TechTarget, Inc. (TTGT) Q1 2020 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the TechTarget Q1 2020 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 Charles Rennick, General Counsel. Please go ahead.

Thank you, Grant, and good afternoon. Joining me here today remotely are Greg Strakosch, our Executive Chairman; Mike Cotoia, our Chief Executive Officer; and Dan Noreck, our CFO. Before turning the call over to Greg, I'd like to remind everyone on the call of our earnings release process. As previously announced, in order to provide you with an update on 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. 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 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 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'll turn the call over to Greg.

Great. Thank you, Charlie. I hope everyone is healthy. We are very proud of the TechTarget team. We are very grateful for the resilience and positive spirit as productivity has remained high by working from home. Revenue grew in Q1 5% to $31.4 million, adjusted EBITDA grew 7% to $8.5 million, adjusted free cash flow was $7.7 million, representing 91% of adjusted EBITDA. Our balance sheet remains strong with $45 million of cash and $23 million in term loan debt, but only $1.6 million of the debt is due for the rest of 2020. In the quarter, we purchased 736,000 shares of TechTarget stock. Today, we announced a new $25 million stock repurchase plan. I will now open the call to questions.

We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Aaron Kessler with Raymond James. Please go ahead.

Great, thanks guys. A couple of questions. One, maybe just on the customer size performance, if you can give us an update there, what you're seeing, especially during this period. Second, just what sort of pressure are you seeing more on the advertising side of the business with the display products? And third, maybe just – maybe some of the expense controls, what type of – which lines should we see that in? Thank you.

Right. Hey, Aaron, I hope you're doing well. This is Mike. In terms of the customer size performance, we break this down to typically three different customer segmentation groups, the Global 10, the next 100 and all others. And I think when we talked about this during the last call, back in February, we're probably going to be moving in 2021 to breaking this down into two classes of customers, the Global 10 and then all others. And the reason why I say that is because the Global 10 is the only consistent cohort of customers that we report quarter-over-quarter and year-over-year, where the next 100 and all others can flip back and forth depending on their growth and their decline within the quarter. So I think to bring more clarity on that and make it easier to understand, we've got to break that down into two customers moving forward. We probably won't do that until 2021, but consistent with what we had said before. In terms of the customer size performance, what we saw was our large global accounts in North America had declined year-over-year. But the all other accounts were up 11%. And what we see in North America is primarily those customers have headquarters in North America, most of their employees and a large percentage of their revenue is based in North America, where you might see them perform larger brand campaigns, programmatic campaigns, larger overall campaigns. So when you enter into a time of a pullback, like we're all dealing with during this COVID-19 period, you'll see a lot of those programs get reduced or get paused or just be at a small level. Now on the reverse side, the global – those global accounts were actually up internationally. And again, there's not a lot of – there's still some, but not always a lot of large brand campaigns or pure advertising campaigns. Those offices are primarily employed by field marketers, marketers and sales organizations so that they're working in the field together and there's more communication and collaboration around going after opportunities, leveraging a little bit more data on that. Also, there's a lot of regional events in those international markets, which as you've seen in the short term, has stalled out on the face-to-face events. How much that comes back later on? We don't know. If it comes back to a certain level? We don't know, but we think there's an opportunity for TechTarget. So on the top 10 global accounts, we saw pullback in North America. And then I would say, in terms of the really small accounts, and remember when we talk about all other accounts, we have close to 1,400 spenders with TechTarget. And there are some very, very small accounts. And in a period, again like this, where there's a pullback in, I'll just say, an immediate recession-type environment, these accounts are going to want to preserve capital, preserve cash. They want to navigate it. They're going to play defense. And so we'll see some pullback. In terms of the advertising pressure, I think I answered that. We typically see the branding dollars, which is the advertising coming from those larger accounts. And when there's a pullback like this, they typically will resort back to more of a content syndication or shorter-term type of programs. But again, our branding revenue represents anywhere between 10 and 15% of our overall revenue. So if you look at our branding revenue, consider those banners on our sites, we're charging anywhere between $100 CPM to $500 CPM. So that's really how that effects on the advertising pressure. And then to address your expense. TechTarget has generated positive cash flow for the last 17 years. We manage our expenses very closely. We saw this coming in the beginning where we saw some of this coming. We saw some of the conversations and what was going on in the news in the beginning of February. So we immediately pulled all discretionary expenses, travel and entertainment. We took a look at head count and what I mean by head count, open racks that we had in the budget that we froze the open racks. If there was a backfill, somebody may have left at the end of Q1, in the middle of Q1, we didn't backfill it. So we managed that very closely, as you can see by the good EBITDA and gross margins. And we'll continue to monitor that. So hopefully, that answered the questions across all three.

