TechTarget, Inc. (TTGT) Q1 2023 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and thank you for attending today's TechTarget Report First Quarter 2023 Financial Results Conference Call. My name is Danielle, and I will be the moderator for today's call. All lines will be muted during the presentation portion of today’s call, with an opportunity for questions and answers at the end. [Operator Instructions]. It is now my pleasure to hand the conference over to our host, Charlie Rennick, General Counsel. You may proceed, Charlie.

Thank you, Danielle, and good afternoon. Joining me here today are Greg Strakosch, our Executive Chairman; Michael Cotoia, our Chief Executive Officer; and Dan Noreck, our Chief Financial Officer. Before turning the call over to Greg, I 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 posted our shareholder letter on the Investor Relations section of our website and furnished it on an 8-K. Following Greg's introductory remarks, the management team will be available to answer your questions. Any statements made today by TechTarget that are not factual, including during the Q&A, may be considered forward-looking statements. These forward-looking statements, which are subject to risks and uncertainties are based on assumptions and are not guarantees of our future performance. Actual results may differ materially from our forecast and from these forward-looking statements. Forward-looking statements involve a number of risks and uncertainties, including those discussed in the Risk Factors section of our filings with the SEC. These statements speak only as of the date of this call, and TechTarget undertakes no obligation to revise or update any forward-looking statements in order to reflect events that may arise after this conference call, except as required by law. Finally, we may also refer to certain financial measures not prepared in accordance with GAAP. A reconciliation of certain of these non-GAAP financial measures to the most comparable GAAP measures to the extent available without unreasonable efforts accompanies our shareholder letter. With that, I'll turn the call over to Greg.

Great. Thanks, Charlie. GAAP revenue was approximately $57.1 million, a decrease of 16%. Adjusted EBITDA was approximately $17.6 million, which is 31% of revenues. Longer-term revenue was 41% of total revenue. Free cash flow was $14.7 million, which represents 26% of growth. The technology market continues to be besieged by weak demand, widespread layoffs and budget costs. If that wasn't challenging enough, the leading technology bank failed in the quarter, which we believe increased negative sentiment among our customers. Our results reflect these challenging macro environment. I will now open the call to questions.

[Operator Instructions] The first question comes from the line of Justin Patterson of KeyBanc. You may proceed.

Great. Thank you very much. Two, if I can, First, in the letter, you teased out some of your thoughts on AI a bit. I'm curious, when do you think we can start seeing some of the benefits from AI flowing into the business? And just kind of frame some of the investments that you're making into it right now. And then secondarily, just thinking about EBITDA guidance for the year, you noted that reinvestment is one of the few areas you can’t control in this market right now. How should we think about just the guardrails around annual EBITDA guidance? Thank you.

