TechTarget, Inc. (NASDAQ:TTGT) Q1 2024 Earnings Call Transcript

TechTarget, Inc. (NASDAQ:TTGT) Q1 2024 Earnings Call Transcript May 11, 2024

TechTarget, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon. Thank you for attending the TechTarget reports First Quarter 2024 Conference Call and Webcast. My name is Cameron, and I will be your moderator for today. [Operator Instructions] And I would now like to pass the conference over to your host, Charles Rennick with the General Counsel. You may proceed.

Charles Rennick: Thank you, Cameron, and good afternoon, everyone. The speakers joining us here today are Greg Strakosch, our Executive Chairman; Mike Cotoia, our Chief Executive Officer; and Dan Noreck, our Chief Financial Officer. Before turning the call over to Greg, we would like to remind everyone on the call of our earnings release process. As previously announced, in order to provide you with an update on our business in advance of the call, we have posted our shareholder letter on the Investor Relations section of our website and furnished it on an 8-K. You can also find these materials with the SEC, free of charge, at SEC’s website at www.sec.gov. The corresponding webcast as well as a replay of this conference call will be made available on the Investor Relations section of our website.

Following Greg’s introductory remarks, the management team will be available to answer questions. Any statements made today by TechTarget that are not factual, including during the Q&A, may be considered forward-looking statements. These forward-looking statements, which are subject to risks and uncertainties, are based on assumptions and are not guarantees of our future performance. Actual results may differ materially from our forecast and from these forward-looking statements. Forward-looking statements involve a number of risks and uncertainties, including those discussed in the Risk Factors section of our most recent periodic reports on Forms 10-Q and 10-K. These statements speak only as of the date of this call, and TechTarget undertakes no obligation to revise or update 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. And with that, I’ll turn the call over to Greg.

Greg Strakosch: Great. Thank you, Charlie. On January 10, we entered into a definitive agreement with Informa to combine TechTarget with Informa Tech’s digital business. The combined company will have increased scale with over 8,000 customers in over 20 countries, first-party purchase intent data from over 220 leading digital brands and a permission audience of over 50 million people. The combination increases our TAM by 10x as we will enter 18 new vertical markets with the unique end-to-end solution across our clients’ go-to-market. We’ve been pleased with the progress we have made over the past 4 months, and we are on track to have this transaction closed during the second half of 2024. The combination creates a company with a strong financial profile.

We expect 2024 pro forma revenues to be over $500 million. Within 5 years, we expect revenue to grow to over $1 billion and with at least 35% EBITDA margins. We structured the deal so our shareholders will get some immediate benefit by paying out $11.79 per share in cash and long-term benefit by providing the opportunity for shareholders to participate in a long-term value creation through a 43% stake going forward. In regards to our first quarter, we are pleased to report revenues above consensus, and we believe our investments and product offerings are and will continue to pay off. We are forecasting Q2 revenues to be in the range of $57 million and $59 million, which represents a 12% sequential increase from Q1 and roughly flat year-over-year.

We see that as support for a stabilized business with some signs of a return to normal seasonality. This reflects the macro technology environment, which customers remain cautious regarding the sales and marketing investment levels. We expect this dynamic to continue throughout 2024 because of uncertainty surrounding inflation, interest rates, the presidential election and geopolitical issues. We expect a better macro environment in 2025 and 2026, which is good timing as the combined company will have additional scale to take advantage of the recovery. I will now open the call to questions.

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Q&A Session

Operator: [Operator Instructions] And the first question is from the line of Justin Patterson with KeyBanc.

Miles Jakubiak: This is Miles Jakubiak on for Justin. Just to start, would love to get an update on what you’re seeing with the macro environment. You touched on it a little bit with kind of the transition from R&D spend to S&M spend, but maybe just touch on any updates you’re seeing there and any change to visibility.

Mike Cotoia: Thanks, Miles. In terms of the macro, nothing has really changed over the last several quarters. We still see the enterprise technology market being, facing some headwinds with high interest rates, inflation. As we mentioned in the shareholder, a lot of international tensions and we have an upcoming presidential election. But I’d say, we’ve been in business, we’re going to be celebrating our 25th anniversary this year being in business and we’ve managed through several pullbacks. And our playbook is pretty simple. We leverage our strong balance sheet to take an opportunity to invest in the right areas around product evolution, functionality, audience and content to make sure that we continue to be the leader when it comes to enterprise B2B marketing and sales services for our customer.

