TechTarget - Q4 2023

Transcript

Operator (participant)

Good afternoon. Thank you for attending the TechTarget's Reports fourth quarter and full year 2023 financial results conference call. My name is Matt, and I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call for 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 our host, Charles Rennick, with TechTarget. Charles, please go ahead.

Charlie Rennick (VP, General Counsel & Corporate Secretary)

Thank you, Matt, 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've 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 at 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 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 effort, accompanies our shareholder letter. With that, I'll turn the call over to Greg.

Greg Strakosch (Executive Chairman)

Great. Thank you, Charlie. Well, the big news since our last earnings call was the announcement we made on January tenth. We entered into a definitive agreement with Informa to merge TechTarget with Informa's Tech 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 over 10 times, as we will enter 18 new vertical markets with a unique end-to-end solution across the go-to market. The combination creates a company with a strong financial profile. We expect 2024 pro forma revenues to be over $500 million.

Within five years, we expect revenue to grow to over $1 billion in revenue and at least 35% EBITDA margins. We structured the deal so our shareholders will get some immediate benefit by receiving an $11.79 per share in cash, and long-term benefit by providing the opportunity for shareholders to participate in the value creation through a 43% stake going forward. In regards to the current environment, we came in slightly ahead of the high end of our Q4 guidance. This reflects a macro technology environment in which customers remain cautious regarding their 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 internationally. I will now open the call to questions.

Operator (participant)

If you would like to ask a question, please press star one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. The first question is from the line of Jason Kreyer with Craig-Hallum. Your line is now open.

Speaker 8

Great. This is Cal Bartyzal for Jason. First one for me. I was just wondering if you could just talk a little bit on the AI capabilities across TechTarget and Informa. You know, if there's any kind of differences in approaches between the two companies and how complementary, you know, those capabilities can come together.

Mike Cotoia (CEO)

Great, Cal, this is Mike. I'm gonna focus on the AI capabilities with TechTarget right now, because we've been working with our generative AI capabilities and roadmap for the last, you know, year plus. So I really want to focus on that. And I see there's really four areas that we are where we see the benefits of generative AI in, you know, creating measurable impact for the business. On the first side, I'd say it would be on our product side. In Q4, we launched our IntentMail AI, which is under our Personal Assist product suite. And what that does is hyper-personalize and auto-generate emails for sales reps to leverage for their outreach, sales reps work with who work for our customers.

So what we're doing on that, it leverages AI to blend TechTarget's prospect level, purchase intent, insights, and behavior, along with what we call recent product line customer information, to personalize a rep's outreach. And what this does, it increases response time, reduces the time to create the emails, and as part of their product suite, we also have different entry points or points of interest at the individual prospect level. So a rep can build a cadence that has multiple entry points to engage with a prospect that they are-- he or she is targeting. We've seen a good adoption in terms of reps leveraging that, reducing their time to create emails, and leveraging the first-party, prospect-level intelligence. We also see it internally, you know, leveraging it across our internal functions, within TechTarget.

You know, we have a content marketing department whose goal is to help promote customers' content to our audience and to their prospects. And everything that we do is 100% indexed by topic, by content. We rate the performance, the promotions. So what we've done on that is we've built a model that now, we're instead of hiring more junior copywriters, we're taking our more experienced copywriters to help train the models to help do the promotions and subject lines for the white paper and, you know, webinar, assets that we want to promote to our customers. So we've taken that, we've seen success on that, and now we're evaluating and rolling out, you know, gen AI for internal control, for internal, procedures and processes across four or five other different functional areas.

I think in terms of member and audience, in creating a better user experience for our members who come to our sites, we've built a private LLM, driven out of our own content and first-party data, which is all behind the firewalls, to provide what I would call a micro experience, and which will be driven by prompt intelligence. So when a user or a member comes to our sites, we can then prompt them to find out what other information that would be relevant for them for their research, and then guide them to our knowledge base of content, whether it's editorial content, vendor content, analyst-written content, webinar content, to make sure it's a better user experience. As we created better user experience for our members, we also gained relevant first-party purchase intent signals.