Great. Justin, this is Mike. In terms of the AI benefits and framework around some of our AI initiatives, we've been working with AI technology for quite some time, but we see an opportunity in the business. We recently announced the appointment of Paul to run our AI strategy. And we see several key areas that we'll see opportunities to help really accelerate the business. And I think it's important to note that there's a lot of announcements right now around AI. And what you're going to see is a lot of content being disseminated across the entire Web, very thin content, not really specific addressing current concerns and needs. So there's going to be a, call it, content dilution, and that's going to be out there in the market. But for publishers and strategic content providers like TechTarget, we believe it's a competitive advantage. We have a lot of insights, relevant insights, relevant content, that we supply the technology buyers to help them do their research day in and day out. So we've been in business for 25 years, coming up next year, providing technology buyers, really strong content to help them when they're doing their research. Out of their content that we've invested, we've extracted and we've been able to maintain and gather really valuable insights at the buying level, at the account level. And so what we see is the opportunity to help our customers action against the insights that we can deliver, a, in the product portfolio and the product suite. So as you know, for years, we're kind of at the mercy of our customers to action against the data and the deliveries that we provided to them in their campaigns. But now we'll be able to have a very strategic, insightful next steps to help them action and trigger very specific e-mail outreach, phone conversations and in content strategies. As you know, our content enablement business is a very strong opportunity for us, and it's something that we've made some investments in around ESG and BrightTalk and TechTarget together. We have the content that we provided on our editorial and the analyst side. Well, also, our customers need to have an effective content strategy and be able to leverage that content strategy from our capabilities and pilot with AI as well and will help them provide that effective content strategy to engage with those buyers. And we've talked about this before, that buying key demographic continues to change. I think we mentioned this in our last earnings call that over 50% of technology buyers wanted a repless experience, which means they really rely on content to make all decisions about 6, 7, 8 figure acquisitions that they want. They can't be fooled by thin, broad-based, a relevant content that's not recent and relevant. So being able to help our customers tying in those insights to help power and empower their content strategy will be an effective place for us that we have as a publisher and as a community with proprietary first-party data insights. So we're excited about that opportunity. In terms of EBITDA margin for the year. It's really important, we understand that the technology market is really challenged right now. I think you can see that through all the announcements on the layoffs and budget costs, it's just throughout. And then you tackle on the collapse of Silicon Valley Bank that had 30,000-plus customers, all technology focused, many of them VC-backed, so it's challenging on that front. But in terms of EBITDA, we still need to make sure that -- we've managed downturns in the past. We have a very effective playbook we believe there's still a really good opportunity to make the right investments in the right areas. One of them I just mentioned around AI. We can talk about some other one we have in the call around some of the product enhancements and what we're doing. So we want to make sure that we're being opportunistic. We will manage our discretionary spending like we have as part of our playbook for 24 years, and we will do a good job on that. We have a track record on that. In terms of batteries, we're assuming about 30% EBITDA margin. I think those are the right -- that's the right ballpark to assume with the updated guidance and the go-forward strategy.

Great. Thank you, Mike.

The next question comes from the line of Josh Reilly of Needham.

Hi, this is Rob Marelli on for Josh. Thanks of taking the question. Kind of carrying on with the topic of Silicon Valley Bank, how should we think about the impact from SVB influencing confidence among your customer base? And then can you remind us of the exposure to venture-backed startups? And have things improved subsequent to the quarter end on trends with these customers? Thanks.

Yes, great question. In terms of the Silicon Valley, as you know, they were 100% focused on the enterprise-type market. And a lot of those customers they serve, which I believe is over 30,000 a lot of them were VC-backed firms. Our business has evolved in a nice way over the last several years in terms of our customer segmentation. If you look at our business 10 years ago, close to 40% of our business was guided through the top 10 global accounts. And today, that's below 20%. And we have 3,000 customers. You can imagine like we span across all customer sizes and segmentations in the enterprise B2B side. The Silicon Valley Bank, the economy -- and when I say the economy, the technology-specific macro environment was challenging as it was. We noted that in Q4, we started in Q1, there's no surprises on that. You can see by the layoffs. You can see by the cuts and that we're seeing day in and day out, which is still carried into Q2. Silicon Valley Bank brought another amount of uncertainty and a lot of centers to the market. So if you can imagine those customers, which we serve, we have a good size of our customer base that serves those smaller customers for VC-backed software-based organizations. They all went through a very challenging period. There's a lot of uncertainty in jitteriness. And I don't think you see a lot of the VCs right now ready to hand over another check where they want to make sure that these companies are making the right decisions around the expenses, discretionary spending, making line item cuts. As we are a premium player in the market, and we always want to strive to be that premium player because of our content investment, our first-party purchase intent data, those line items get scrutinized across all segments of our customer base, and that includes the VC-backed firms. So we believe that, that caused another results in a negative way to the economy. And I think we've all seen that. Everything you've read and you've seen through the technology landscape. Good step. So we're dealing with that. We're working with our customers to make sure we're dealing with it. I would also say that we talk about the enterprise tech market, and that is the gross performance sector right now in the markets. It's also probably the most sound long-term sector in the market where we have the ability to see -- if you talk to 100 investors, I think 100 out of 100 would say the long-term viewpoint of the enterprise B2B tech sector is very strong and something that they would invest and bank on. So that's important for us. So yes, we're managing through a downturn in the market. Our business is 100% aligned to enterprise B2B tech, so we are going to feel that pain. I think others that we talk to probably feel a little bit worse as well. But when that market turns around, we also capture the upside, and that's why we're making those investments that I mentioned earlier.

