TechTarget, Inc. (TTGT) CEO Mike Cotoia on Q2 2021 Results - Earnings Call Transcript

TechTarget, Inc. (NASDAQ:TTGT) Q2 2021 Earnings Conference Call August 4, 2021 5:00 PM ET

Company Participants

Charlie Rennick - General Counsel

Greg Strakosch - Executive Chairman

Mike Cotoia - Chief Executive Officer

Dan Noreck - Chief Financial Officer

Conference Call Participants

Aaron Kessler - Raymond James

Joshua Reilly - Needham

Zack Ajzenman - Cowen

Greg Burns - Sidoti & Co

Justin Patterson - KeyBanc

Operator

Good day and welcome to the TechTarget Second Quarter 2021 Earnings Release Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Charlie Rennick, General Counsel. Please go ahead.

Charlie Rennick

Thank you, Betsy and good afternoon. Joining me 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, 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 the 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. 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 maybe considered forward-looking statements. These forward-looking statements are based on assumptions and are not guarantees of our future performance. Actual results may differ materially from our forecast.

Forward-looking statements involve a number of risks and uncertainties, including those discussed in the Risk Factors sections of our filings with the SEC. The company 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. We may also refer to financial measures not prepared in accordance with GAAP. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures accompanies our shareholder letter.

With that, I will turn the call over to Greg.

Greg Strakosch

Thank you, Charlie. We continue to enjoy positive momentum from multiple tailwinds, which is translating into broad-based strength across all products, customer segments and geographies. Revenue grew over 80% in the quarter year-over-year. We are growing faster than we originally forecasted and today, we are raising our annual forecast for the second time this year. The revised upward range is included in our shareholder letter that we released today. Also today, we are announcing the acquisition of Xtelligent Healthcare Media, which is a natural extension into an important adjacent vertical technology market.

I will now open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question comes from Aaron Kessler with Raymond James. Please go ahead.

Aaron Kessler

Hey, thanks guys and congrats on the nice upside. Couple of questions. I mean, first, any insights you can give us – I didn’t see it in the shareholder letter, maybe it’s in the 10-Q, North America versus international performance? And then maybe on the Xtelligent acquisition, if you can talk a little bit maybe the monetization plans? I think, you said you are kind of plugged that into your platform, but just a little bit more details how you maybe integrating that given it’s kind of different vertical within healthcare? Thank you.

Mike Cotoia

Great. Thanks, Aaron. This is Mike. Thanks for the question. Across the globe, both in North America and international, we saw outpaced performance than we had originally guided to. The real – the tailwinds that we talked about in the shareholder letter and the momentum in the industry: one, the transition from face-to-face events. On the international side face-to-face events was pretty dominant in the market pre-COVID. Lot of field marketing dollars are being allocated to face-to-face events and that has been shift quickly and that’s going to continue to move to digital, always-on and first-party purchase intent data driven. There is also a lot of privacy regulations and compliance across the globe, but in particular, on the international side. And so having an opt-in permission-based audience through our own registration, through our own content vehicles, our customers really see the value in that and that value continues to increase. And then Google’s announcement of eliminating on third-party cookies has really brought a spotlight on this, again, to enhance the privacy concerns and the opt-in and people wanting to deal and engage with first-party content. I would say the North American side as well, we are seeing – again, as we stated during the shareholder letter, there is a big focus for our customers to modernize their sales and marketing departments and they want to do that with first-party purchase intent data and having that first-party purchase intent data driven with our own active, relevant and segmented audience members has really driven the K. I would say that we have seen really good growth across all of our products, so our demand generation as well as our Priority Engine numbers, as we have noted in the shareholder letter, Priority Engine grew 20% year-over-year, across the customer segmentation, our Global 10 as well as all others and again across all the geos.

And then for your second question, on the Xtelligent side, this acquisition, as we noted, checked all the boxes, original content, opt-in permission-based members and a large amount of first-party purchase intent data. And we see the opportunity right now to monetize our purchase intent data into our Priority Engine subscriptions. I would expect that we will be rolling out new segments in this market, where healthcare intersects with IT, software and hardware. We have a really good untapped opportunity right now to grow that first-party purchase intent data that Xtelligent brings with the acquisition.

Aaron Kessler

Got it. Great, thank you.

Operator

The next question comes from Joshua Reilly with Needham. Please go ahead.