That's great, thank you.

You're welcome.

Our next question will come from Eric Martinuzzi with Lake Street. Please go ahead.

Yes. Kind of interested in the green shoots question. I've heard other companies in digital advertising definitely talking about the dramatic fall off at the end of March and in April. But late April, early May, signs of people – budgets sort of thawing. Any comment there as far as TechTarget?

I think right now, what I would say that we are in a very fluid and uncertain situation. And Eric, I would classify our customers into three buckets, right now during this pandemic. Number one, I think that there are customers out there that are very opportunistic and see that there's an opportunity to take market share and drive mind share and overall revenue. I think they understand that. Yes, we're in a downturn right now. We're in a pandemic, but this will end. When it ends, they don't know, but they do know there will be a recovery, whether that's a V-shape, U-shape, there's talks about W-shape. So they are very focused on that. Then you have customers that want to hold the course. And we have some of those customers that want to keep things status quo. They might not want to try new things. They might not want to implement new ideas and philosophies, but they understand that they need to stay in front of their prospects and their existing customers. And the value of TechTarget of being a content provider from day one. We celebrated our 20th year anniversary being in business. We published thousands of pieces of relevant cards every week, every month, every year. So it attracts an audience that they know they have to stay in front of. And then there's that third bucket. And I think that third bucket are accounts that might not have the strong financial statements or the balance sheet they may have had early seed funding. They really need to preserve cash and capital. So they will play defense mode, and they may pause what they're trying to do. They may look to push us out for 90 days, they're looking for preservation of cash and capital. So I think it hits across all those folks. What I would say for TechTarget, which is pretty significant, if you look back at the last downturn, which was 2008 and 2009, 40% of our business was really aligned to that Global 10, those top 10 global accounts. And then today, it's approximately 20%. So we're better leveraged. We have better customer concentration. We're developing the right products to make sure that all customers can use it. So I feel very fortunate that we have a long-term data subscription business, but – and we also have a short-term capability for our customers to pivot and to do the appropriate marketing that they feel they need to do today and having that combination.

Okay. Another way to frame the question is to go out, maybe not so much in the near term, but in the mid to longer term. Is your assumption or as you're forecasting for 2020 internally, even though I know you've withdrawn your 2020 guidance. Is your assumption that there is relief in Q3 or that there's relief in Q4? Just at a high level, I'm not looking for dollars.

Yes. I see what you say. I just think that it is so unpredictable. It would be really tough to manage on that. What I will tell you in the mid to long term, that our market is transitioning to a data-driven market. That is not changing. So the foundation of our investments on what we're doing on our priority engine and a data-driven business, in the long term, that plays out very, very well. And our customers want real and observed purchase intent data. They want it at the account level, and they want it at the individual prospect level. And when we have an organization that builds content, produces and publishes 140-plus technology website, captures the data at the account and individual level that is GDPR and CCPA compliant, we are in that right position. So do I think things pick up in Q3 and Q4, maybe this comes back? I use a term that I have founded, optimism. But I really don't know the answer on that. So, hopefully, that answers your question. I just don't want to give you any numbers that are not actual.

And Eric, one thing I'll say to put a little color on it. If you look at, obviously, COVID showed up in Q1, but you can see from our numbers, we still finished Q1 very well. And then if you look at our Q2 guidance, you kind of see normal seasonality, that normal sequential increase in revenue. So to me, both of those things are promising and speak well to the resiliency of our product line. And our – customers are pretty resilient. I'd say our industry work from home wasn't a big switch and this whole, obviously what Mike was just saying about everyone going toward data and having subscription revenue is really helping us. In terms of the second half of the year, yes, if the economy performs well, then I think we'll perform well, but there's so much uncertainty around how the virus is going to play out and how that affects the economy. But we're comfortable that we're seeing normal seasonality.