Then I would say, whenever there's a disruptive or an evolution in the market, that benefits TechTarget quite well. We've seen that, you know, we're celebrating our 25th anniversary. We came into the business, you know, storage was big, virtualization became a big mover, cloud, now AI. And if you take a look at the content that we produce, where we have 1,000 number one rankings around the topic of generative AI, and vendors and customers need to cut through the noise, because there's a lot of noise on how to leverage it, what are the regulatory concerns, how does it work in enterprise tech? That has always been a beneficial and a driver for our TechTarget business. So those are the four areas I'd say that we implemented and continue to implement and evolve around the business.

Speaker 8

Perfect. Thanks. And then just last one from me. It looks like, you know, the guide implies something like a double-digit decline in Q1, but flat or better for the year. Is there anything that you would call out that's kind of signaling that you could see spend free up a little bit in the H2?

Mike Cotoia (CEO)

Yeah, so I'd say, in the Q1 is always historically the lowest, and you align this to the technology market. Q1 is always the smallest revenue quarter for the year, and that aligns with the technology market. When you see Q4 to Q1, over the history of our business, typically between 10%-13% decline from Q4 to Q1. We're predicting between 9%-10%. I think it's still, as we mentioned in the shareholder letter, you know, there are not a lot of, like, big catalysts in the market right now. We've seen the high interest rates, the inflation, we have a geopolitical situations going on, and we have an upcoming election. But what we also are seeing is, you know, our customers are spending a lot of money in R&D, and there's always going to be a pent-up demand.

When that shift from, you know, goes from cost cutting to growth, because there will be a pent-up demand for technology as well as for marketing and sales, typically, it's right back to quality. And we've seen this through several downturns over the course of 25 years, and, you know, we're seeing some... Again, very consistent with our November call, like pretty stable and, like, no surprises right now. So as we've seen that stabilize versus last year, going into Q1, we saw a big dip. This is some signs that the market's stabilizing a little bit, and when the pent-up demand is there, there'll be a flight back to quality, and we're putting ourselves in the best position to take advantage of that flight back to quality and focus on the recovery.

Speaker 8

Perfect. Thank you so much.

Operator (participant)

Thank you for your question. Next question is from the line of Kunal Madhukar with UBS. Your line is now open.

Kunal Madhukar (Stock Analyst)

Hi, thank you for taking my questions. A couple, if I could. One is on the permissioned audience. So what percentage of your traffic in any given month is permissioned audience? And how much of the permissioned audience have you kind of maybe potentially lost because of all the layoffs? That's one. Second is with regard to the guide. Wanted to understand you know, seasonality and what's going into your guide in terms of you know, the Q1 that you're doing explicitly and the Q4, what are the Q-over-Q-over-Q trends in revenue that you're kind of anticipating? Thank you.

Mike Cotoia (CEO)

Okay. I want to talk about the... On the permission-based audience side, I would reflect that to our organic traffic. And so we saw an increase of 14% year-over-year of organic traffic, Kunal, and that's actually coming off a high watermark for 2022, Q4 in 2022, where we saw 51% growth the previous year. So in terms of audience and, you know, permission-based audience, whenever we run a program for our customers in terms of lead gen or delivering them prospect-level intelligence, 100% of our audience is permission-based. In terms of the layoffs, what we're seeing the layoffs are at the vendor side, not necessarily at the buying team side.

So the announcement that you see, you know, continuously throughout 2023 and even into Q1 of 2024... Our tech vendors doing a lot of layoffs around sales and marketing because of their numbers and their demand that they have, and that doesn't really impact what we see in terms of the traffic and the permission-based audience. On your second question, in terms of seasonality, let me go back to historically, what we've seen, and you can go back into our financials for the last, you know, 16 years, 17 years of being public, is that Q1 is typically the smallest revenue quarter. Vendors are not done finalizing their budgets. It a lot of the vendors are year-end, are December year-end, so budgets might not get finalized until February, March, or March. So, and in terms of their world, that's typically their lowest revenue quarter.

In Q2, it ramps up. You see a lot of product releases and updates being presented by customers. You'll see them at more trade shows, you know, in April and May. Q3 levels off with Q2, typically. You have some of the summer months, especially in Europe, where people are taking vacations. Then Q4 is typically their largest revenue quarter, both for us TechTarget, but that directly aligns the enterprise tech market as well. So you know, we're, we're starting to see some signs where that's coming back slowly in terms of those patterns, and that's what we're focused on in terms of our investments and the opportunity to get back to.

Kunal Madhukar (Stock Analyst)

Thank you.

