Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

TechTarget, Inc. (NASDAQ:TTGT)

Q3 2009 Earnings Call

November 9, 2009 5:00 pm ET

Executives

Rick Olin - Vice President and General Counsel

Greg Strakosch - Co-founder and Chief Executive Officer

Don Hawk - President and Co-founder

Analysts

Paul Weaver - Lazard Capital

Jim Friedland - Cowen & Company

Ross Sandler - RBC Capital Markets

Mark May - Needham

Operator

Good day, ladies and gentlemen, and welcome to the TechTarget Third Quarter 2009 Conference Call and Webcast. My name is Kevin. I will be your coordinator for today.

At this time, all participants are in listen-only mode. Following introductory remarks by Greg Strakosch, TechTarget’s CEO, Chairman and Co-founder, we will be facilitating a question-and-answer session for today’s conference call. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.

I would now turn the call over to Rick Olin, Vice President and General Counsel. Please proceed.

Rick Olin

Thank you, operator. Before turning the call over to Greg, I want to briefly remind everyone on the call of the new earnings release process that we began using last quarter, are using today and plan on using going forward.

As you saw, we issued our press release earlier today, and we previously announced, in order to provide the usual update on the business ahead of this call and hopefully save you all some time and effort, we have posted on the Investors section of our website and furnished with our 8-K filing today management’s prepared remarks. These remarks are meant to function as the script otherwise would for this call.

On the call today, Greg will provide a brief summary of our financial results for the most recently completed quarter, and then management will devote the rest of the call to answering your questions.

We are seeing some other companies use variations of this format, and given that it provides, both an opportunity for all of you to read the prepared remarks prior to the call and a more meaningful interchange on any follow-up questions, we’ve decided to adopt this process. We hope that you find this helpful and look forward to your feedback on it.

Additionally, I would like to remind everyone that during the course of this conference call and the Q&A session, TechTarget will make certain statements that may be considered to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including particularly its guidance as to future financial results.

Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements.

These risks include market acceptance for our products and services; relationship with customers, strategic partners and our employees; difficulties in integrating acquired business; and changes in economic or regulatory conditions, or other trends affecting the Internet, Internet advertising and information technology industries.

For a description of these and other risks, the company encourages you to read the section entitled Risk Factors in our Annual Report filed on Form 10-K, as well as our other filings we have made with the Securities and Exchange Commission. In addition, the forward-looking statements speak only as of the day of this call, and the company undertakes no obligation to update these forward-looking statements.

Following Greg’s introductory remarks, in addition to Greg, the following members of our management will be available to answer your questions: Don Hawk, President and Co-founder, and Eric Sockol, Chief Financial Officer and Treasurer.

I’ll now turn the call over to Greg.

Greg Strakosch

Thank you, Rick. The market is stabilized and our results are [flat back]. While customer psychology has improved from a year ago, the mood is till cautious. Our strategy through this downturn has been to invest aggressively to gain market share while maintaining 15 to 20% adjusted EBITDA margins and to generate healthy free cash flow. So far we have been successful on these accounts.

Before I open up the call to questions, I want to make a comment on the accounting issue. We are disappointed by it and take it very seriously. At this time, we have nothing further to add from what has been disclosed in our press release and prepared comments.

So we’ll not be taking any questions on this matter during this call.

With that said, I will now open the call up to questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from line of Colin Sebastian with Lazard Capital. Please proceed.

Paul Weaver - Lazard Capital

Hi. This is [Paul Weaver] for Colin. Thanks for taking my question. I apologize I had trouble downloading the prepared remarks of the website. I am only just looking at it on EDGAR, so I apologize if you answered this in the prepared remarks. But I was hoping you give us some color on what advertisers are saying about budgets for next year. And also, if you could give us some color on just the general ad market, display, lead gen, also paid search costs?

Greg Strakosch

Well, in terms of the general market, customers are still cautious. But I would definitely say that the worst is behind us. So in terms of, if you go back to beginning of this year, there was a lot of fear in the marketplace, and customers it was hard to even get a meeting with these customers, they don’t want to waste our time.

Now, from an activity standpoint, there is a lot of activity. There are a lot of discussions about 2010. But in terms of what’s happening right now, customers are still very cautious. So I would say, we are basically at this point where the market is stabilized, the worst is behind us. But it’s before, like I say, it’s too early to say, hey, recovery is definitely here.