Okay. And last question for me has to do with the repurchase plan. You bought 736,760 shares in the first quarter. I understand that you've now reloaded on that stock repurchase program. There was – the way it was worded kind of made me think, hey, current prices probably aren't as attractive to us. Is that to say then that the average price that you purchased at in Q1, that's where you would be more supportive? Or am I misinterpreting?

Well, not necessarily – I don't want to get into prices. But I think, in general, in this period of uncertainty, everyone and ourselves are, obviously, going to manage cash very carefully. So I don't think you'll see us be extremely aggressive, but I think it's smart for us to have a plan in place. As you know, historically, we've been very opportunistic in buying the shares. And so if there's some sort of opportunity where we think the shares are trading way out of balance of where they should be, then we would act. Just in general, I think we're in a mindset of conserving cash right now. But the reason we're putting in place is that we always want to have the ability to be opportunistic.

Got it. Thank you for taking my questions.

[Operator Instructions] Our next question will come from Marco Rodriguez with Stonegate. Please go ahead.

Good afternoon guys. Thank you for taking my questions. I was wondering if maybe you could talk a little bit more about the – your three buckets of your clients. You've provided the percent of revenue for your Global 10 at about 20%. Just wondering if you could parse the additional data for the other two buckets. And then if maybe you can talk a little bit about where you kind of see the biggest risks to your revenue or revenue growth movements through the year as it relates to those three buckets?

Right. Marco, the way we define and how we've defined our revenue by our customer buckets are onto the Global 10, and those are the largest, I would call, legacy hardware and software global accounts. Then we identify the next 100, and then we have a bucket that we call all others. What's caused a little bit confusion when we talked with the analysts back in February, and I think we may have mentioned it back in November as well, 2019 was there's only one consistent cohort of accounts, and that is the Global 10. So you actually have accounts that may fall into that next 100 in one quarter. And then when we're reporting on that a year later in the following quarter, they may fall. So for example, if you got a customer in Q1 that spent $200,000 in the quarter, and they fell into that next 100 and then Q1 of 2020, they only spent $100,000, they would fall into that all other bucket possibly. I'm just giving you an example. So they would drop down. But in the flip side, in Q1 of 2019, if there was a customer that only spent $25,000 and was classified into that all other bucket and then increase their spend, which we've seen many times, by $125,000 and fell into $150,000, they would have got leveled up in that second bucket. So at the end of the day, that next 100 account would have showed a decrease of $50,000 because the $200,000 account was replaced by $150,000 account. And then the all others would have shown an increase of $75,000 because the $25,000 account was replaced by $100,000 account. And the net effect is a $25,000 gain. So I go through all that. It's pretty confusing when you start talking about the story, how they can flip-flop back and forth. So we break it down into – moving forward, we're going to make it a lot clearer and analysts and both investors have asked us for this, to break it down into our Global 10 and every other account. So I want to give you a little bit of clarity on that, a little bit of background on that. In terms of where we see – you mentioned some of the risk. The first thing I would say is we have done such a great job as an organization on not only the sales side, but on the product development side and the marketing side and the execution side of building a suite of products and solutions that – we are well-known for industry enterprise solutions that are reaching additional customers. They can go a little bit down scale and little bit further down into that SMB market. So we've – we haven't eliminated risk, but we've absolutely reduced the risk that we used to have when our top 10 customers made up 40% of our revenue. And so that is a good thing that we've done, again, across the board, and I mean that's in North America, as well as international. I think when you go through periods like this, and I brought it up a little bit earlier on the call, you have very, very small customers. They need to preserve cash and they need to preserve capital, and they need to navigate through this. They're trying to make payroll. They are applying for PPP loans. They're doing a lot of different things right now to navigate through this time. So they don't want to, a, spend on discretionary spending in the short term; or b, commit to long-term data deals even for the long term. So I think there's a little bit of cautiousness on that end. And then I would also say on some of those global accounts, there's a little bit of cautiousness on the brand component. Again, when I mentioned brand, those are banner advertisements that might come on our sites, where if the market is doing really well, they can turn that on at a drop of the hat and throw extra money toward their brand. They have good brands, they have well-known brands, and they might want to scale that up. But when you incur a pullback like this, they will lessen that in North America. And so that's where I see it. But when you take a look at the market as a whole, the one constant thing that we have seen over the last couple of years, and again, we are still in the very early innings of this, our customers need to and want to transition to a data-driven sales and marketing organization, and the number one type of data they want is real and observed purchase intent data at the account and at the prospect level. So that's really what we've helped alleviate some of that risk and see long-term growth.

