TechTarget - Q2 2023

Transcript

Operator (participant)

Good afternoon. Thank you for joining the TechTarget Report's second quarter 2023 conference call and webcast. My name is Kate, and I will be the moderator for today's call. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. I would now like to pass the call over to our host, Charles Rennick, with TechTarget. You may proceed.

Charles Rennick (VP of General Council and Corporate Secretary)

Thank you, Kate, and good afternoon. Joining me here today 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 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 factor sections of our filings with 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.

Greg Strakosch (Executive Chairman)

Great. Thank you, Charlie. We are pleased that we hit our Q2 2023 forecast despite the continued macro weakness in the technology market during the quarter. While it's too early to say that we are seeing a recovery, we believe the environment feels like it is stabilizing. We are maintaining our previous guidance for 2023. While nobody wishes for a downturn, historically, we've taken advantage of these down cycles by using our market leadership and strong balance sheet to reinvest and optimize the business for the eventual upswing. We are optimistic that we are currently doing the right things that will pay off for our customers, employees, more and shareholders in the future. I will now open up the call for questions.

Operator (participant)

Absolutely. We will now begin the question and answer session. If you would like to ask a question, please press star followed by a one on your telephone keypad. If for any reason you would like to remove your question, please press star followed by a two. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. Again, to ask a question, please press star followed by a one. We will pause momentarily to compile the roster. The first question will be from the line of Justin Patterson with KeyBanc. Your line is now open.

Justin Patterson (Managing Director)

Great. Thank you very much, and good afternoon. Greg and team, I just wanted to tease out that point you just left on. As you mentioned, longtime, longtime TechTarget shareholders know that you view downturns as an opportunity to really reposition the business. As we come out of this downturn, how should we think about just the, the pace of growth for TechTarget, especially as you lean into these categories like AI, that you teased out in the letter a little bit? Second question, I just would love to know a little bit more about what you're seeing on the macro. Obviously, it's still choppy out there, but you did hit numbers this quarter. You did reaffirm the guide. Curious if you're seeing a little more stabilization and signs of things just not getting as bad anymore. Thank you.

Mike Cotoia (CEO)

Great. Yeah, Justin, in terms of navigating through the downturn and taking this opportunity to invest back into the business, that's gonna help us accelerate what we believe will get back to normalized growth, which we've seen in the past, with double-digit growth. There's a lot of areas that we're really focused on during a downturn, and our playbook has always been, you know, making sure that we're being aggressive with, you know, product and feature rollouts, making sure we're doing the right things internally to reallocate resources, to pivot against the right initiatives and the right priorities. Part of this is around timing of the ma- of the macro, as you, as you asked as well. We noted in the letter, we don't see the macro, you know, improving tremendously, but we are seeing some signs of stabilization.

As we mentioned last year at this time, as we went into the slowdown, it might take three, four, five quarters for companies to navigate through this, but at one point, they're gonna need to feed their pipeline. There's typically a flight back to quality around first-party data, prospect-level intelligence, market alignment, and proximity. That's not really a matter of what if, it's more of a matter of when, and we think when that comes back, we will see, you know, the growth that we're used to, double-digit growth moving forward, with incremental EBITDA margins expanding and overall margin expansion.

Justin Patterson (Managing Director)

Thank you.

Operator (participant)

Thank you. Thank you. The next question will be from the line of Josh Reilly with Needham & Company. Your line is now open.

Robert Morelli (Equity Research Associate)

Hi, this is Robert Morelli on for Josh. Thanks for taking the question. With the cycle incrementally challenging, how should we think about trends in the second half of the year? You know, given the normal seasonality, you know, will be a 10% sequential increase in revenue from Q3 to Q4. Is that seasonality still in place?

Mike Cotoia (CEO)

Yeah, Rob, I think as we look at it and you take a look at the current macro conditions, you know, it sort of changed a little bit this year, right? We've been pretty like, if you look at the overall guidance that we reaffirmed this year of $225 million-$230 million in revenue, with $65 million-$70 million in EBITDA. You know, I don't think you're going to see any major swings in terms of Q3 to Q4. I think you'll see some growth in Q4 versus Q3.

