main recognition, and it's something that they are very familiar with. And when I say they, I'm referring to a lot of the larger counts. As we got into Q3 – and at the end of Q3, we started seeing a little bit of a slowdown on that and we address the three buckets where I'd say there was some slowdown that was tied to some uncertainty and some cautiousness. And that really is around the midterm elections, which we're glad those are over, around the tariff situation and as well as GDPR and the compliance situation, and they can very quickly pull that back whether the short-term cautiousness and internal debt gone later. And I think that's a direct impact.

Yes. And the thing about Q3 is, I mean, we deal with this every year is that is a more back-ended quarter for us. So basically you have July and August, you're in the middle of the summer and then the way you typically – once Labor Day hits, you have very strong momentum through September, October, November, and that didn't materialize as much this year because of the issues Mike just related, and it was really basically with our larger customers. And so that kind of big booking period of September, October and this first week in November, that's where we saw that.

Okay, got it. And then just so I can understand some of the numbers, the long-term contracts have 35% on the overall revenue. So basically, we just took the $30.7 million in terms of that $35 million, that's your recurring revenue as we stand right now?

Yes.

Okay. And then, I'm assuming that, that percentage is – that $10.7-or-so million that's basically Priority Engine?

It's a mix, but it's primarily driven by Priority Engine, and now we'll start integrating to our product offering some Core and some lead gen and branding with it. But the driver of that, Mike, is Priority Engine.

The majority of the revenue is Priority Engine and then any non-Priority Engine revenue is primarily tied to Priority Engine contracts. So Priority Engine – while it's not all the revenue exactly. It's a driver of just about all of it.

Okay. And that's the number you're going to continue to release and is it more of a function as you think you want guys like me to focus in on a certain number, rather than you just don't have access to that number? I mean, obviously, the reaction does say something like Apple's decision to reduce their number of iPhones sold, it was not very well received, but they obviously can tell you how many phones are being sold. They just feel like people are focusing on it incorrectly.

Yes, Mike, this is Mike. The real driver of this is when we first launched Priority Engine, we did. We sold it as a standalone. And part of that, as you recall, was we want to introduce a purchase intent. We wanted to introduce Priority Engine. Our goal is to drive longer-term data subscriptions, and we've also want to integrate it with the Core. And they go hand-in-hand. Our customers, when we sell Priority Engine, we're giving our customers access into all the purchase and tenant sites by technology segment at the account and individual buying-team level. So they know and they can rank their accounts and the buying fees within those accounts by technology, what's it's missing is the second component, which is critical. The vendors have signed up to Priority, and just have to engage and influence those buying team members within those accounts that they are ranking and prioritizing with their content and branding messaging, because it's important that if they are ranked whatever this week around this technology segment, but it's important that they are engaging with them and they're thinking about vendor A or vendor B. So tying those together to our products and to our sales efforts is not only what we want, it's what our customers want and it makes sense and it just gets blurrier and blurrier, and it's not trying to hide anything. It's trying to do the best practices and really build this long-term model, which is integrated with our data and our Core product.

So that's the strategic model. I mean, we're very focused on selling integrated programs on long-term contracts. But the reality situation, all of our products now are basically hybrid. So I'll give you an example. We'll sell a branding program and we'll go to our customer and say, hey, we will use our purchase intent data to identify who we're going to serve the branding unit to, okay. So we're basically going to the customer and saying, it's a combination of branding with purchase intent data. So how do we identify that? Do we label that as IT Dealer? Do we label that as Core? Do we try to split it out? And so it's just – we're at a point now where the products are so hybrid that the exercise of trying to split them out doesn't really make sense, especially the products have the same margin. So strategically, that's the way we're running the business. But tactically, in terms of a reporting situation, it doesn't really make sense for us to go through this exercise any longer. And at the end of the day, the real investment thesis is, as we scale revenue, we can really expand margins and expand cash flow and grow our recurring revenue. And that's what's really driving the investment return. So that's the thinking behind it.

Got it. Okay. Thanks for the color. Appreciated.

Thank you.

Thank you. Your next question comes from Bruce Goldfarb with Lake Street Capital Markets. Please go ahead.

Hey guys. Thanks for taking my call. First, historically, you've seen revenue renewal rates from large and medium customers greater than 100%. Did you see any change in that for Q3? Or thus far, for Q4?

No, we still are seeing greater than 100% for those revenue renewal rates for the top 10 and next 100 customers.

Thank you. And then in regard to Core, your 8% year-to-date and your 1% year-over-year growth for the quarter, do you expect to see – are you anticipating growth for 2019? And if so, how much?

Yes, Bruce, as we mentioned before, we're really looking for tie and integrate our data offerings with our Core offerings. And before we had these separated, because there were standalone. But everything is powered by our purchase intent, and so we're going to be integrating and reporting on one total number for 2019. On the topline revenue, which will include all the brand, lead generation and IT Deal Alert, and we're also going to be reporting on the amount of revenue in the quarter derived from long-term contracts. And we'll do that for North America as well as international base in 2019.

And for 2019, to reiterate, we're expecting double-digit revenue growth and 20% plus EBITDA growth without the combined integrated number.

Okay, great. Okay, so for next year, you don't break it out, you'll just do those combined?

Correct.

Thank you. That’s all I had. Thanks for taking the questions. End of Q&A

Thank you. This concludes our question-and-answer session. And the conference has now concluded. Thank you for participating. You may now disconnect.