Understood. And then in terms of the impact you guys saw from a revenue standpoint, can you just maybe touch on what you've seen thus far here in April, as it relates to the different regions?

Yes. I mean, I still see – again, April was the first full month that I would say that there's been an impact with the whole COVID breakout and the pandemic. And I think it ranges all over the place in terms of – again, you have some customers that are being very opportunistic right now, and they see that – they've probably been through this before, and they – not through this particular situation, but they've been through a downturn where they want to take advantage of it. You do have a lot of customers that are going to like hold serve and stay the course. I don't think they're going to increase a lot, and they might just keep things a little bit level, and then you have customers that are going to play very defensively and navigate over the next 90 days. I can tell you that our international numbers have been – we saw good growth in Q1. We continue that. I think there's a lot to say about those international regions, which are very event-focused and event-centric, regional events. Those events have come to a complete standstill. People still need. And again, those offices that are out there are a lot of sales and marketing offices. They need to drive revenue and pipeline and opportunity. So there's been a quick transition to digital, and this may accelerate some of their transitions because they're typically a couple of years behind North America. And I think that there is an opportunity because I don't know how well face-to-face events will come back that there's not only a short term, but when things get settled down, the new norm may be a big reduction in event business and a bigger focus, a forced focus on digital and purchase intent-driven digital media.

Got it. And last quick question here. You guys operate such a very highly variable model, a little bit surprised by the gross margin, a sequential decline and year-over-year decline. Can you maybe talk a little bit about that or what the drivers were there or if there are any sort of one-time items? And how we should be thinking about that as we progress through the year?

Yes. It's a good question. So our gross margin dropped about 2.5%. And really, what I'd say is we have a very big focus on data quality, and I would put that under our data-cleansing umbrella. So we will hire third-party resources to help cleanse and append some of our data that we are collecting on our first-party data. And it's important for us because the quality of our data matters and if there is a field missing or a misspelling or an email that's not complete, we need to invest in those data-cleansing efforts. And again, typically third-party resources, they're not full-time employees. We can manage that pretty carefully, up and down. But to be able to drive the quality of the data and make sure – we have a very big focus on quality control and quality assurance. And even with some of our upcoming releases with priority engine, where we're going to – not just focus on the marketing customers, but also on the sales customers, that data is going to be integrated into their systems of record, whether it's Salesforce, Marketo, Eloqua, you name it. We want to make sure that we have the most accurate and updated and appended and cleansed data available. So yes, it was down 2.5%, it's rounded 3% on the financials. We're going to keep an eye on that, but we are not going to substitute quality because that data is going right into our customers' systems.

Yes. And part of that is also just a function of the amount of revenue. So Q1 is always our lowest revenue quarter, and it's always our lowest gross margin quarter. So we have some – we have made some additional investment in data cleansing like Mike said, but also part of that is just a mass function of the lowest revenue quarter of the year.

Got it. And is there an expectation that those individuals will continue to work through some data cleansing the remainder of the year? Or are they stopping sometime mid-year?

Yes, we'll see – we'll monitor that throughout the year, and we may have those folks. We may pull back some of the resources. I mean, we have – if you recall back in August of 2018, we acquired a company called Oceanos that really focuses on the data append and plans and would take this very seriously. So we may see some of that being pulled back. And we see the revenue continue to grow and hit certain thresholds. We may even increase it based on the demand of the product in the data that we have.

Got it, thanks a lot. Appreciate your time.

You bet.

Our last question will come from Allen Klee with National Securities Corp. Please go ahead.

Yes, hello. Couple of questions on Priority alert first off. I think you were planning to implement a price increase in the beginning of the year. If you have any comment on how that's gone? And then you've talked in the past about adding some additional features linking it more to Salesforce.com. Maybe talking about, is that still on track? And then during the quarter, you rolled out a product, Verified MSP Targeting, which use Priority Engine to focus on the managed services. And I was just wondering, is the way to think about that that kind of target – better targets a market you already had or expands the pie you're going after?