It's kind of early to tell on that, but it does go back to what we're really focused on, the investments we're making around the products, the investments we're making around the content side, the Gen AI opportunities that we're working on as an organization, and then our customers that really need to focus on building that pipeline going into the end of the year and into 2024. The best way to build that pipeline is through quality data, quality insights at the account and the prospect level. You can really marry it out in terms of, you can reconcile the range based on what we gave for guidance, which is well in line with what we had on the analyst side. You know, plug in your Q4 numbers that you see, and we're gonna align to that range that we announced back in May. That's how I would look at it right now.

Robert Morelli (Equity Research Associate)

Got it. That's helpful color. One thing we've heard from competitors is new business cases are the most challenged in the current environment. You know, how would you position the TechTarget product set in terms of use cases for new customer acquisition, you know, versus upselling existing customers and, you know, engaging retention? Thanks.

Mike Cotoia (CEO)

Yeah. What I'd say on that is, I, I think in this type of map, when we talk to customers, new business cases and net new logos is always a challenge because as always, you know, as you can see in the tech market, there's been a pullback on spending, there's been layoffs and things like that. Again, this goes back to, there comes a point in time, and this happens during every down cycle, when our customers need to really engage and build up a, a believable and trustworthy pipeline. When that happens, I think there are three things that will bear fruit on that. Number one, there will be a fight back to net new logo acquisition. Two, there's always gonna be land and expand, protect your existing customers.

I believe three, as we get through this expense cleansing cycle, the customers are gonna be very particular in terms of what investments they make, to make sure they're really driving ROI through the product innovation, and through our alignment to our markets, and through our prospect-level intelligence. We think we check all the boxes on that, so we'll see that, you know, we hopefully sooner rather than later, but this is something that we're, we're planning to see going into 2024.

Robert Morelli (Equity Research Associate)

Got it. Thank you.

Operator (participant)

Thank you. The next question will be from the line of Bhavin Shah with Deutsche Bank. Your line is now open.

Bhavin Shah (Director of Software Equity Research)

Great, thanks for taking my questions. Just following up on what you saw play out through the quarter and what you're seeing today. Can you just maybe elaborate a little bit more from a product perspective on any changes you're seeing from Priority Engine to maybe some of your other more, more marketing-focused solutions? Even from a customer cohort perspective, larger customers versus smaller customers, any difference you've seen in terms of improvement, stabilization, that would be helpful.

Mike Cotoia (CEO)

Sure. Bhavin, on July 20th, we announced one of our largest launches on Priority Engine. There were three or four key areas that we really wanted to focus on. Number one was our Salesforce integration with our new Salesforce connector. What we're really focused on that, we've talked about this in previous earnings calls, was enabling our customers to really leverage their own first-party data and align it with TechTarget's first-party account and prospect-level data. Also allow our customers who are using third-party, data-driven ABM platforms to sync that data with their first-party data within their own CRM system, along with TechTarget's first-party data at the account and prospect level.

That helps with cadences, workflows, ABM strategies, sales outreach, because you want to combine all the datasets and really understand not only at the account level, but which prospects should focus on based on their activity. That's been a pretty big enhancement for us. We also did launch a new UI, UI interface to help on the sales side. Reps within our accounts have a shortcut to the most critical account list territories data. For example, they can favorite some of their accounts and store them, favorite some of their prospects and have it right in front of them with one click. They can add to their CRM. They can view contacts now and identify contacts who've actually viewed their marketing content to have a quicker and more engaged conversation.

The other thing that we launched was our account journey visualization. This has been really key for us, because we want to show how the account is engaging across the TechTarget network, what buyers are researching, when are they researching, when do they become a lead. Also, is the sales reps within our clients, how and when or what are they doing to engage with those accounts? Now we have insights that help them show, this is what your marketing investments have done with TechTarget. This is the outreach that we are seeing. This is what your sales teams are doing or not doing. It's all about attribution, visualization, and holding everybody accountable. That was a really big launch. We updated our new Opportunity Dashboards.