Joshua Reilly

Hey, guys. Thanks for taking my questions. Congrats on the strong quarter. So I think if you look at the strong increase in the guidance for the second half of the year here, how much of that is balanced between the Xtelligent acquisition, the core TechTarget business kind of outperforming or maybe even greater strength than you anticipated in BrightTALK?

Mike Cotoia

Thanks, Josh. In terms of the – the Xtelligent side really doesn’t factor into this guidance that we are doing. At the beginning of the year, we provided some guidance because we are operating and reporting under one number. BrightTALK and TechTarget is selling to the same customer, same accounts. We have very similar offerings. They complement each other, but we are reporting on one number. And we originally gave modeling guidance of 20% growth for BrightTALK and you have the numbers from last year and low to mid-teens growth in TechTarget organically. We are just seeing us accelerate across those original guidance or forecast measures. And again, just to reiterate, we are seeing that across all the product sides, as you have read in the shareholder letter, Priority Engine, which was single-digit growth last year at this time is now 20% growth and demand generation. So, that’s where we are seeing the growth based on what we originally forecasted. We are seeing the accelerants on those areas.

Joshua Reilly

Okay, great. And then just a follow-up on the Google delaying the third-party cookies removal from Chrome for year, my sense is that’s not a direct – going to cause any direct loss of business in the near-term. But did you have any pipeline building from customers that were looking to switch their intent data providers that are maybe going to reevaluate the timeline of when they were going to make the change? Thanks.

Mike Cotoia

Yes, great question. First of all, we see this as a very strong competitive advantage and Google delaying it a year we see that okay, because customers really need to plan what their overall marketing strategy is going to be around intent data using third-party cookies versus first-party cookies. I would say, it’s shown a bright spotlight on this topic. We are having a lot of customers – conversations with customers on this and they will continue to migrate from the use of third-party cookies to first-party purchase intent data, contextually relevant and aligned marketing programs and that bears well for us over the next year, 1.5 years until it fully transitions. Hello?

Joshua Reilly

Thank you.

Mike Cotoia

You’re welcome.

Operator

And the next question comes from Bryan Bergin with Cowen. Please go ahead.

Zack Ajzenman

Hi, thanks. This is Zack Ajzenman on for Bryan. Couple of questions. First on Priority Engine, certainly, it seems like the trajectory is stronger than what was contemplated last quarter, when there was guidance on 15% growth in the second half. Can you maybe give us some more color on expectations for the second half? And then on that note, maybe talk a little bit about Priority Engine Express and update on sales adoption there and any data points you can share as it relates to progress on Express?

Mike Cotoia

Great. Yes, Zack. If you look at our Priority Engine, so I am going to bring us back to last Q2 as we got out of – as we entered into the COVID arena and you saw a lot of pullback in terms of customers committing to long-term contracts. But what customers started quickly doing was shifting their face-to-face event budget to demand generation, content syndication. They wanted really tight contextual alignment with relevant active opt-in first-party members. As we grew the demand generation list of clients and revenue throughout Q3, Q4 of 2020 and then throughout the first half of 2021, one of our playbook was to engage with those customers, make sure they are seeing value and the ROI from their demand generation efforts and investments with TechTarget and slowly migrate them into longer term subscriptions, annual subscriptions being powered by Priority Engine. When we spoke back in May, we expect this to be 15% plus growth. We exceeded those. Our customers are doing the migrations from shorter term demand generation to more integrated long-term subscriptions. In terms of the second half, I expect it to be very similar in terms of numbers and pretty consistent with what we have seen in Q2, high-teens to 20%. And I would also say that not all of our customers are back in terms of migrating from short-term demand generation programs to longer term subscription. So we are very bullish in the second half on that and we continue to execute and do well against the playbook. In terms of Priority Engine Express as we mentioned, very early in the cycle in the launch on Priority Engine Express. We’ve seen some really good momentum. On a percentage-wise, it’s very high. In overall dollar amount, it’s still building its base in terms of customer revenue and insertion order count. So we are really bullish about that, but it’s really confirming that we have a really good opportunity in that SMB market that are really focused on sales used cases, a lot of those small companies do not have elaborate, sophisticated marketing teams or marketing systems, but they all have inside sales force, inside sales reps, outside reps and they really want to identify which accounts and which contacts within those accounts that they should be mobilizing and prioritizing their sales efforts against.