So even though there’s no real catalyst, we feel that the investments that we’re making are paying off. We’ve done a lot of stuff on our product front in terms of leveraging some of our AI functionality and capabilities. It’s our first full quarter. Customers have been able to leverage our IntentMail AI which we’ve seen a great retention, increase in usage from sales users in our platform that are leveraging our prospect-level intelligence for e-mail outreach and automation, again based on our prospect-level intelligence, and we combine it with our customers’ most recent and most relevant product marketing positioning. So we’re seeing healthy adoption on that, retention, competitive usage, repetitive usage. And our road map on that is going to continue to expand the future to work with multi-email sequences and integrations into sales engagement platforms, so continuing around the platform and making sure we’re making the right investments.

As we mentioned in the shareholder letter and in Greg’s opening, 2024 doesn’t present a lot of catalysts in terms of high interest rates, and as I mentioned, high inflation. But we know a couple of things to be true, that the tech market will return, interest rates are low and there’ll be a recovery, so making sure we’re making the right investments today to capture that recovery. And as you can see in our Q1 results and our Q2 forecast, we feel we’re doing the right things to navigate through this challenging macro.

Miles Jakubiak: That’s helpful. And then maybe just building off that last point about investments in the product. It seems like there’s some upcoming improvements to Priority Engine and maybe a little bit more focus on the direct integration side. So just would love to hear about how you think about current product priorities as you kind of invest through the cycle.

Mike Cotoia: Yes, great. As I mentioned, IntentMail, which is our generative AI offering, is 1 full quarter into use. We’ve had a big focus on integrations, integrations in our customer CRM, marketing automation platforms. But over the last 6 to 9 months and beyond, we really made a concentrated effort of integrating our Priority Engine information and data into other technology platforms. We reallocated and invested in internal resources to help support customers who want to integrate Priority Engine data into existing workflows within other platforms. We have announced some partnerships, and we’re going to continue to announce some strategic partnerships throughout Q2, Q3, and Q4. And we’re working with partners that have a, that we are focused on a share of like a critical mass of joint customers.

And our customers are looking to get the benefits from TechTarget’s first-party data, doing leverage with our partners’ existing platforms. So we’re seeing some good success on that and it’s a big focus for us, and we’re pleased with where we are with this and we’re pleased with the road map.

Operator: The next question is from the line of Bhavin Shah with Deutsche Bank.

Bhavin Shah: Just kind of on that last point in terms of product improvements just on IntentMail and Priority Engine, kind of when do we think about that kind of helping translate over to kind of improvement in the long-term revenue as that kind of continues to lag overall total revenue growth?

Mike Cotoia: Yes, that’s a great question, Bhavin. So the investments we’re making now and again, IntentMail being one of them, I’ll get into some of road map around Priority Engine, which will help support the question you just asked. It’s really important for us on 2 fronts: getting our customers to continue to use and be engaged in the platform as well as the integration story. And those are big investments that we’ve talked about, and we’re making some really, when we look at it, some good progress against both of those areas. So on the IntentMail, that’s 1 version of our personal assist product family. There’s other avenues that we’re looking to do. In terms of expanding those features to work with, as I mentioned, multi-email sequences and integrations with sales engagement platforms, so things like SalesLoft and Outreach.

In organizations like that, you want to have access to prospect-level intelligence as part of their SDR or BDR cadence of outreaching to customers. So again, integrations, personalized data, prospect-level data creates stickiness, more engagement and more usage. On the integration strategy, I explained what we’re doing on that end. And in terms of the priority and road map, we have a very large initiative that we’re evolving the platform to incorporate other TechTarget offerings into a more, into a common user experience. So that will be driven by a unified visualization of program impact, action intent-based insights to support program decision-making, and the ability to identify and take action with active buying teams. So if you look at this, it’s more about getting the end-to-end solution offerings from content to demand to brand all inside a unified platform so customers can have access and insight and visibility to the updated visualizations of how the overall programs are doing versus being siloed into an intent offering only.