Operator (participant)

Thank you for your question. Next question is from the line of Justin Patterson with KeyBanc. Your line is now open.

Justin Patterson (Managing Director, Equity Research Analyst, Internet–Digital Media)

Great. Thank you and good afternoon. Two, if I can. First, just going back to guidance. When you think about just, you know, kind of the bit of recovery over the course of the year, is that driven primarily by customer growth within there, or are you making some assumptions in terms of just pricing impacts around Priority Engine and the rest? So that's question number one. And then question number two, just philosophically, the product portfolio you have today is very different than what you've had in the past, coming out of downturns, whether it's ESG or even just the BrightTALK asset. So as you kind of look at the TechTarget that exists today, how do you think an enterprise recovery might differ today versus what you've seen in the past? Thanks.

Mike Cotoia (CEO)

Great. Justin, I'm going to start with your second question first, because you bring up a good point. The product portfolio, portfolio today is much different than it was 3 years ago, 5 years ago, even 2 years ago, and that's been part of our strategic roadmap. It's very important, and what we've been very conscious about, is making sure whether it's through our organic capabilities and launches on our product side or through acquisitions, we want to be the premier provider to help our customers with their end-to-end go-to-market strategies. So when the recovery comes back, you're going to have customers that are going to increase their demand all around content marketing. They need really relevant content to talk about their technical or their economic validation and positioning within the market to engage with the right buyers.

So now getting into that end-to-end go-to-market strategy earlier with not only the ESG capabilities, but the BrightTALK capabilities, through a multimedia format, making sure we can do this through webinars, we can do this through PDF, we can do this through, you know, infographics to make sure that we're helping our customers earlier in their go-to-market stage. Then being able to take that, that content and put those into very effective programs that will be delivered and put in front of prospect level, you know, prospects and buying teams, that we know who they are, we know they're permission-based, we know everything that they're looking at, and then being able to capture all that intent to deliver both to the sales and the marketing organizations to help them prioritize not only accounts, but the individual prospects within those accounts.

So combining that together and then being able to plug into the healthcare vertical with Xtelligent and create additional peripheral content, that's been really important for us, and that's a big focus. So when you have an opportunity to play in the whole end-to-end go-to-market strategy for a vendor, put yourself in a really good position. In terms of your first question, how we see, you know, the modest growth, I think it's a combination. So as we reported, the number of customer count was down, and that reflected in terms pretty close to the decline in revenue for this year. We started seeing the overall, you know, revenue per customer leveled up, was actually up a little bit. And I think it's a combination between, yes, there will be some customers that are coming back through net new.

I think there's some pricing capabilities that we have on our technology. I also think some of the new products that we'll be launching as part of our roadmap with Priority Engine, some extensions of what we're doing, and having some of these regions that may have been consolidated into a global spend from North America, if the market starts picking up, possibly later in the second half, there's more budget being allocated to field marketing. We mentioned in the last two earnings calls, whenever we see a pullback, budgets get centralized. They tend to take them out of the regions. They want to centralize them, typically in the U.S., then they allocate some dollars on that. Well, the regions have numbers to hit, too. They have sales, they have field marketers down there.

So between, yes, customer-increasing customer count, some pricing and new product solutions, that's the approach that we see for 2024 and more importantly, for 2025 and beyond.

Justin Patterson (Managing Director, Equity Research Analyst, Internet–Digital Media)

Great. Thank you very much.

Operator (participant)

Thank you for your question. Next question is from the line of Josh Reilly with Needham. Your line is now open.

Speaker 9

Hi, this is Radon Mirfakhraie from him. Regarding the acquisition of Informa, the 2025 pro forma model assumes about 500 basis points of EBITDA growth year-over-year for the combined company, assuming a linear progression to 35% margin. Should we expect the margin progression is linear over the next few years, and can you just touch on some of the key items that will drive, you know, the EBITDA margin improvement?

Mike Cotoia (CEO)

Okay. So you were a little broken up on that. I think you were talking about the margin expansion over the years. And what we say is we, you know, TechTarget's had a really good history of making sure that we manage our margins. And, you know, when you have a $500 million, and you look at the numbers, and it's a pro forma of $500 million going into 2025, and the ability to take on revenue growth, which we have shown and proven over the history of our time, we have a greater than 50% incremental EBITDA margin. It's a lot of that revenue ends up falling on the bottom line. So we'll be able to expand the margins on that side.