Zack Ajzenman

That’s helpful. Thanks. And just a follow-up, looking at the P&L, operating leverage this quarter was pretty impressive. Actually, SG&A and product dev was essentially flat quarter-over-quarter looks like on an absolute basis. How should we think about investments here going forward in just leverage? I know, you gave some guardrails on guidance in 3Q and 4Q kind of back into things, looks like 3Q will stay flat and 4Q expenses might pickup a bit. But can you just talk about – a little more broadly about leveraging the model and how should we think about this going forward?

Greg Strakosch

Yes. So, this is Greg. So OpEx will go up gradually in the second half versus the first half. We do – about half of our employee base is – gets reviewed on compensation increases in July and about half are in January, so that will increase some response. But in terms of long-term operating leverage, it’s a great model. There is very little incremental cost of sales, so it’s a model where most incremental revenue on a gross basis drops to the bottom line. So, we target around at least a 50% incremental to EBITDA margin. So that allows us to reinvest half the incremental revenue. So, it’s a model where we are able to reinvest at a healthy rate and expand margins at the same time. So, this type of operating leverage you will – that you see in this quarter and you will see in this year is pretty consistent what you have seen with us for the past several years and what you can expect to see going forward. So, as if we – as we have said in the past, as we continue to scale revenue, 40% adjusted EBITDA margins are – we are going to see in the near term. And we think, long-term, as we scale the revenue that 50% adjusted EBITDA margins are achievable.

Zack Ajzenman

Great. Thank you.

Operator

The next question comes from Patrick Colville with Deutsche Bank. Please go ahead.

Unidentified Analyst

Great. Thanks so much. This is [indiscernible] on for Patrick. Congrats on the strong performance in the quarter. Michael, in your shareholder letter, you mentioned some early cross-selling efforts going well with the BrightTALK. Can you maybe elaborate on this a bit? What are you – where are you seeing some success today and maybe what’s left on the product side to really drive additional revenue synergies?

Mike Cotoia

Right. Bob, yes, in terms of the cross-selling efforts, as I mentioned the acquisition of BrightTALK just made complete sense for all the reasons that we talked about earlier, content, the audience in the first-party purchase intent data. But even more importantly, the complementary product offerings, they really focus on webinars, videos, talks, they create a platform where customers can on all-inclusive platform, generate their own content, promote it as well as create a demand generation system engine within that platform. Our reps – and we’re all one organization, but our reps are walking the BrightTALK reps into account where they are spending with TechTarget, might not be spending with BrightTALK at a material level. And the BrightTALK reps continue to do a great job of walking TechTarget reps into those accounts that are spending on the BrightTALK product, but maybe not as heavily on the TechTarget solutions. And there is a huge high, I get it factor from customers. They want to make sure they have the right mix of media, content, vehicles out there to engage with the active buyers throughout the entire research process, and this combination is working well. It’s working well in North America. We’re doing it throughout EMEA, and we’re rolling this out in APJ as well. We’ve seen it with really good success. What was – I’m sorry, what was the second question you had on the product side?

Unidentified Analyst

No. Is there anything left on the product side to really drive additional synergies in terms of any new product features that you need to come out with?

Mike Cotoia

Yes, very good. So there are a lot of synergies on the product side that we’re looking at in the short-term as well as the long-term strategic product road map. Again, BrightTALK has just launched their BrightTALK Central platform, which I call – which I would refer to as an all-inclusive content creation and demand gen vehicle for the marketers. We obviously have our Priority Engine platform that works across marketing and sales. Recently, we announced in Priority Engine that we are just an account level intelligence from the BrightTALK members – from the BrightTALK community into Priority Engine. We did this really to focus on a sales use case and what that has been able to accomplish in the short-term, it has allowed our customers sales force to now have double on average 2x the amount of accounts that are active within their respective territories that they can engage with. So now, you have more reps within our accounts, calling on more accounts with a near territory that are active with first-party purchase intent signals, which creates a larger engagement and consumption model of the TechTarget data and the BrightTALK data coming together. So we’re keeping that on the account level right now. We’re working on future road map strategies in terms of the platform, as I mentioned, from Priority Engine as well as BrightTALK Central. Teams are working closely together, and we’re really excited about both short and a long-term on that.

Unidentified Analyst

Got it. That’s super helpful. And that segue nicely to my second question, can you maybe just talk a little bit about the sales use case within some of your larger customers of Priority Engine? How has adoption been thus far relative to your expectations? And any data points that you can provide just to highlight some of the adoption you’ve seen thus far?