You're welcome, Allen. Let me answer the questions one at a time. In terms of the price increase, we really don't get a lot of pushback when we increase our pricing. We typically increase our pricing at the beginning of each calendar year, which is our fiscal year, as you know. Obviously, when we had tried to drive customer acquisition and net new customers during a sudden recession-type environment, I don't think that the price increase that we put in, in January has an impact. I think the overall macro is having an impact on that. So I don't see really an issue with the pricing increase. And we will continue to bring features and functionality in a Priority Engine that will warrant additional increases down the road that we feel because we're going to be leveraging a lot of different data sorts. In terms of the features in Salesforce, you mentioned that we were launching some features in Salesforce.com. Yes, one of the key goals and investment strategies that we've had as a company that we've communicated is to get – tie the integration into our customers' marketing and sales workflow. And their system of record, which, in most cases, in the technology world, Salesforce is a big – takes up a lot of the market share when it comes to systems, I reckon around the CRM and some of the functionality they do. We are continuing to move forward in terms of those investments that we're doing. And I think if you take a look at it, we're planning on coming out with an updated version of Priority Engine at the end of the summer, early fall. We're going to beta some of this in the middle of the summer. And historically, we have been very focused on selling and helping our enterprise customers in their marketing departments. And we're going to continue to do that. And whether it's an ABM strategy, a nurture strategy, help build net new contacts that they can then develop and get into their systems and their workflow, that is still going to be right where we are. However, there's a lot of – in those marketers, I should step back, they're very focused on identifying what accounts that they should market to and expand within those accounts. Again, like an ABM strategy, an account-based marketing strategy. We're going to be making some additional investments around our user interface, our integration into Salesforce. And we're going to be able to provide more sales use cases in terms of not only at the account where we're ranking and stacking the account, but we're going to be able to look to rank and stack the individual buying team members, no matter what account they're in. So yes, that is a big focus and a big investment for us because if we can get the marketing use case with Priority Engine, the sales use case with Priority Engine and then we have our advertising and content business that gets integrated into everything, you've created a triple threat. And as it relates to the Verified MSP, we had a community on our sites that were MSPs, Managed Service Providers. And we went out and made some investments in personnel. We hired a publisher in that group, as well as we wanted to make sure that we were tying in the data around the MSP market into Priority Engine because we didn't have that before. So it's a build on an extension, some investments around an audience that we had, but we needed to make – we needed to monetize that better, and that's what the MSP – Verified MSP solution is about.

That's very helpful. And then in early March, you announced the acquisition of Data Science Central. And I was just wondering if we should think about this as just kind of a little tuck-in or if there's anything in terms of the contribution that is more meaningful that we should think about?

Yes. That's a good question. If I'm looking at Data Science Central, look at that as an audience play. We didn't go after it for the revenue or – I mean, it was immaterial. We didn't have to – I say immaterial in terms of reporting and finance. And it was not about a revenue and EBITDA play or that. It really was about their audience. They have a great audience that aligns with machine learning, enterprise artificial intelligence, data privacy, so predictive analytics. In that we had an audience too on our site of TechTarget communities on our sites around our search enterprise AI audience and business analytics audiences. We see a great opportunity based on where those markets are heading, and it has been an absolute wonderful acquisition. The audience members have really – are a big play. They're very active. They're a focused, and that really aligns with what our overall business strategy is. So I look at it as a small tuck-in acquisition financially, but it's in a market that we expect to grow very large – into large capacity, and I think we're going to be in a very good position for that in the long-term – short and long-term.

My last question is just definitional. I just forgot when you talk about adjusted free cash flow, how do you define that?

I will let Dan take that, our CFO. Dan, are you on?

Yes. So we define – adjusted free cash flow means the change in operating cash, less purchases of equipment and other capitalized assets and debt repayment. And we actually disclosed the definition in our shareholder letter.

Okay, wonderful. Thank you so much.

Thanks Allen.

Thank you.

This concludes our Q&A and conference. Thank you for attending today’s presentation. You may now disconnect.