But in terms of, if you think about the budget process, which most companies do, during this time period, a year ago, you were dealing with Lehman Brothers and AIG and there was a lot of fear in the market and that was reflected very much in 2009 budgets. Customers are definitely much more optimistic about their business today and I think that will be reflected in their budgets next year. Although we are not expecting there to be a huge increase, we definitely expect a better operating environment.

Don Hawk

And this is Don. Was the second part of that question about display versus lead gen versus page search costs?

Paul Weaver - Lazard Capital

Yes.

Don Hawk

Okay. I’ll take that piece. So our business is maybe a little different than consumer business you see may follow, and if we are on the online side of our business, primarily lead gen, and we have a lot of programs that combined both lead gen and display. So the trends that we are seeing with regard to display, for example, might be different than what you are seeing in the overall consumer market.

Display has been strong for us throughout this year and that’s powered primarily by the fact that it’s our largest accounts that tend to buy a lot of our display inventory. And as we talked about on previous calls, those large accounts have been a source of strength for us in 2009.

Lead gen, which makes up the bulk of our online revenues, we see that has gained pretty consistent. And heading into next year, we are definitely seeing, as Greg just talked about, an uptick in interest, particularly from the small to mid sized segment of our account base. The small to mid sized accounts tend to do primarily lead gen business with us. So during this downturn, those accounts had pulled back a little bit on that spend, but heading into next year, we are definitely seeing some renewed signs of optimism on that.

I think the last part of your question was about page search costs, that’s not really a driver to our business. We don’t buy virtually any of our traffic, 98% of the members in the traffic that we bring into the network are from organic sources. So really can’t comment on that piece.

Paul Weaver - Lazard Capital

And can you give us a sense of how many new vertical sites you plan on launching next year?

Greg Strakosch

Yeah. So part of our strategy during the downturn is to invest aggressively. And site launches is one of the primary places. So during the downturn, during ‘08 and ’09, we’ve launched about 20 new websites. And we are still doing planning for next year. But I would think it would be in the neighborhood of about eight new websites next year.

Operator

Our next question comes from the line of Jim Friedland with Cowen & Company. Please proceed.

Jim Friedland - Cowen & Company

Thanks. And I also has not been able to go through the prepared comments completely, and so you may have covered this in there. But, first, wanted to ask on the segment breakout. In terms of your customer base, it seems like the larger customers are still continuing to spend and the smaller customers haven’t come yet. Just wondering if you could give some more color on what you are seeing there in terms of sort of a same customer sales basis than what you see going into Q4? And then maybe if you could talk about the Windows 7 cycle, if you think that’s going to help you out at all in Q4, Q1? Thanks.

Don Hawk

So with regard to the customer segments, when you get a chance to review the prepared comments, we did talk a little bit about this in there.

In Q3, what we saw actually was a better contribution than we’ve seen previously with regard to the small to mid sized segment. So one of the stats that we had in the prepared comments was if you backed out the 12 largest vendors that we kind of talk about as an illustrative benchmark in previous calls, if you back those guys out of the top 100, we actually saw 18% growth on a year-over-year basis from the remainder of the top 100 customer base. And you may remember during the last earnings call, we talked about the fact that the top 100 is a group that has been flat on a year-over-year basis.

That was the first time we’ve seen some signals of growth from that segment of the customer base. With regard to those top 12 that we talked about as the benchmark, we actually saw them be down a little bit within Q3. Now, we did spent some time there in the prepared comments. And I would be happy to answer any follow-up questions on this, on the fact that the year-over-year comparables that we are dealing with here are a little misleading, because if you look at the impact of the change in revenue recognition methodology that we employed at the beginning of this year, that means we retroactively. The impact of that in 2008 was actually to move a decent amount of revenue from the first half of the year to the latter half of the year.

And that’s particularly true on larger accounts because larger accounts tend to buy multi-element offerings from us. They tend to buy contracts that you sell them multiple pieces through the promotional program. So in those types of programs, the impact of that rev-rec change was to shift revenue to the back half of the year. So it creates an unfavorable comp force when we’re talking about a very small sample of accounts there, kind of the larger [that gets] trends with regard to that account base, though, we feel pretty good. We are seeing normal spending patterns from them. We are having good conversations as we are elsewhere in the customer base as we head into 2010. So we continue to think that the mega trends that we talked about there stay constant. That is the migration from traditional to online for those guys and as we are in this space, we stand well positioned to take advantage of that as it proceeds.