Getting into the real key on this, there's a lot of growth through cross-selling and upselling our platforms into new customers. Also, if we take a look at the two businesses, when they combine, there are over 8,000 customers that we have an opportunity to both cross-sell and upsell the solutions that we have, respectively, to get a deeper footprint into existing customers. In terms of the Omdia business, which I can't really comment on them, that's a new product line, but it really does align with our strategy that we're talking about getting into our customers earlier to help them with their end-to-end go-to-market strategy. So pure revenue growth, driving 50%+ incremental EBITDA margins, if you do the math over the five years, you get to your 35% EBITDA margin. That won't be in year one.

That gets over the period of several years for the growth and the opportunities that we have.

Speaker 9

Got it. That's helpful. And then regarding some of the products coming from Informa, Industry Dive, you know, brings some nice diversification from an industry perspective, while Omdia is solely focused on the tech industry. Does it make sense to bring some of Industry Dive's 20 verticals into the business model of Omdia, given it's a pure subscription, and expand their business coverage beyond tech verticals?

Mike Cotoia (CEO)

Yeah. Well, I cannot comment on the Informa business and each of their divisions on it. What I can comment on is what our strategy has been, and has been publicly announced, about getting into adjacent markets, making sure we have our content enablement services, making sure we have an end-to-end solution, and having the platform to reach across all the opportunities, including adjacent markets. So that being said, you know, that's been a vision that we've stated pretty clearly around permission-based audience, first-party insights, and a comprehensive end-to-end go-to-market strategy. And so when that's finalized and signed, we'll be able to dive into that a little bit more with the public.

Speaker 9

Got it. Thanks for the color.

Operator (participant)

Thank you for your question. Next question is from the line of Andrew Marok with Raymond James. Your line is now open.

Andrew Marok (CFA - Director, Equity Research)

Great. Thanks for taking my question. Wanted to dig in on the customer count a little bit. So that decline seems like it accelerated in 4Q. You know, it was down 100 in 3Q, down about 300 in 4Q. What do you think is the floor here? And I guess, to the extent that you know, how much of the decline over the course of 2023 is kind of involuntary, like companies going out of business versus voluntary cutbacks?

Mike Cotoia (CEO)

So I would say the decline, if you look at the overall decline throughout the year, you had a lot of customers that may have signed annual deals in 2022, and it was the second half of 2022, really in Q3, where we started seeing some of the decline. So, you didn't have a lot of folks, a lot of organizations sign up for annual deals going into Q4 of 2022. That's when the market started to send signals that it was slowing down. So that's probably one of the reasons why, you know, Q4 was a little bit higher. People that signed the annual deals in up to May, June, July, that expired. They were dealing with the macro. They pulled back. In terms of, you know, voluntary or involuntary, you know, you got to understand, there's a couple things.

We're less than one year out from the Silicon Valley Bank collapse, and they are 100%, 100% focused on technology companies. So a lot, some of those companies went away. A lot of those companies are still in business, but they are navigating through the environment, and they have to make sure they are managing their costs very closely. So as the market picks up, as we talked about, and the demand picks up, which it will, it's not a matter of if, it's a matter of when, a lot of those companies will come back. Also, during the customer count, and I mentioned this earlier, you might have an organization that's spending in North America, EMEA, and APAC, and the APAC region may have cut back, and EMEA may have cut back, but North America was still going.

That would decrease our customer count based on those regionals that we treat as separate businesses because we're working on separate contracts and agreements. When the market comes back, you typically see that centralized budget flush back into the field. So that's the color that I can give you. I can also tell you, if you look at the total customer count, the revenue, and I get Dan right here, I think the overall revenue per customer is actually up slightly in 2023 versus 2022. So it's, you know, and again, it's another sign we talked about in November. We're saying, now, like, no major surprises right now, and this is what we're seeing right now. We're navigating it, and we don't see things falling off, and we don't see big catalysts sprucing up right now in the first half of 2024.

Andrew Marok (CFA - Director, Equity Research)

... Really appreciate the color. Thank you. That's very helpful. And one more, if I could. I mean, I understand that it's very early days right now, and this may not even be that much of a client-facing effort at this point, but has there been any meaningful feedback from your clients so far in terms of the reaction to the announcement of the Informa deal?