We want to make sure that we are getting as much attribution and visualization and transparency about the data that we're providing to the accounts and the, at prospect level, GDPR, consent-based prospect, members of our, our buying teams, and show how those efforts are working against opportunities that have been created, so they can look back and see the impact in that marketing level and that marketing spend, as well as opportunities that have been created, and how are we accelerating them from opportunity creation date to closed one? as well as close loss. There's a lot more that we can do with that around insights about why you win a deal, why you might lose a deal. There's that's part of the roadmap.

In terms of the other marketing opportunities and products, I mean, we're in a really good position today versus, you know, probably our breadth of products has expanded, so we have different avenues to walk in and show value for our customers. For example, if a customer today in a choppy macro doesn't want to sign up for a one, two year Priority Engine subscription, but they have a need around content strategy, about positioning their product, showing an economic validation of why they should, you know, choose, you know, a technology buyer should choose their solution, we can walk in there with content strategy and content enablement services.

We can walk in there with webinar capabilities, not only to promote to our members, but to help our customers promote their, their own database, where we, relaunched and updated our whole FastReg, which one-click to register based on the information we know about prospects from our customer's database that are already opted in and permission-based. We walk into our branding elements, our content marketing elements, demand generation elements. Now when a customer says, "I can't commit to X, but I have these problems at Y and Z," we have a reason to engage and deliver value.

I would say we've seen some shiny, you know, points with some of our strategic accounts, those larger accounts. We talked about this last quarter, how we revamped the sales organization, where we created pods, that we have an ESG, which is our Content Enablement Services, opportunity and capability set, a BrightTALK and a TechTarget up, all engaged within these accounts so that they are bringing that end-to-end capability set, but entering where the customer needs or has a demand, a pain point, or a value that they need. We're seeing some signs of that. I think as somebody else mentioned on the call, I think a lot of our clients are being very staying very close to their existing clients. They want to be in front of their existing clients. I think as this market turn continues to go from stabilization to growth, you'll see a flight back to net new logo focus, penetration, as well as land and expand.

Bhavin Shah (Director of Software Equity Research)

Super insightful and detailed. Just a quick follow-up on AI. I know in the letter you talked a lot about some of the investments you're making and the opportunities there. How do we think about maybe the opportunity on leveraging some of the generative AI on the content creation side of things, and being able to kind of offer more articles and features leveraging kind of gen AI? Thanks.

Mike Cotoia (CEO)

Yeah, that's a great question. I mean, when you look at Gen AI, you got to look at the market that we serve, and we get a lot of questions around Generative AI. In the markets and the constituents we serve are the technology buyers and technology vendors. On the technology buyer side, we've all seen the demographics that buyers driving towards a millennial stage buyer wants really deep, insightful content. There was a Harvard Business Review study that came out at the end of 2022, that said millennials, 54% of millennials in the tech buying stage, want a refree experience. They want to get engaged with relevant content. We serve an unbelievable opportunity, and when you remember why people go to TechTarget, it's because of our market alignment, our content that we serve up.

We dominate in organic Google organic search, and we're serving the buyers information. One of the things that we've worked on, we hired Paul Healey, who's running our generative AI strategic strategy on this, is when customers go to Google, which we continue to dominate, and come to TechTarget sites, we're going to be able to, as part of our roadmap, set up a prompt type capability set through Gen AI to help serve up all the knowledge-based content and the insights around that particular topic that those researchers are looking at. I'll say this, like, there's nobody else that I can think of in this enterprise B2B tech area, because of their lack of investments in content and our strong investments in content, that can serve that up.

If I go in there as a buyer, I go to Google, I search XYZ, I end up on a TechTarget community. I'm reading my articles, and I get prompted, "What else are you looking for? What else can we help you with?" Ask a few questions. We can serve up content from our BrightTALK community, which is protected right now, vendor content, our Enterprise Strategy Group, research content, market insights, everything served up for that buyer. It provides a better experience, and then the flip side, it drives more engagement, more insights, and more capabilities for us to productize to our customers at the end.

