TechTarget - Q3 2024

Executive Summary

• Modest return to YoY growth and in-line execution: Q3 revenue was $58.47M (+2% YoY), GAAP net loss was $(1.72)M (−3% margin), and Adjusted EBITDA was $16.48M (28% margin). DSO improved to 64 days and free cash flow was $15.56M.
• Results tracked prior guidance: Q3 revenue ($57–59M), net loss ($(1.9)–$(1.2)M) and Adjusted EBITDA ($16–17M) were all achieved within ranges set on Aug 8, 2024.
• Product roadmap advancing into 2025: Account Intent Feeds (Q2), Market Monitor (Q3), and Priority Engine Demand (Q4 launch) support a buying-group-centric GTM and deeper enterprise wallet share.
• Combination with Informa Tech’s digital businesses remains a key catalyst; management expects close in Q4 and sees low-to-mid single-digit industry growth in Q4 and early 2025 as macro headwinds ease and AI-related R&D starts to commercialize.

What Went Well and What Went Wrong

• What Went Well
  • Returned to YoY revenue growth (+2%) with strong cash conversion: cash from operations $19.73M, FCF $15.56M; DSO improved to 64 days (vs 70 a year ago).
  • Product innovation pace high: Account Intent Feeds, Market Monitor, and Priority Engine Demand unify insights and activation across buying groups; early customer feedback and integrations (e.g., 6sense) are positives.
  • Strategic combination on track: Special meeting held Nov 26; management reiterated confidence the deal strengthens content scale, data, research and end-to-end offering.
• What Went Wrong
  • Profitability still pressured: GAAP gross margin 62% (vs 67% in Q3’23), Adjusted EBITDA down 5% YoY to $16.48M; GAAP net loss $(1.72)M (−3% margin).
  • Elevated transaction and related expenses tied to the combination continue to weigh on GAAP results ($2.65M in Q3).
  • Macro demand cautious: management cites suppressed tech cycle, with SMB cohorts remaining challenged; growth expected to be led by large enterprise/strategic accounts near term.

Transcript

Operator (participant)

Good afternoon. Thank you for attending today's TechTarget Reports Q3 2024 Conference Call and Webcast. My name is Tamia, and I will be your 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. If you would like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to your host, Charlie Rennick, General Counsel. You may proceed.

Charlie Rennick (General Counsel)

Thank you, Tamia, 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 the SEC's website, www.sec.gov. A 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.

The reconciliation of certain of these non-GAAP financial measures to the most comparable GAAP measures, to the extent available without unreasonable effort, accompanies our shareholder letter. With that, I'll turn the call over to Greg.

Greg Strakosch (Executive Chairman)

Great. Thank you, Charlie. We are encouraged to report modest year-over-year revenue growth for the Q2 in a row. We think it is clear that the worst of the downturn is behind us. We expect to continue to see similar revenue growth in Q4 and into the early part of 2025. We have several reasons to be optimistic, including a better interest rate environment, the certainty that comes with the election behind us, and the expectation that there will be a new technology investment cycle around AI. We used our strong balance sheet to invest during the downturn to strengthen our leadership position. This strength will be increased with the proposed combination with Informa Tech digital business. We expect this deal to close this quarter. I will now open the call to questions.

Operator (participant)

We will now begin the Q&A session. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason at all you would like to remove that question, please press star followed by two. Again, to ask a question, please press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. Our first question comes from Justin Patterson with KeyBanc. You may proceed.

Justin Patterson (Equity Research Analyst)

Great. Thank you. Two, if I can. First, you've had a lot of product innovation this year. I'd love to hear just how customers are adopting some of these new products and what could be into the product pipeline for 2025. So that's the first question. And then secondly, Greg, I just wanted to come back to that point you talked about. There's going to be an AI investment cycle here. I know it's something we're all trying to work through the pace of. When you look at page views on your site, content being consumed, any signs that we're now closer to seeing some of that monetization come in? Thanks so much.

Mike Cotoia (CEO)

Great. Justin, this is Mike. In terms of the product innovation, we've been very aggressive in terms of the product innovation and what we're trying to build for the overall platform that we're bringing to the market. At the end of Q2, we introduced one of the products, which is our Account Intent Feeds, which is a subscription offering. It's a module of the Priority Engine, but it's very focused on account-only first-party intent signals. That was really important for us because if you know us historically, we have focused on prospect-level intelligence for sales activation and for marketing automation to reach individuals. At the account level, our customers have come to us and said they are craving for first-party account-specific intent feeds to help fuel different go-to-market strategies. For example, they look at account-level targeting for customers. They look at creating ABM lists.

