Good afternoon and welcome to the TechTarget Incorporated Fourth Quarter and Full Year 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Charles Rennick, General Counsel. Please go ahead.

Thank you, Gary. Good afternoon. Joining me here today are Greg Strakosch, our Executive Chairman; Mike Cotoia, our Chief Executive Officer; and Dan Noreck, our Chief Financial Officer. Before turning the call over to Greg, I 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 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 maybe 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 periodic 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 will turn the call over to Greg.

Great, thank you. We finished 2018 on a strong note, which sets us up very well for 2019 and beyond. 2018 revenue grew 12% to $121.3 million, 2018 adjusted EBITDA grew 38% to $30.3 million. Adjusted EBITDA margin was 25% in 2018 versus 20% in 2017. Incremental EBITDA margin was 65% in 2018. Net income per share grew 88% in 2018. Cash flow from operations was $23.9 million, representing 79% of adjusted EBITDA. Priority Engine revenues were up 29% in the fourth quarter and long-term contracts represented 33% of revenue in the fourth quarter, up from 24% in the fourth quarter a year ago. We feel that 2018 was a breakthrough year for the company and we are optimistic that we can use that momentum to carry us to even better results in 2019 and beyond. I will now open up the call to questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Eric Martinuzzi with Lake Street. Please go ahead.

Thanks. Congratulations on Q4. I have got a few questions. I want to first focus on the price increase that you talked about in your shareholder letter. You did this a year ago, you mentioned it was 20% increase on Priority Engine in January of 2018 and it’s going to be 10% for Priority Engine in January of 2019. Now, is this going to be focused kind of size dependent or is this across the board increase? You talked about certain customers require a little bit more handholding than others.

Hey, Eric, it’s Mike. In terms of the price increase, we have different offerings across Priority Engine from more of an entry level all the way to – hello…

I am here.

Okay. We have different offerings of Priority Engine from more of an entry level to a fully robust scalable level and we are going to be doing that price increase across all the levels. So, it’s not just going to be based on a size dependent situation, it’s going to be across all the Priority Engine solutions.

Okay. And then refresh my memory, how did that rollout last year, was it on the anniversary of an annual contract, was it rolling kind of – you rolled out throughout the year or was it all in one quarter?

Yes. So we launched in the first quarter as we did last year and we did it this quarter this year as well. People that signed up prior to the beginning of the year were protected in their previous year’s pricing, but then we added other add-on bundles and solutions, because as we talked about in the past, we are integrating a lot of our branding lead generation offers into Priority Engine. So there is a up-sell capability and opportunity for our customers to really what I would say create a greater share of voice percentage within the markets they care about.

Okay. And also on the revenue you talked about, you are giving a double-digit growth outlook for 2019, but you talked about that being little bit more robust growth in the second half of the year, what is the reason behind the confidence in that more robust growth in the second half?

Sure. Good question. I think if you look back at our November earnings call, we discussed how it was – when we take a look at our year, especially coming out of the summer months. And I really say post Labor Day we typically see a big increase of investment from Q3 over to Q4. And what we saw this year where a lot of companies due to some of the uncertainties that will happen in the short-term. For example, we had mid-term elections, we had tariff talks, trade talks that later ended up into an – led to a volatile stock market November and December. We had a government shutdown. And so what happens on that is we projected that people would stay relatively flat coming out of September, because we saw little bit of a delay and a little bit of flatness. And when that happens, people are really trying to compare to what we typically see in terms of like a big increase where that impacts Q4 going into the first quarter and second quarter. We saw uptick not as much as we wanted, we also had some privacy in GDPR pushed back with some of our – couple of our larger accounts and we see that entering into Q1 and at the beginning of Q2. So I think we are well positioned. We are still seeing some good growth in Q1 and Q2 and very well positioned with our long-term subscription strategy to pickup that Q3 and Q4 growth to achieve double-digit growth.

Okay. And then last question from me, I want to drill down on – I had in my notes that they are really – those three things you touched on, trade and tariff being one, election uncertainty being two and then GDPR being three. Obviously, election uncertainty is behind us, there is always going to be some element of political uncertainty, but have you seen a change in the behavior of your largest customers with regard to GDPR?