Jim Friedland - Cowen & Company

And Windows 7 helping you?

Don Hawk

Yeah. Well, on Windows 7, I think eventually that will help us. But I don’t know how immediate it will be, because typically Microsoft upgrades are adopted by consumers first and enterprises generally delay to make sure that it is stable.

Well, my sense is that a lot of organizations are two releases behind on the desktop. So we think this one is probably going to get some pretty good traction eventually. And when that happens, that’s good for us because whenever there is change, that’s good for us. Microsoft will have a push behind on it on the corporate side and then all of the software that is tied in with Microsoft and especially the servers, people will be doing upgrades to take into account Window 7. So any kind of the big Microsoft refresh it tends to be good for us. But in terms of it in the next quarter or two, it’s probably longer term than that for us.

Jim Friedland - Cowen & Company

Okay. And so maybe we see in the back half of 2010, but we just have to keep an eye on what enterprise adoption is?

Greg Strakosch

Yeah. Enterprise adoption is what will really drive people to do a lot of advertising around their upgrade options.

Jim Friedland - Cowen & Company

And then just a quick question on events. Just looking at your guidance for Q4 and your statement about doing fewer but more profitable events. As we think about our models for next year, should we just expect that trend to continue kind of on a year-over-year basis in terms of number of events held versus the previous year that kind of thing?

Don Hawk

Yeah. Well, I think it’s sort of the target revenue mix. We are targeting 90% online, 10% events. That’s our long-term target. But we are going to be pretty close to that next year. And then I think you can see we had improvement in gross margin this year. And I think that gross margin will hold through next year as we continue to be very selective which events we hold.

Operator

Our next question comes from the line of Ross Sandler with RBC markets. Please proceed.

Ross Sandler - RBC Capital Markets

Hi, guys. Just a couple of questions. First on the 4Q revenue guidance. Sorry, if you already talked about this. But I was hopping around on couple of calls, but it looks like you’re calling for year-over-year kind of flattish for the online piece. Any reason why that shouldn’t start to accelerate in 4Q, given easier comps and then if you think if we look at 2010 and just take a step back without giving any kind of formal comments, why would TechTarget now revert back to kind of the above 20% growth rate that you’ve been consistently delivering in online given that you’ve got fairly easy comps and we should get some sort of a recovery?

And then lastly, the new healthcare IT and government IT verticals that you are working on rolling out. At what point did that take six or 12 months or longer before it becomes a more meaningful driver of online revenue? Thanks.

Don Hawk

This is Don. I will take the first of those with regard to the Q4 guidance. So Q4 actually is not one of the easier comps for us, which is somewhat counterintuitive, because certainly the sales reality of what we are dealing with last year was (inaudible) the worse in Q3 and then things really took (inaudible) terms of the worse in Q4.

As I was talking about in the previous question, I’d refer you to our prepared comments on this. I’ll spent just a moment on it and then certainly can answer any follow-up questions that you had. But when we implemented this new revenue recognition, the impact on the revenue as a whole for last year was to shift revenue from the first half of the year into the second half of the year.

So if you look at it actually Q3 2008 restated was our highest online revenue quarter and Q4 was our second highest quarter. And as I just said, that really doesn’t reflect the sales value. Actually what's going on there with regard to the revenue recognition change, instead applying it retroactively, essentially had the impact of extending revenue recognition on large programs.

So I am giving an example, I think that might make this a little bit more clear in the context of a single contract. So, for example, had we sold a contract to an individual customer that had three different elements to it, banner advertising, a white paper and a webcast. Okay. Our old revenue recognition policy on that would have been to recognize revenue against each one of those elements separately based on whatever its delivery period was.

The new revenue recognition methodology takes the earlier starting point of any of those elements and the latest ending points of any of those elements and spreads the revenue equally between them. So if you had a situation last year where there was a webcast, one of those three elements, so it was the last thing that we delivered. When we retroactively apply that policy, it would have spread out the revenue over a much longer period of time based on the fact solely that the webcast is the last thing that we delivered.

So that’s why you are seeing all that revenue shift from the first half of the year into the second half of the year. This year, knowing what this revenue recognition policies going forward, we structured our program delivery to provide a delivery over terms that are kind of closer to what we’ve done historically. So instead of revenue being elongated over extended periods and the example I just gave you, for example, we might take that webcast to run that early in the program instead of late.