Got it. Thanks. And then as you kind of mentioned, there's the layouts within the tech industry. Have you started to see some of those impact land at new opportunities? And have they started bringing you guys in as they were champions of your products at their last jobs in sales and marketing? Thanks.

Well, some of those people are still looking for jobs, so that makes it very challenging. And then the people that are staying with the company that may be not were caught in the lets are very hesitant. Again, this whole move of uncertainty, we're now uncertain in your -- you're very cautious about spending even the budget that you have. So you might see some pickups in some -- in terms of some pockets that we see. But the mood is very focused on uncertainty. And for those folks that -- listen, I will tell you this, we have really good relationships and we have a good brand, and we have a good recognition with our customers. Typically, if somebody does get laid off and goes to another customer, and this has happened, they will call us to bring us in. And I can tell you that, that's happening. The thing that you just want to make sure some of those folks have not landed a job yet, they're looking for a job. And the folks that have remained in their jobs that weren't part of the layup are very hesitant in terms of making that additional spend or that investment right now. Until we see more clarity and visibility to their job and into the market.

Got it. Thanks for the color.

Thank you. The next question comes from Bryan Bergin of TD Cowen. You may proceed.

Hi, guys. Good afternoon. Thank you. I wanted to ask a question on the outlook and kind of your visibility to it. I'm curious, can you comment on the macro assumptions that you've embedded here in the outlook through the second half of this year. Just any insights around your current visibility relative to where you typically would be at this point of the year? And I guess, how much in that '23 outlook is so signed versus a qualified pipeline or work you have to go get still? Thanks.

Yes. Thanks, Bryan. I mean, we take a look -- I mean, as we look at Q2, and then like you mentioned, the second half, we look at what we have booked right now. We have visibility into. We look at all those dynamics on it. We also are taking into account like the current environment, like the behavior that we're seeing with customers. Now if that turns more for the positive, yes, there could be some upside in that number. But every time that we think that there's going to be -- we're hoping that thing is going to be improved. Like I said, nobody counted for Silicon Valley Bank to collapse, right? And I don't think people fully in there so I want to make sure people understand that. They were 100% aligned to the enterprise tech space. We are 100% aligned to the enterprise tech space. So we see that. But in terms of that, we look at what we have the conversations that we're having typically, you've seen the cycles where Q2 is -- Q1, Q3 is pretty even, Q2 and Q4 really ramps up. I think six months out is really hard to determine going into Q4 right now. So a lot of what we are providing in terms of our guidance is what we see now because it's very -- it changes pretty fast. But in the last five or six months, it's pretty consistent with the tech market pullback, and that hasn't changed. So it's hard to give you -- I don't want to say a crystal ball, but like when I think things will get better because based on what we've seen right now, the tech market is in a lot of uncertainty, doubt and there's a lot of genes on this.

Okay. No, understood. It makes complete sense. And then just a follow-up. So the shareholder letter talks about new product capabilities for Priority Engine. So I think, focused on some integrations with other platforms and related workflows. Can you just kind of tease that out a bit more what you're working on there?