So, I would say – we as well as our customers take any data privacy and GDPR very seriously. And I wouldn’t say it’s all of our largest customers. There is a select of few customers that really take a conservative approach to this. And what does that mean? As far as TechTarget is concerned, we maintain and really try to execute on a very transparent opt-in consent-based registration process. And I will say it’s less than a handful of our customers take a very ultra conservative approach on that where they want to add additional what I would say opt-in policies or additional questions in that policy. I still think that they are dealing with that today. That doesn’t go away, because the calendar flipped over to January of 2019, but I also understand that our customers understand how we approach our registration process. We believe in our registration process and they also have pipeline numbers to hit and they have to make sure that they are doing it in a compliant way. So, I still think that they are trying to figure out, because there is a lot of room for interpretation as it comes to the GDPR laws and the regulations. They are trying to get their hands around that as well and we feel we are in a pretty good position to make sure that we are trusted source to help drive their marketing and sales pipeline.

I am just trying to get a sense of where we are in the timeline do you feel like we are kind of closer to the middle than we are to the end with these handful of customers?

Well, I think it launched in May of 2018. And I think from the first quarter, people were – had really not a lot of clue of what was going on. The next quarter, there has been some news with some – they don’t want to be mentioned in the news and I think they try to figure this out. If I had to guess and I really don’t know for sure, I would say we are in the Back 9 but we are not on the final 18th hole, if that’s a good golf analogy.

Yes, I mean, the one way to put it is like less than 1% of our customers this is an issue with. So they are at a competitive disadvantage to the other 99% of the competitors. So that’s why we think that long term that those handful of small company those handful of companies that extra conservative view, competitive pressure could change that.

I understand. Thanks, Michael. Thanks, Greg.

Welcome.

The next question comes from Mike Malouf with Craig-Hallum Capital Group. Please go ahead.

Hi, guys. Thanks for taking my questions.

Hi, Mike.

In your letter, you kind of laid out a little bit about talking about going after your smaller customers. And I know you know when you take a look at smaller customers, I’m sure the price increase and as you look into what you’re charging for Priority Engine that can be a daunting amount. And I’m just wondering, what have you decided to do with regards to going after smaller customers?

That’s good question. So today we breakout our customer set in three areas. We have our top 10 global accounts, which I think everybody knows. You could guess who those folks are. We have next 100, which are a lot of the high-growth SaaS-based companies. And then we have what we consider all others and if you look at a cohort of 1,200 to 1,300 customers, you can really start seeing a trend we are very focused on making sure that we develop our products, our marketing, our selling capabilities and our support to really help all of our customers across all of the different customer segments. So, I was very happy to see this quarter was that our next 100 customers grew at a very strong rate as well as our all other customers, which grew in high double-digit rate. So, we’re seeing success on those we also believe there could be another subsegment of even smaller accounts that we’re evaluating possible opportunities to address those folks to some future product offerings and announcements, but we’re not ready to discuss that today.

Okay, that’s great. Thanks. And then when you take a look at the 20% price increase that you took last year, and you were up about 19% in revenue and IT Deal Alert. Can you, sort of, break down or give us a sense of how much of that 19% was due to the price to that 20% price increase?

So that price increase was layered in over the course of the year so, for example, someone who was coming up for renewal in September, they would only had that price increase for October, November, December and we also keep in mind because we’re recognizing revenue pro rata. So, that price increase just on Priority Engine, which is about a third of our revenue, the price increase last year we’ll see more benefit this year than we did last year most of that revenue growth for Priority Engine last year was based on people buying more, not the price increase.

Okay. And if I take a look at Priority Engine, sort of, do the math, looks like it’s about $10.5 million of your revenue this quarter. IT Deal Alert was about $15 million just over $15 million, so is it right to say that basically the recurring all the recurring revenue that you sort of break out is Priority Engine and that $10.5 million?

A majority of the revenue that we have under recurrent revenue is under Priority Engine. Now, I’ll also add a caveat to that there are some there are Priority Engine subscriptions sold on 3-month trials I mean, people have to pay for it obviously, they have to pay a higher price in the premium for it. But in some cases where maybe budgets get delayed or stalled, people want to make sure they’re getting actions to some of the data and they will come in into that. We have some piece of our revenue recurrent revenue as what you would classify typically or historically as core. And that was one of the things we’ve talked about since I believe Q2 of last year about really integrating the products because what our IT Deal Alerts Priority Engines gives our customers access to who’s in market today and which companies are in market and we rank and prioritize those. It doesn’t necessarily say they’re in market or engaged with you Mr. Customer. So, the integration of our lead generation and our branding offerings inside of Priority Engine allows our customers a best practice that they want. A, Identify, who’s in market, by which technology segment and which region today and allows them to influence, engage and action against those active prospects or buying team members through their content and branding components.