They look at account prioritization based on first-party insights, programmatic advertising, and account insights for sellers. So it's really important that we can provide our intent at the account level into our customers' workflows. We announced as part of that a partnership with 6sense Revenue AI platform. So think about 6sense and the platform helping customers have access to account insight feeds. But vendors don't get access to the TechTarget intelligence unless they subscribe to our insights. So making sure that we have our account insights integrated seamlessly into the 6sense platform helps our customers have a better experience and to really help put that account intent insight into action around those use cases. The other launch that we did was Market Monitor, which is a real-time market dynamics data set to assist our clients in a lot of different areas.

Think about content investments, marketing, and sales outreach. So what we're looking at are the types of accounts actively researching a particular solution, buying industry or buying vertical, the types of personas within those accounts. We're reporting on best-performing content, what resonates, what doesn't resonate, as well as competitive insights, who's influencing or engaging within those accounts. And if you take a look at our product strategy, we're really focused on connecting the dots across all the different products that we have to offer, from content enablement and custom content strategy. So if we can help customers by identifying and providing them the insights on, "You need to invest in this type of content because this is what performs the best to go out and reach, engage, and influence buyers," that's going to help on our content strategy.

All the way to brand and, as I mentioned, content investment, all the way to putting the right assets in market for demand and intent that converts. So Market Monitor was another release, and we're seeing success on that as well. The other product that we announced was our Priority Engine Demand. We've been talking about this throughout the year. Think about this as really tying a holistic approach and providing our customers insights on how all the products are doing and all the solutions that TechTarget is providing them. Each of our solutions is powered by permission-based and first-party intent insights. So we want to make sure that we're revolutionizing and evolving the demand gen strategy. And this, again, is a subscription-based offering where our customers will now have access to customized Content Offers.

Not only will they have insights into that active, we'll call it lead or prospect, but we will be able to deliver and provide insights into the buying groups and the buying teams within those accounts. We'll be leveraging our IntentMail AI, which we launched early in the year, that was focused on prospect level to buying group levels so we can scale and make sure that our customers are in the best position to reach and scale with efficiency and efficacy to the right buying groups, and it's part of that whole investment strategy to provide real-time analytics to show our customers how their content's doing, how their demand's doing, how ultimately their brand is doing, and tie it all together in a holistic view. These are really important investments as we get ready for the close and then the launch of a new company heading into 2025.

So we've been pretty aggressive on that, and we're really happy where we stand on that. In terms of the AI investment cycle, what we see with customers is they're spending a lot of money in their research and development. A lot of the R&D is around AI enhancements to existing products as well as new products that they will launch. And the point of that is there'll come a point when those R&D investments have to generate an ROI in terms of revenue growth and market penetration and market share. And as the recovery continues and we get through that R&D investment, we expect to see customers really fuel growth around sales and marketing efforts and being able to clearly identify the value that their solutions are bringing versus the noise that's in the market.

What better place to do that is around an organization that actually covers this market pretty deeply, and technology buying teams and buying groups and organizations leverage on the data, the insight, the analyst reports, and our editorial strength.

Justin Patterson (Equity Research Analyst)

Thank you.

Operator (participant)

Thank you. The next question comes from Joshua Riley with Needham. You may proceed.

Joshua Reilly (Equity Research Analyst)

Hi, yeah. Thanks for taking my questions. Maybe just starting off on the macro. I guess you guys have been running this business for a long time and have seen a lot of cycles. I guess, are you seeing any trends in how this cycle has developed relative to past cycles that can kind of give you confidence that spending will improve in a more material way next year, kind of in line with your commentary from the shareholder letter?

Mike Cotoia (CEO)

Yes. That's a good question. So I'd say we've been in a two-year depressed technology cycle. And we've seen that. It's not a matter of if. It's a matter of when that will rebound. And I'll say if you take a look at TechTarget throughout 2024, if you look at our Q1 results, our expectations were we'd be down high single digits, relatively flat year over year, but we're up 1% in Q2, and then we saw a 2% growth in Q3. And we're still seeing those we expect to see very similar trends, consistent trends with Q3 as we go into Q4 and into the first half of 2025. If you've taken a look at a lot of the other some of the companies that have reported actually saw double-digit decline in the first half. You're seeing less of a decline in the second half.

We feel like we're navigating a little bit better than a lot of our competition. But what I also look at is some of the things that we've talked about in these downturns, you're seeing a lot at the end of the tunnel. For example, we've seen two interest rate cuts. That always bodes well for the future for the technology market. We saw a presidential election, which we didn't know how that was going to go or if it was going to get contested. Seems like it's come and gone, and we're moving forward on that. So there were some signs out there that really will benefit, we believe, the technology market and what we've seen historically in the long term.