Yes, absolutely. So we may some once you'll see a lot of announcements over the next 1.5 months to two months in terms of what we're doing. Let me give you some feedback on what's going on. A lot of it is focused on, a, number one, are tech-enabled integrations that really will allow our customers to leverage our proprietary first-party intent data at the prospect and an account level, not only within their CRM and marketing automation platform but within other platforms, whether it's the homegrown platforms and temp providers, ATM platforms, that power other sales and marketing campaigns. So that's really important for us because it's key to make sure that our customers have access to the data that we supply, the proprietary data, whether it's in the Priority Engine platform, whether it's in their CRM or if they have other platforms that power programmatic or nurturing campaigns or XYZ and working with our customers as well as some of the partners throughout the community is really important for us. We're also going to be releasing features that will improve Priority Engine as a direct workflow tool, including enhanced e-mail alerts that will help sales and marketing have very specific and relevant and real-time information about how they can action against. For example, being able to work the marketing and sales team that XYZ organization was on your website and not only on your website today, but what pages they were on your website. So on the marketer's side, they can then trigger within their workflows, whether it's in their own marketing automation or through another platform, on ways to target those organizations with the appropriate message, also being able to award sales reps to say -- and again, very unique, at the individual prospect level, that this new member of the buying team became an active prospect on the technology initiative that you sell in your respective territory, being able to promote that to our -- push that out and that information out to sales reps provides them a very tangible, easy and laid-out time actually to engage and personalize the outreach, whether it's sales or on the marketing side. We've talked about in the past that we've all this out as well and announcing this our tighter salesforce integration within our customers' CRM around salesforce customer marketing automation with bidirectional data analysis and workflow. Why are we bringing this up is because we want to make sure that we are tied to the opportunity data, and we can identify investments, the TechTarget investments we show, the TechTarget investments, that we've identified prior to the opportunity becoming an opportunity in our customers' salesforce. So we've identified it. And then post-opportunity creation date, how have we accelerated that opportunity right in front of our customer sales and marketing departments. So those are really key. And then the one last thing which I'm really excited for, and this is, again, both for marketing and sales users, we'll be updating and enhancing our visualization around talent activity dashboards and time lines. It's really important that we can show our customers the investments they've made within TechTarget are working. So when you have a look back on a visualization and the visualization platform, this is in the last nine months, here is how your investments in TechTarget have engaged with buyers, how we've identified the buyers and how you progress the buy, it's right in front of them, which again roll out our customers to trigger the most actionable and relevant next steps is really important. It's stuff that we've been working on for quite some time, and we'll be announcing that. So as you can see, our product investments enable customers, a, to leverage the data across any and all of their platforms that they use to go to market, increase their usage and reliance with sales and marketing to see results, and to show attribution and ROI. Those are the three focus areas that we are really honing in on our Priority Engine in our platform investments.

Okay. I appreciate all the detail on that. Just a follow-up on it, are you at a point where you're able to, on the other side of this, leverage the investments you've made here potentially into next year from a margin standpoint?

Yes. Our goal on that is to make the investments now, turn it down economy where everybody is getting impact some worse than others that we've seen, put the right investments around the product, the content strategy and a couple of other key areas. And when this market turns, which we all know, that the enterprise B2B tech market in the long term is going to be a strong market, it still has, so modernizing their sales and marketing departments, revenue first-party data, leveraging other data sets as well and make it more effective for sale and marketing departments, this will help with our long-term growth margin expansion and what we've been talking about for the last five years.

Okay. Thank you.

The next question comes from the line of Bruce Goldfarb of Lake Street Capital Markets. You may proceed.

Hi, thanks for taking my call. Just a question like in the shareholder letter, you highlighted strategic investments. Are there certain technologies or areas that you have like a sort of a shopping list for your kind of targeting?

In terms of investments, on the last question we just discussed, tank was the investments we're making in the Priority Engine platform and capabilities around integration around usage, around tracking about ROI. That's one of them, Bruce. We're also seeing some investment. We're making some concentrated investments around our content and content enablement services. So the business we've seen and we've seen throughout the market that today's buyer, enterprise B2B technology buyer wants to spend less time working and dealing with sales reps and vendors and want more time on research with relevant content on their time and on their time. And so making sure that we have the right content to attract those buyers to then helping our customers put an effective and thoughtful content strategy together through our investments with ESG, BrightTALK as well as TechTarget and leveraging some of the information we talked about around our AI capabilities to help accelerate our customers who have access to relevant content that will engage with buyers at the right time is really key. Because vendors that do not have a content strategy, an effective and thoughtful content strategy, will miss out on this because the buyers of technology do not want to rely on technology reps vendors. They want to have information on their time. And then I would just say in the other investments that we look at, we're always looking at -- can you guys hear me?