Okay. And then just one more final housekeeping are you still planning on not breaking out IT Deal Alert going forward?

Yes. We’re combining it, that’s exactly what it is. Our products – our sales position on this is integrated. All of our products, Mike, are purchase intent driven. And again, if you look back at this and look at Priority Engine, Priority Engine is a subscription that our customers sign up and they want to have all the access to purchase intended sites around a specific topic. And let’s just say, it’s all-flash storage, for example. And we’ll give them that. We’re looking at all the companies on our sites and the individual buyers that are reading and engaged in the content, will let them know a lot of different intent signals. However, that’s great to have and that’s a good thing to have and people can leverage that. But our marketing and sales organizations need to influence those buyers. So, they need to make sure they’re taking their core investments, which is lead gen, content syndication and branding and integrating it into the Priority Engine subscription as it runs. So, what we’re doing as a company is building all of our products to integrate off the Priority Engine platform, so everybody has a comprehensive view of who’s in market and who they can engage and how they can engage with them through their core.

Yes, so just to reiterate, I mean –

So you’re just going to break it out into international and North America, that’s where we’re going to see –

Yes, sir, yes.

Yes. The reason we’re not breaking it out going forward is because that delineation no longer exists. I mean, that’s the reason. We’re spending all this time doing allocations that aren’t meaningful. That’s what – that’s Mike said, that’s not the way we’re selling it, that’s not the way we’re running the business. So those numbers are no longer a meaningful delineation.

Got it. Okay, great. Thanks a lot. Appreciate it.

The next question comes from Marco Rodriguez with Stonegate Capital. Please go ahead.

Good afternoon, guys. Thanks for taking my question. Kind of want to follow up in regard to that last question on the change in the model, if you will, just to kind of use the phrase here for having Core Online, your branding initiatives kind of dovetail into the IT Deal Alert, which is obviously sold on a subscription basis. Just kind of wondering how the pricing is going to work when both of them are sort of combined, if you will? I mean, presumably in the past, on the Core Online stuff, it was – I’m assuming kind of piecemeal based on the campaigns that they did, I’m just kind of wondering how that’s going to work with the subscription?

Right. So, there’s a couple of ways this will work. So, we would be able to price out – in the back end, somebody came to us and said they wanted to have – they’re going to buy an annual subscription of Priority Engine. We know a pricing number on that. We know a pricing number if somebody said separately, I want to generate 500 leads through content syndication. And by integrating them into one component, we’re taking one plus one and we’re adding a little bit more. And what we’re able to do and I think is pretty important is we’re now able to show right in the Priority Engine platform a couple of key things: one, we just launched an ROI Dashboard. So, one of the hardest things that our customers have is measurability. Hard to measure what a lead that they may generate through content syndication is actually doing – it goes into what nurture system, it kind of gets lost. Now we’re able to show right in there a few things. We’re able to show through you total addressable – through Priority Engine, what’s the total addressable market, what are you getting out of your lead generation and branding offerings when we integrate it meaning how many of that total addressable market audience are you engaging with brand, how many of those individuals are you engaging with content syndication, so we can actually highlight it and show it right in the dashboard. So, for example, if a customer we name Juliette as a number one prospect this week in account on all-flash storage and they were 25 people inside of Juliette that were actively looking at all-flash storage over the last 90 days, if five of those people engage with branding elements or lead-generation elements, content…

Got it. Understood there. So, just to make sure I’m understanding something here on the lead generation, the branding initiatives. So, are they going to be signing up some sort of annual subscription there as well that is added on top of IT Deal Alert or will they – and so in essence, they’ll pay whatever amount of money per year and they’ll get X amount of leads or X amount of impressions or will that be kind of tailored depending upon what they’re doing on a quarter-to-quarter basis?

It can be both. So, the first – the answer to the first is they can sign up for Priority Engine with a guaranteed number of banner, integration impressions as well as leads to content. They can also sign up for Priority Engine alone if they want to for the year, which we don’t typically see a lot of people doing – the transition to integration is massive. This is best practice and this is what our customers want. And even if they do sign up for an annual Priority Engine, where they’ve also added leads and branding impressions, there are also additional markets that they enter; segments that they care about; product launches that they care about; new geos, whether it’s EMEA, APJ, Latin America; whether there’s add-ons to those; whether it’s quarterly or additional annual subscriptions.