So that, those are the investments that we’re making. We’re seeing good traction on that, and you’ll be seeing some announcements at the end of the second half of 2024 about the road map and the overall Priority Engine platform and capability strategy.

Bhavin Shah: Got it, that’s helpful there. And just 1 follow-up, a little bit more macro-related, but it looks like your top 10 largest kind of legacy customer base, their revenue grew in the quarter, which is great to see for the first time in a while. But the remainder continues to decline year-over-year. Anything to call out macro-wise, SMB or large enterprise, that you can notice the difference?

Mike Cotoia: Yes. What I’ll say on the enterprise accounts, we’ve talked about over the last several quarters some of the key acquisitions and investments we made with Enterprise Strategy Group and BrightTALK and Xtelligent to create this end-to-end go-to-market strategy and product offering to help our customers. So in terms of enterprise accounts, we have more entry points now with our product portfolio position and our capability set to get in there from research, intelligence and advisory to creating strategic content to put into programs and then activate against the right accounts. And so we’re actually seeing great momentum in terms of penetrating different budget stakeholders across the entire go-to-market strategy. And that makes a lot of sense in terms of the larger the account, the more pockets and the more end-to-end that we can get involved in.

In terms of the smaller accounts, I think this market is absolutely putting some headwinds against the smaller accounts. But again, I go back to our product offerings that we have today versus what we had 2 years ago, where we had different area points and different entry points to drive value for our customers. And what I mean by that, if a customer, an SMB or smaller account isn’t ready to do intent or leverage a Priority Engine subscription, they might have a need for lower end-of-the-funnel confirmed projects. They might need some help with their positioning so we leveraged the ESG capabilities with our BrightTALK Studios and our content creation. They might want to do demand over a quarter versus a year as they navigate through this environment.

Again, it’s only been 14 months since the collapse of Silicon Valley Bank. A lot of these smaller accounts are looking to rightsize their budgets to make sure they’re managing expenses and were looking for true value propositions to meet their, whether it’s content, whether it’s their brand positioning, demand or intent. So we feel we’re in a pretty good position in terms of engaging and providing value for those SMB customers as well.

Operator: The next question is from the line of Joshua Reilly with Needham.

Joshua Reilly: So as we’re looking at the June quarter guidance here, I believe typically, historically, you guys have talked about how some new product releases by your customers can drive this typical seasonality with the sequential increase in revenues. Just wanted to understand, is that what, the normal seasonality, is that what is driving the improved revenues? Or is there some other maybe factor at play there that we should be aware of?

Mike Cotoia: I think it’s a couple of things, Josh. I think first of all, it’s the breadth of the product offerings that we have that can really, when you work with customers who might not be ready to do annual or multiyear deals, they still need to help support their sales targets, pipeline, revenue forecasts. And as we’ve said before, even in a down market, when that market recovers, there’s going to be a flight back to quality, and that quality is going to be driven by first-party purchase intent data and permission-based audiences. But our conversations with those customers started in the middle of last year. We’re starting to see some normalization of some, things starting to stabilize, is really understanding how we can serve their needs based on what our customers are really focused on today.

That’s paying off right now. So as we came into 2024, the portfolio is well-architected, well positioned and being able to accommodate what our customers need, again, whether it’s around content strategy or brand to demand to intent, so well, yes, bottom-of-the-funnel confirmed projects and qualified sales opportunities, the quality of our data and the quality of our investments are paying off. Now we just launched and announced we’re running a multiple beta/early adopter program around Account Insights Feed. So it’s a new Priority Engine offering that was announced. That really won’t have any revenue impact in Q2. But it’s a different use case from our prospect-level Priority Engine offerings. This new offering is account insights-only, will be used for our customers against their programmatic ABM initiatives and propensity scoring.

So again, I go back and say, first-party data is where the gold is, and not only at the prospect level but also at the account level. And we believe with the future of Google announcing that they are, the deprecation of third-party cookies, we’re going to sunset that now in 2025, will create another revenue stream that’s going to be very impactful for our customers with new buyers and new case studies that we weren’t able to get into the mix before. So that’s what we’re focused on. But in terms of the June revenue, I mean, we guided to this, projected this 2 quarters ago. I said we expect Q1 to be down around 10%. Q2, we’re going to be closing the gap. Q3 will be relatively up, and then Q4, we see an increase in the revenue year-over-year. So we’re on track with what we laid out and we’re pleased with the performance of the business.