Bhavin Shah (Director of Software Equity Research)

Great. Thanks for taking my questions.

Operator (participant)

The next question will be from the line of Bryan Bergin with TD Cowen. Your line is now open.

Bryan Bergin (Managing Director)

Hi, guys. Good afternoon. Thank you. I wanted to start just kind of a double click on the feeling of stabilization. Can you just talk a little bit more about the, you know, the confidence in calling that, that feeling? Is it a result of more leads within your sales funnel? Is it actual signings? Is it just a slower level of touches? Can you give us a sense of what's, I guess, contractually committed in that revenue outlook as well to get comfort in the full year?

Mike Cotoia (CEO)

Yeah, we don't disclose what we have contractually committed. Bryan, here's what I can tell you is, you know, we've seen through the conversations with the sales teams, with our customers, our customer success teams, the conversations feel like they are like what we stated in the shareholder letter. There's more of a stabilization. As you saw at the beginning of the year, there was a little bit of a free fall. People didn't know. There was still layoffs going on, and there's cost cutting, but it's also some of the breadth of our offerings that we talked about a few minutes ago, are giving us other entry points to get into the door to bring value to our customers that might not want to sign, as I mentioned earlier, a one or a two or three-year deal.

Now we have a reason to engage around, again, around messaging, around creating leads, driving, you know, increasing your database, even branding activities. We're seeing that. I would say, you know, we don't disclose it, but, you know, we've seen it, the trend in bookings, too. We've seen deals that have, you know, if you looked in the past quarter, where they may have committed, and we had it at a certain percentage in our Salesforce, you know, forecasting, that got pulled back. We're seeing some of those, or a lot more of those, come to fruition in terms of signage. It's early. I don't want to say we're out of this, but the signs that we've seen over the last 30, 45 days are trending cautiously optimistic.

Bryan Bergin (Managing Director)

Okay. Okay, that's good to hear. As it relates to maybe free cash flow and capital allocation, just first off, anything to be mindful of on free cash flow and the conversion off the EBITDA for the second half? As you generate cash flow, can you just give us a sense on capital allocation priorities? How are you feeling about M&A appetite here, just given that large cash position versus more active share repo deployment?

Dan Noreck (CFO)

Yeah, no real change in strategy. We're looking at M&A opportunities. As we say in the shareholder letter, we're looking at share buybacks and potential debt buybacks. We'll, you know, continue to be opportunistic on both fronts there.

Bryan Bergin (Managing Director)

Thanks.

Operator (participant)

Thank you. The next question will be from the line of Bruce Goldfarb with Lake Street Capital. Your line is now open.

Bruce Goldfarb (Managing Director of Institutional Equities)

Thank you. Thanks for taking my questions, and congrats on your results, you know, especially given the current macro environment.

Mike Cotoia (CEO)

Thanks, Bruce.

Bruce Goldfarb (Managing Director of Institutional Equities)

have you guys have you seen a recovery in demand from accounts that were impacted by the collapse of Silicon Valley Bank?

Mike Cotoia (CEO)

Well, I would say we don't, we don't break it down, but I would say, Bruce, that's 4.5 months old, so there's still some repercussions going on to that. What I would tell you is, we haven't run into any cash collection issues that we report on that. We're still engaged in conversations. Some of those accounts, or a good amount of those accounts, are spending. They're watching their budget. Like, of all people, I don't want to say of all companies, but when you're VC-backed and you're running to grow at all costs, and then the brakes get jammed to a halt, you're very careful on what you spend, and you want to make sure that you're getting ROI, and you can attribute your investments to that ROI.

I believe, you know, as we continue to navigate this, so 4, 4.5 months since the March 8th, you know, collapse on that, you know, our conversations are about that. What do you need to do? What do you need to accomplish? What do you need right now, and how can we help you? Here's the breadth of products that not everything might fit for you, but we're gonna put the right products with the right solutions in front of you. Versus, I would say, pre-SVB collapse, we could be in those conversations, and their appetite might have been bigger than it should have been, where they wanted to get everything.