Mike Cotoia (CEO)

No, not really. I mean, we're not really allowed to discuss, you know, but, we're really focused on business as usual here and making sure we're doing the right things for the business. But, listen, I will tell you this, from my own view, I think it's pretty... Like, when we talked about our M&A strategy for the last three years, I really think there's a really big hygienic factor, and that's, again, from my own point of view. We talked about our strategy of driving our first-party purchase intent data, permission-based audience, and content. And so we've been very clear over the last few years and also getting into adjacent markets. So, we've been discussing this publicly for the last couple of years as part of our roadmap strategy.

You know, this is, you know, this is the announcement that we're, that's in front of everyone, and they can interpret it how they want it, but, you know, we can't really share what we hear for feedback.

Andrew Marok (CFA - Director, Equity Research)

Okay. Really appreciate it. Thank you for the color.

Operator (participant)

Thank you for your question. Next question is from the line of Bruce Goldfarb with Lake Street. Your line is now open.

Bruce Goldfarb (Managing Director, Institutional Sales)

Hey, thanks for taking my call, my questions. With Google Chrome's new treatment of cookies, have you seen any increased lift in budget from long-time customers allocating more to TechTarget spend versus legacy cookie-driven spend?

Mike Cotoia (CEO)

So as we all know, Google announced the phasing out of cookies starting in January and accelerating that throughout the end of the year. It was just announced in terms of them putting that into action. Definitely part of our playbook. I mean, we are all first-party data, both at the prospect level and as well as at the account level. We're gonna take advantage of that in terms of our go-to-market strategy and making sure that, you know, customers... and we believe, and even part of some of our product strategy, which you'll see us announce in Q1, will be, at the end of Q1, will be account-only insights. You gotta remember, Bruce, most of our customers have always bought prospect-level intelligence from us, and we've identified the accounts that those prospects work in.

You have a lot of accounts that buy—a lot of our customers also want modeling, propensity modeling, ABM strategies with account-only information. So as part of our roadmap strategy and our product launches, you're gonna see some announcements around our Account Insights Feed, which will be at the account level only, and tying that into our first-party data versus Google phasing out third-party cookies, we see that as a pretty big competitive advantage.

Bruce Goldfarb (Managing Director, Institutional Sales)

Thank you. And then, post Informa Tech combination, I don't know if you can answer this, but post Informa Tech combination, should we expect the new board chairman to be elected from the post-closed directors, or could it be a new director?

Mike Cotoia (CEO)

It could, I mean, it could be a new director.

Bruce Goldfarb (Managing Director, Institutional Sales)

Could be, okay. And then lastly, when do you, when do you expect demand in the legacy business to stop contracting? Do you think, like, Q3, Q2, or Q3, or Q4?

Mike Cotoia (CEO)

Yeah, I mean, you know, like you said it, I mean, the numbers and the guidance we gave this year are relatively flat up, you know, 2%. You know-

Bruce Goldfarb (Managing Director, Institutional Sales)

Mm-hmm.

Mike Cotoia (CEO)

Heading into 2024, we still have, you know, on the tech industry, on the enterprise B2B tech industry, we still have high inflation, high interest rates, and a lot of layoffs right now. That's still gonna get settled. What I do know on this is we've seen pullbacks before, and we've seen customers who have spent a lot of money, invest a lot of money in R&D. We also see technology initiatives such as AI, and we've seen it with virtualization and cloud and other things before, that create a pent-up demand.

And it's not a matter of if, it's a matter of when the market turns around, where customers turn from, "Hey, I got to watch everything I do on cost," to, "I really need to focus on growth through sales and marketing efforts regionally and globally." And when that turns, and I wish I had a crystal ball on that, I mean, we've seen some signs, like I mentioned, over the last couple of quarters, some stabilization. When that turns, there will be a quick recovery, in my opinion. And we've seen that in the past. And when we, we see that recovery, and whether that's Q3 2024 or Q4 2024 or the beginning of 2025, our goal is to be ready for that recovery to take the upside in that.

That's, as you can see, some of the investments we've made, the announcements that we've made, that is a real focus for us right now.

Bruce Goldfarb (Managing Director, Institutional Sales)

Great. Thank you.

Operator (participant)

Thank you for your question. There are no additional questions waiting at this time, so that will conclude the conference call. Thank you for your participation. You may now disconnect your lines.