So I'd say in the short term, though, we'd like to see the consistent go from decline to growth, two consecutive quarters in growth, and being able to say, "We have a pattern now of seeing year-over-year growth at modest, low to mid-single-digit numbers." That's what gives us confidence in the long term. Our focus right now is to close this combination with Informa Tech. We announced the Informa Tech digital assets. We announced a special meeting date on November 26th. We expect it to close shortly thereafter. And then our focus will be executing on the business, making sure that we have the integration done in a timely manner, and really navigate through the next couple of quarters and look at capturing the upside when the market does recover and when all these impacts come into play or these changes. And that's what we're really focused on right now.

Joshua Reilly (Equity Research Analyst)

Got it. That's super helpful. Maybe just following up on that, in the last cycle, a major contributor of your growth was a pretty big increase in the SMB customer count. And then, obviously, we know they pulled back quite a bit, particularly when the Silicon Valley Bank crisis hit. In this next cycle coming next year, do you think that these SMB customers will come back, or do you think that the growth will be driven more by the enterprise and larger customer cohorts? Thanks.

Mike Cotoia (CEO)

Yeah, no problem. I think the first level of growth is going to be with our increased product and capability set at the large enterprise and strategic accounts. We now have an ability to go wider and deeper. If you take a look at what we have to offer on our own product roadmap and what we're launching, that's been really important for us to get ready for 2025. But when you take a look at the assets coming into TechTarget and combining with TechTarget, and you talk about Industry Dive and being able to get into the vertical markets, and you talk about the intelligence and advisory arm of Omdia, and you look at IT, media markets, and brands, as well as the NetLine engine, we have a really good opportunity to land and expand within our existing accounts.

And there'll be a focus on that on the strategic accounts and the enterprise accounts, as well as getting into those verticals. I would say that you nailed it. I mean, if you take a look at even Gartner's most recent information that came out, it talked about some of the smaller tech companies that are really challenged with cost and really challenged managing their expenses and don't have access to finance and the capital that's really beneficial for them like it was, or favorable, I should say, like it was a few years ago. They may continue to be challenged a little bit, but we still see some opportunities for us in terms of, because of the depth and breadth of our product offerings, to be able to do a good job with those smaller accounts.

But I would say the number one place where we're going to be able to grow and land and expand is on the enterprise and those strategic accounts.

Joshua Reilly (Equity Research Analyst)

Got it. Thanks, guys, and good luck with closing the deal.

Mike Cotoia (CEO)

Thank you.

Operator (participant)

Thank you. As a quick reminder, if you would like to ask a question, please press star one on your telephone keypad. The following comes from Jason Kreyer with Craig-Hallum. You may proceed.

Great. Thank you. This is Cal for Jason. So first question from us, can you just discuss how the pre-merger planning has gone so far, and how do you feel like your position should the merger eventually go through here?

Mike Cotoia (CEO)

Yeah. So, Cal, we've been working on this since the beginning of the year when we announced it on January 10th. We've worked together closely with the Informa Tech digital business units, working closely with Gary, with the business leaders to really understand the operating model, how do we best set the new organization, set it up for success, the teams get along well, the operating model and the organizational structure. I would say it's been going very, very well across the board. I think everybody sees the opportunity and understands the opportunity that these two organizations coming together can really play in the long term as well as getting off the ground in the short term. We're focused on day one planning. We're going to day 180 planning all the way to day 365.

I'd say the teams are in a large step on this, and I would say that the planning and the pre-merger planning has gone well. I didn't catch your second question on that.

I think that was it for that one. The second question that I just had here, I just kind of wanted to ask on the competitive environment. You kind of talked about leaning on the balance sheet here, keeping your investments progressing. How do you see those investments really differentiating yourself versus your competitors who may have had to pull back here during the down cycle?

I think companies like a lot of our competitors are private companies that we stay in touch with, and we also have some public companies. But we've built 25 years of a strong financial profile organization with a strong balance sheet. And we've always had, in any downturn, be optimistic. Always be careful on how you invest and understand how you invest, but be opportunistic because any downturn, we have an opportunity to take market share and really put ourselves in the best position to capture the upside when the recovery comes. And even without a recovery, the investments that we make around our products, around our content, and around our audiences, I believe, put us in a competitive advantage. There are not a lot of organizations that I will call own and operate the sites and communities that have access to permission-based audiences as well as first-party intent.

And to me, that's the most accurate and most effective way to help sales and marketing when they're ready to invest in their growth capabilities for driving revenue and market share. So those investments are really important for us. We take a view of we understand we have 90-day quarters, but we take a look at the one to two to three years, and if we invest X on this because we can do it with our balance sheet, this will generate Y and Z in terms of return. So I think we're in an enviable position on that because of the model that we've built over 25 years. We're very disciplined, and we're effective when we make those investments in the right areas.

Perfect. Thank you. And I will echo good luck here closing the merger.

Thank you.

Operator (participant)

Thank you. There are currently no other questions in the queue waiting at this time. This concludes today's conference call. Thank you for your participation. You may now disconnect your line.