Got it. And then in terms of your shareholder letter, you mentioned doing some additional work here in post-sales efforts to kind of help the smaller customers utilize your information on a more comprehensive or a better platform. Are you building a new team or are you reallocation resources that you currently have? Can you just add a little more color there?

Sure, thanks. So, we’re reallocating a lot of our folks internally and we have done it. So back in August, we mentioned that we were building a renewal team. And the reason why we started looking at this is, we’ve learned a lot over the last couple of years from transition from a media company, which was a 30-day, 60-day, 90-day typical program type of revenue stream to a SaaS-based subscription type of revenue, where our smaller customers are a lot different than our midsize customers and a lot different than our larger customers. And a lot of the high-growth and enterprise customers have the people, the tools, the metrics, the maturity like a lot of resources to help measure. What we noticed is there was some churn with some of the smaller customers. So, what we did was we started with the renewal team and then we transitioned to a completely new innovative Customer Success team. And that entails senior sales folks that have been with the company on average of 10 years, our former client consultant and Customer Success folks that are tied into our Customer Success team and our post-sales operations team. And our goal with those folks as well as with the new product releases, and when we’re talking about the product relations, the visualization and the dashboards, when you couple the dashboards that can really show measurability, they can hook into your sales force and be tied to your sales – customers sales force pipeline and forecast along with these folks whose job is to onboard, train, provide best practices, actually, leverage content marketing strategies and really make sure that the data is being integrated into our customers’ workflow. We have seen some really good early success. So that’s why we have restructured this and it was leveraging the same personnel, but reallocating them into these new roles.

Got it. Thanks a lot guys. I appreciate your time.

Sure.

The next question comes from Aaron Kessler with Raymond James. Please go ahead.

Yes, hi, guys. Couple of questions. First, Core Online business looks fairly strong in the quarter at least sequentially, was there anything specific should we attribute that to or is that just more seasonal strength? And can you remind us the GDPR impact, is that more impacting IT Deal Alert a little more than Core Online at this point? Thank you.

So I think on the Core business, Aaron, it was we typically see Q4 as our strongest quarter in terms of overall revenue. And you have end of the year and end of the quarter some budget flush, but our customers have been pretty strong throughout the year. If you look at our Core numbers, it was the first year that we saw growth in several years. I think we projected that our Core business in 2018 was going to be either be flat to maybe down single-digits. So we have seen some pretty good movement throughout the year. And I would attribute that to even though we are integrating all of our product offerings right now our sales team still leads with data information. So, we have purchase intent data. We have installed base criteria data. We have share of voice and market data. And when we show the data, it really does help support both IT Deal Alert as well as the Core. And as far as GDPR, I think it’s a little bit of mix on both and I will give you an example. If we have a customer that wants us to generate 10,000 leads throughout the quarter and we look at our – the way we are setup and how we have an opt-in, pretty transparent, consent based system but they add additional requirements that are above and beyond, but it’s what they are asking us to do. If they said, can you generate 10,000 leads and we know that we can generate 10,000 leads, until they ask for these additional requirements, because it’s very difficult to get people to continuously respond and say, it’s okay to add this additional question or this filter or this. So we will have some drop off. So we…

Got it. And just quickly any areas you recall either kind of throughout 2018 as we enter 2019 kind of we are tech verticals of strength or maybe that you are seeing some more weakness and just overall? Thank you.

Sure. So we are seeing some good strength obviously in business analytics, software, hybrid, public cloud in terms of catalyst, artificial intelligence, machine learning, modernized data center, software defined whether you look at data center storage or things like that. We are seeing some of the traditional storage-based companies that really used to be a big powerhouse. They are still doing well, but they are getting into some of these other markets. So, it’s a good thing. Security is typically a pretty hot topic as well. So, in terms of the catalysts that are sparking IT research and purchases, it’s a pretty healthy environment right now in that. And when you couple that with what we believe will be healthy IT spend environment over the next few years, I think it aligns up pretty well.

Great. Thank you.

You are welcome.

This concludes our question-and-answer session and the conference is also now concluded. Thank you for attending today’s presentation. You may now disconnect.