So when you talk about year-over-year comps, again, that’s why I am spending some time on this. That actually makes it a little misleading from a directional standpoint with regard to what’s going on there. You would expect Q4 has been our easiest comp last year and that’s actually not the case. Does that help?

Ross Sandler - RBC Capital Markets

Yeah. It definitely helps. And on the 2010?

Greg Strakosch

Yeah. So in terms of 2010, what our view is that with all the investments that we have been making, we were very confident that we’ve been gaining market share. When there is an upturn, we are going to be a main beneficiary of that and we’ll have very, very healthy growth again like we did before the downturn. What’s just not clear to us is when is that.

So if the recovery starts in 2010, then, yeah, we will participate then. We just don’t have visibility at this point to say, yeah, that’s the recoveries definitely starting next year. So at that point, as I’ve said before, definitely it feels like the worst is behind us, but we are kind of in that stage where the worst is behind us, but we are not yet in full recovery. So things have definitely stabilized. So it’s really just a matter of when that recovery starts. So we just don’t have clear visibility when that is.

In terms of healthcare and government, we are very optimistic about both those segments. But there is ramp-up time started. So I think we will see some benefit in 2010, but I think it's more likely to be in the second half of next year than the first half.

Operator

(Operator Instructions). Our next question comes from the line of Mark May with Needham. Please proceed.

Mark May - Needham

I think this is just another question along the lines of what Don was just speaking about regarding the comparisons given that the accounting restatement and how you’ve sort of addressed your deals since then. With based on the comparisons going forward, sort of thinking Q1 of ‘09 on a year ago basis, they start to get a little more favorable from that regard.

And then, you’ve, sort of, been changing your contracts and how you deliver them now for a while? And based on that plus your early conversations with clients, which it sounds like that you’re doing, would you anticipate that starting in Q1 that you’d start to more likely posting year-over-year growth in revenue? And I had one other question.

Don Hawk

The anticipation is, yes. I mean, just to reiterate what Greg just said, we’re not calling the upturn, but certainly the issue about year-over-year comps that I just spent some time on, that really starts to go away in Q1 of 2010 based on the fact as you just pointed out that we’ve been structuring our contracts cognizant of this new revenue recognition policy. So again, going forward and assuming a reasonable level of return to normalcy in the environment, yes, there is no reason why we shouldn’t start seeing growth on that particular metric.

Mark May - Needham

Okay. And then on the events, I think you addressed it, but I'll ask in another way because you tried to reconcile the 90:10 mix with the guidance for Q4. It looks like if you annualize Q4, it’s kind of a 12 million a year kind of events business. I know it’s lumpy from quarter to quarter. But is it fair to say that that is kind of the new floor or do you have plans to exit some other events into the New Year?

Don Hawk

We’re not going to commit certainly at this point to an events number for next year. In terms of how you think about it, I would say that most of the corrective steps that we took with regard to right-sizing that business, we were able to take this year. We're currently going through our 2010 planning process. So we’re finalizing decisions about what exactly we’re going to run next year.

You really can’t take the Q4 and annualize it because as you pointed out, it is kind of a lumpy business. We don’t manage that business and produce smooth revenues from quarter-to-quarter. I wouldn’t expect as I guess in terms of giving you some directional guidance on this, the drop off from 2008 to 2009 with regard to the events business, I would say is much larger than what you would see from 2009 to 2010. So I wouldn’t expect any sort of decline approaching what we did this year. We are still finalizing those decisions kind of as we speak.

Mark May - Needham

Okay. And my last thing, I respect your position not to discuss the accounting issue, but I feel like I wouldn’t be doing my fiduciary duty if I didn’t at least ask one question. And if I don’t convince you to answer it then, maybe you’ll just know kind of one thing that’s in my head. I guess one question would be, has the single individual that you identified in the press release been terminated? I don’t know if you care to comment on that?

Greg Strakosch

Yeah. Mark, we are in a position that we just can’t give anymore details than we’ve already discussed. But at the appropriate time, we will disclose what is necessary, but just we can’t for obvious reasons. This is too soon for us to make any comments.

Operator

There are no further questions at this time. So I will turn the call back to TechTarget management for closing comments.

Greg Strakosch

Great. Well, thank you everyone for calling in. We appreciate it. And we look forward to talking to you again next quarter. Good night.

Operator

This concludes the presentation for the day. Thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: TechTarget, Inc. Q3 2009 Earnings Call Transcript
This Transcript
All Transcripts