Greg Strakosch

Yes, that’s a good question.

Mike Cotoia

Use case is going well. So historically, this has been a marketing focused use case platform where marketers would have insights into the accounts as well as the active prospects at the account level, by segment and by geography. And marketers – this is still a big focus for us, marketers that are looking to mobilize against an account-based marketing strategy, ABM, named account strategy, they want to increase their database. Sales is a different use case, so we rolled out our prospect level intelligence at the beginning of this year, where sales reps, if you think about their cadence, they will come in, they’ll do a call blitz, they have a territory that they call into. Now, it’s enable them to rank at the individual prospect level, who is most likely to be prioritized first. So if I’m a rep and I am coming on Monday morning, and I’m doing a call blitz, I might have an active prospect that we’ve identified in account A, be number one to call into, account B would be number two versus just focusing on the individual account level. And what that does is it allows sales reps to customize and personalize the individual outreach, whether it’s e-mail or phone conversation when they reach out to that individual buying team member and that has seen really good adoption. We’ve seen sales uses increase by 2x, and we’re driving, again, very focused around the sales application and the sales use case.

In this recent press release, Bob, we talked about the ingesting the account intelligence data from BrightTALK, but we also expanded on our functionality with what we call Inbound Converter. An Inbound Converter is a technology that’s tied to Priority Engine that will – tracks the accounts that visit our customers’ websites. And what we’ve now done is we expanded that intelligence and granularity to not only tell you what accounts visit your sites, but we’re now identifying which pages on the customers’ websites, those accounts are engaging with. Are they on product review pages, customer success pages, demo pages? So it helps prioritize the accounts. Then we marry that account data into Priority Engine to show which individual active members within that accounts buying team are probably the ones that are engaging on those customers’ websites. So what we’re really doing is deanonymizing the account-based traffic going on to our customers’ websites and will prioritize on which people they should reach out to within those accounts. And sales are seeing a lot of success on that and we are focused on both on the sales use case and on the marketing use case and features and functionalities on our next rollout or revision, which will come in the late – the latter part of the year, in the fourth quarter.

Unidentified Analyst

Got it. Super helpful. Last quick one, if I could squeeze in. Long-term revenue mix down ticked slightly from 1Q. Is there anything of note impacting the mix here or was it just strong performance on some of the managing side of the business?

Mike Cotoia

It’s two things. The overall number grew materially quarter-over-quarter and if you look at the overall revenue dollars associated with the long-term revenue, they were up double-digits quarter-over-quarter.

Greg Strakosch

So it’s just really that the percentage is a little lower because the revenue was so much higher.

Unidentified Analyst

Makes sense. Congrats again guys.

Mike Cotoia

Thank you.

Operator

The next question comes from Greg Burns with Sidoti & Co. Please go ahead.

Greg Burns

Good afternoon. What was the Xtelligent’s trailing 12-month revenues and EBITDA?

Mike Cotoia

Greg, we don’t report that for disclosure reasons. I can tell you it’s – the main focus of this acquisition was on the content, the opt-in audience and the untapped monetization of first-party purchase intent data. In the press release, we mentioned that the CEO of Xtelligent is a former TechTarget employee. He spent 11 years here, focused on our member and audience acquisition methods and process. The focus on this number – the focus on this acquisition was around the content, the audience and the – again, the potential in terms of first-party purchase intent data and the ability to monetize that. We also really – we have a lot of good relationships that we – with organizations around the industry, and we don’t really get into any – try to bid. We try to avoid any bid process, so what we see is value, again, around content audience and first-party purchase intent data. We try to keep that really close to the best. Again, this do not reach any of the materiality threshold. We didn’t have to disclose it, but we also want to make sure we keep a competitive advantage, so investors – so our competitors aren’t seeing how we are trying to value potential organizations and we want to make it sure it’s fair to our investors.

Greg Burns

Okay. And was the healthcare, IT vertical, is this something that you had your eye on for a while? And there are any other kind of niche technology verticals that might be able to do the same thing, kind of plug them into your platform and expand the monetization opportunities?