We're gonna see this gradually, I think, pick up, and we haven't seen a, an adverse impact right now, but in terms of conversations and go-forward opportunity, but it's still fairly early. It's 4+ months since that March 8th date.

Bruce Goldfarb (Managing Director of Institutional Equities)

Thank you. Do you, do you believe that the install base could support a price increase in 2024? I guess, assuming macro, you know, see, you know, you know...

Mike Cotoia (CEO)

Uh-

Bruce Goldfarb (Managing Director of Institutional Equities)

I guess a significant improvement in the macro, I guess.

Mike Cotoia (CEO)

You know, I don't want to answer that right now. If you asked me today, and I don't have a crystal ball, I would say I'd be very careful on doing a price increase. It also depends on the feature and functionality launches that we have coming down the road, which might warrant a price increase. We're, we're not there yet, and we're taking this week by week, quarter-by-quarter, and then we'll let you know in November when we're launching it.

Bruce Goldfarb (Managing Director of Institutional Equities)

Have you seen any change in your search rankings with the arrival of AI-assisted search, you know, like ChatGPT?

Mike Cotoia (CEO)

Well, we've seen our search rankings continue to grow. We, you know, I'll say we, we have We dominate in enterprise B2B tech. Our search traffic to our enterprise AI site was up, like, 120%. If you type in Gen AI or generative AI, or what is Gen AI, or what is generative AI, you know, TechTarget's ranked number one. We have a lot of articles. I don't know the exact, but it's hundreds that are ranked, not organically. We continue to do really well on that, and Google and Microsoft Bing will continue to drive, you know, researchers to trusted and sourced communities and publishers. That's a really key differentiator from what we offer.

Bruce Goldfarb (Managing Director of Institutional Equities)

Great. Thank you. My last one is I mean, you guys were active on the buyback during the quarter. Do you think you'll be active, or do you think you'll have appetite, give, you know, at current prices, current stock price?

Dan Noreck (CFO)

Yeah, I mean, we're gonna, like I said, we're gonna continue to be opportunistic. You know, that's been our, our track record. You know, I wouldn't, I expect us to, like, continue to stay the course on that strategy.

Bruce Goldfarb (Managing Director of Institutional Equities)

Great. Thank you. Congrats again, and thanks for taking my questions.

Mike Cotoia (CEO)

Thanks, Bruce.

Operator (participant)

Thank you. The next question will be from the line of Kash Ragnan with Goldman Sachs. Your line is now open.

Jacob Staffel (Associate)

Hey, guys, this is Jacob Staffel for Kash. Thanks for taking the question. Just one from me. I wanted to ask what was meant in the shareholder letter by you're using the slowdown to optimize your organization with an eye on streamlining operations, improving go-to-market processes, and reducing expenses where appropriate. Can you maybe touch on more, more so what, what's meant by that? Does that mean potential RIFs? You know, anything around that might be really helpful.

Mike Cotoia (CEO)

Jacob, as you you're probably well aware, we made a few acquisitions over the last couple of years, so they're on disparate systems. One of the things that we had a real big focus on this year was streamlining those systems, the efficiencies, the reporting, the customer experience. For example, we had 3 different Salesforce instances. We've integrated that into 1. We're looking at other workflow management tools and solutions. The way we deliver our data to our customers or the way we capture it, we're streamlining that, which then we can take some of those resources and reallocate them to other projects that are priorities. We don't plan a RIF. We plan on making sure we believe we're at the right headcount.

We plan on driving the most efficiencies, but we also want to make sure that we're properly staffed to align with those priorities and those opportunities that we have, and that's what we meant by that.

Jacob Staffel (Associate)

Awesome. Thank you so much.

Operator (participant)

Thank you. That concludes today's Q&A session and today's conference call. At this time, you may now disconnect your lines. Thank you for your participation.