Yes, yes.

Okay. And the other investments that we're making is we're always evaluating our M&A capabilities and our M&A prospects across the content, data and technology-enabled audience sets. So we're going to continue to work on that.

Great. Thank you. And then how would you compare like same customer sales metrics, sort of a same-store sales basis, for this year versus last year?

Well, what we do is we disclose that on an annual basis. So that was in our February numbers, and we will report on that next February as well. So we do it on an annual basis.

Great. Thank you. Those are all my questions.

The next question comes from the line of Kash Rangan of Goldman Sachs. You may proceed.

This is Jacob on for Kash. Thanks for taking the question. I'm a little late to the party. So I apologize if this has touched on already. One thing I wanted to touch on was a generative AI has become a lot more topical and the use cases have become a lot more apparent and seemingly widespread, right, I mean we saw check down like 50% the other day. Are there implications around TechTarget? I mean like, are you working to implement it into your product offering? And then how are you viewing it as something of a competitive differentiator or something that might close the moat of what TechTarget offers? Can you provide any color around that?

Yes, absolutely, Jack. Yes, we had brought this up earlier, but I have no problem readdressing this. In terms of AI, we've been leveraging AI in our workflow and in our investments over the course of several years. And we see companies like TechTarget publishers of relevant, thoughtful content and origination of content, actually, have a competitive advantage in this market right now. Yes, there are other say content providers that are or sites that might be quick paid anglers and trying to get more big use in traffic. That's really not our quality. And we believe the publishers have spent years on investing in quality and thoughtful content to attract a very engaged, relevant and recent audience that can then extract very powerful and proprietary first-party purchase in tenant sites, has a huge competitive advantage over other companies in this space. So on that side, we feel very competitive. Now leveraging those first-party purchase intent in our proprietary purchase intent insights will absolutely help our customers in terms of we're embedding are going to be rolling out and at inside of our products. So for example, we have always relied, or have been at the mercy of our customers, to follow up, make sure they're leveraging our data, making sure that everything is being done. And that's hard when you hand that off. To be able to leverage our first-party insights and then provide a recipe, very specific recipe, and trigger action as to say, Mr. sales rep, Mr. sales rep, you need to communicate with this buying team member whose insights are this, their entry point to this, they're trying to address this pain point, and you have the information to do that. It's going to be really relevant. Because technology buyers, they're smart. We're spending 5, 6, 7 figures on these purchases. They want relevant, insightful information and they want really good outreach in terms of when vendors are outreaching to make sure they understand their pain points, their needs and to address that. We have that data. Now to make sure that we're acting that data on putting our customers' workflow, that's going to be beneficial. The other thing that's going to be able to help is help accelerate our content enablement services. Our customers need every content strategy on the marketing side, product marketing, field marketing and to be able to take the insights that we have, help power and help generate more content that's going to be personalized, specific, targeted to the technology buying teams at scale is critical for our side and for our customers.

Okay. I guess just a quick follow-up, though, from my perspective, if a customer can maybe more easily generate their own unique content using generative AI and associated technologies, does that sort of phase out the area of business that TechTarget offers that service in? Like, how should we be thinking about that, if that makes sense?

Yes. Customers are not publishers of content. It produced technology. So we don't have the insights into 29 million up [ph] and at professionals we're looking at the most deep and relevant content around 100 specific market segments where we also marry up the vendor content, the peer-to-peer content, our BrightTALK community that has all the engagement, no one has access to that. And I'll tell you, you can't fool technology buyers. It's going to be relevant, it's going to be real. It's going to be trusted. So buyers want trusted sources of content. We have a great reputation on that. So again, I'm going to go back to my original statement, strategic publishers and content providers that really serve and invest in thoughtful and independent content will be served as well in this space.

Okay. I appreciate that color. Thank you so much, Mike.

There are currently no additional questions registered at this time. So that will conclude our time of question-and-answer as well as today's call. Thank you for participating. You will now disconnect your lines.