Mike Cotoia

Yes, great question. In terms of the healthcare, IT vertical, this is a vertical that we’ve been keeping our eye on for a couple of years and the adjacent vertical where healthcare intersects with IT and infrastructure, security, hardware and software, just made all the sense in the world to us. We believe it’s going to open the door to new customers, opportunities. As I mentioned earlier, we believe that we have an untapped revenue opportunity with Priority Engine and bringing our purchase intent data onto the Xtelligent community. And in terms of other verticals, there are some other adjacent verticals that are interesting to us and that we’re keeping an eye on. And even BrightTALK, when we acquired BrightTALK, they have some audience and verticals in the FinTech space, asset management space, so those are definitely something that we’re keeping an eye on now and moving forward.

Greg Burns

Okay, great. Thank you.

Mike Cotoia

Yes.

Operator

The next question comes from Eric Martinuzzi with Lake Street Capital Markets.

Unidentified Analyst

This is Kevin on for Eric. Thanks for taking my questions. Just on the acquisition, and I know you just touched on it briefly in the last question, but maybe could you give us a little more color in terms of, was this one of the larger players for content and audience in terms of the healthcare, IT vertical or was it kind of the quality of the stuff they are putting out there? I know, you had a relationship with the Founder and stuff, but what really maybe size up the market is what I’m trying to get to?

Mike Cotoia

This is – this play was focused not on the size, but on the target and the quality of the content and the audience and the untapped opportunity with the – monetizing the purchase intent data. There are a couple of big players out there. I think Becker Health and HIMSS that is part of a nonprofit organization that has a big event every year. This was – the reason why this fits so well is we know the folks over at Xtelligent. We know the type of content and the approach, which mirrors what TechTarget would do in terms of the enterprise IT market. We really value the opt-in, permission-based audience members. Again, we talk about eliminating third-party cookies, what’s going to happen with third-party data. And we just see an opportunity to really monetize the large amount of purchase intent insights that they can generate on their sites due to the quality and the targeted focus of the healthcare market.

Unidentified Analyst

Got it. Thanks. And then just a bigger kind of question here, I know you touched on it in the letter, but the continued migration from in-person events to online, do you see that going? Has there any been flurry of more in-person events? I know, you mentioned international earlier in the call, but you see any of that coming back anytime soon or no?

Mike Cotoia

I don’t see it coming back to where it was before or being anywhere near that. There is a couple of things that really – the analogy that we use internally is when somebody moves from analog to digital, it’s really difficult to go back to analog. But also when you go from face-to-face events to online first-party intent driven type of opportunities, it’s more scalable, it’s measurable and it’s less costly. I think CEOs of organizations are really done with sending 25 people to Las Vegas or wherever it is to have people out of the office for 5 days, set up booths, have all these travel costs. And you’re seeing that while, we have to make this digital transformation, COVID accelerated that. We need to capitalize on that, but we can grow scale and measure that more effectively. So I really see this trend moving forward in a positive manner and again, this bodes very well for what we’ve built as an organization.

Unidentified Analyst

Thanks guys.

Mike Cotoia

You are welcome.

Operator

The next question comes from Justin Patterson with KeyBanc. Please go ahead.

Justin Patterson

Great. Thank you. Two, if I can. First, just on the M&A environment, how should we think about the pace of M&A going forward and opportunities available? Even after the acquisitions, you still have a lot of cash on the balance sheet and are still throwing off cash. So just curious, what that future pipeline looks like. Then secondly, Priority Engine growth is strong. We got the new businesses coming in. How should we think about just what the normalized growth rate for TechTarget should be going forward? Thank you.

Mike Cotoia

Right. Justin, in terms of M&A, there is a lot of activity going on in the market, and we’ve seen this for the last couple of years. We have a model that we look at, and we are very active in looking at organizations that fit that model. And that model really focuses on content, opt-in registered members, first-party purchase intent data and/or complementary solutions like BrightTALK, BrightTALK check four other boxes on that. We will get a lot of organizations. We are very selective on what we’re going to choose, and it needs to fit that. I would say for every acquisition we’ve done, we’ve probably looked at 40, and we’re going to continue to be selective on that. We’re not going to make a decision just to make a decision. It’s got to really fit in the short and long-term strategy and what we’re really focused on as a business. And in terms of normalized growth, again, we – beginning of the year, we figured we provided that model of 20% BrightTALK and low to mid-teens in TechTarget. It’s early, but if you look at it and the trends continue the way they are continuing, we continue to execute on how we’re executing. I would say, this would be mid-teens plus growth moving forward, mid to high-teens.

Justin Patterson

Great. Thank you.

Operator

This concludes our question-and-answer session and concludes the conference call. Thank you for attending today’s presentation. You may now disconnect.