Joshua Reilly: Got it. That’s very helpful. And then how should we think about the gross margin leverage moving into Q2? As we know your margins are sensitive to the overall levels of revenue, but then you also have a lot of other investments you’re making here. Are there any other considerations that we should be thinking about as we kind of model our Q2 gross margin and going forward?

Mike Cotoia: Yes. Thanks, Josh. So again, we plan to make the right investments to help the business feel and to drive margin expansion. So some areas that we’ve done this year is we’re currently implementing a workflow management solution so it provides end-to-end visibility from contracts to execution to close to billing. And we feel that this is the right investment so we can streamline the visibility and the information across all of our product fulfillment sets, our sales, our sales operation teams and our customer success teams. So we’re in the middle of implementing a workflow solution on that. We expand the scope a little bit. But at the end, what that will do for us is provide better visibility and be able to create a more efficient cost of sales as we head into Q4 of 2024.

So we’re in the middle of doing that right now. It’s something that we knew we needed to get done. We made the right investments on that so you see a little bit of cost on that. But at the end, that will make a cost of sales that is still more efficient and continue to help expand margins.

Operator: The next question is from the line of Bruce Goldfarb with Lake Street Capital Markets.

Bruce Goldfarb: Greg, Michael, Dan, congrats on the results. Just a question on long-term revenue, where do you expect long-term revenue as a percent of total revenue to be at the end of 2024?

Mike Cotoia: Bruce, yes, we expect that to be in the low to mid-30s. When we talk about ’24, with the pullback in the continued macro environment, that’s why like when we look at this combination that we’re doing, we just feel like this is the absolute right time to be doing this. And when you take a look at what we evaluate when we acquire or do, evaluate different assets, we look at a few things. We look at audience and we look at permission-based audiences. We look at first-party insights, and as we predicted the last couple of years and going into 2025, first-party purchase intent insights are going to be a premium. We look at content and content capabilities in order to drive more revenue on the long-term contracts and look for penetration into new tech-enabled vertical markets.

So we take a look at the assets and the quality assets that we are merging with Informa Tech’s digital business around Industry Dive and around Omdia and there’s so many special digital media brands in that line, can be a business which is around the intelligence research and advisory combined with our Enterprise Strategy Group business. If you take a look at the Omdia business, about 65% of their revenue is under long-term contracts. So really important now, the timing is right now to get all of these assets, quality assets together combined, integrated and be ready for the recovery. So yes, we might be in the low to mid-30s this year but our 3- to 5-year plan is to have revenue over 50% on the long-term revenue contracts.

Bruce Goldfarb: And then in terms of the merger with Informa Tech, are you getting any inbound inquiries from Informa Tech customers regarding working with TechTarget?

Mike Cotoia: No, we haven’t got any inbound Informa Tech customers inbound to us on this. I mean, we’re working right now, as we mentioned in the shareholder letter, and I think Greg’s introduction, yes, we’re really happy with the progress that we’ve made. We have really strong conviction on the timing of this. We’re focused on our business as usual but also making sure that we’re ready for the combination, which we are still scheduled to have complete in the second half of 2024. But we haven’t heard directly from Informa Tech customers reaching out to us.

Bruce Goldfarb: And then I saw like you weren’t active on buyback during the quarter. Are you likely quiet until after the Informa Tech transaction closes?

Mike Cotoia: Yes. I think we’re going to be pretty quiet. Yes, we’re going to be pretty quiet on that. I think that is, [indiscernible] November 2024 anyway.

Bruce Goldfarb: Great, so it’s coming up anyway. Congrats on the results.

Mike Cotoia: Thank you.

Operator: There are no additional questions waiting at this time. I would like to pass the conference back over to the management team for closing remarks.

Mike Cotoia: No other questions? No closing remarks. We appreciate everybody joining and talk to you next quarter.

Greg Strakosch: Thank you, everyone.

Operator: That concludes the TechTarget reports first quarter 2024 conference call and webcast. Thank you for your participation, and enjoy the rest of your day.