TechTarget, Inc. (TTGT) Q2 2023 Earnings Call Transcript

TechTarget, Inc. (NASDAQ:TTGT) Q2 2023 Earnings Conference Call August 8, 2023 5:00 PM ET

Company Participants

Charles Rennick – Vice President, General Counsel and Corporate Secretary

Greg Strakosch – Executive Chairman

Mike Cotoia – Chief Executive Officer

Dan Noreck – Chief Financial Officer

Conference Call Participants

Justin Patterson – KeyBanc

Rob Marelli – Needham & Company

Bhavin Shah – Deutsche Bank

Bryan Bergin – TD Cowen

Bruce Goldfarb – Lake Street Capital

Jacob Staffel – Goldman Sachs

Operator

Good afternoon and thank you for joining the TechTarget Report Second Quarter 2023 Conference Call and Webcast. My name is Kate, and I will be the moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.

I would now like to pass the call over to our host, Charles Rennick, with TechTarget. You may proceed.

Charles Rennick

Thank you, Kate, and good afternoon. Joining me here today are Greg Strakosch, our Executive Chairman; Mike Cotoia, our Chief Executive Officer; and Dan Noreck, our CFO.

Before turning the call over to Greg, I would like to remind everyone on the call of our earnings release process. As previously announced, in order to provide you with an update on our business in advance of the call, we posted our shareholder letter on the Investor Relations section of our website and furnished it on an 8-K. Following Greg's introductory remarks, the management team will be available to answer your questions.

Any statements made today by TechTarget that are not factual, including during the Q&A, may be considered forward-looking statements. These forward-looking statements, which are subject to risks and uncertainties, are based on assumptions and are not guarantees of our future performance. Actual results may differ materially from our forecast and from these forward-looking statements. Forward-looking statements involve a number of risks and uncertainties, including those discussed in the Risk Factors section of our filings with the SEC. These statements speak only as of the date of this call, and TechTarget undertakes no obligation to revise or update any forward-looking statements in order to reflect events that may arise after this conference call, except as required by law.

Finally, we may also refer to certain financial measures not prepared in accordance with GAAP. A reconciliation of certain of these non-GAAP financial measures to the most comparable GAAP measures to the extent available without unreasonable efforts accompanies our shareholder letter.

With that, I'll turn the call over to Greg.

Greg Strakosch

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

I will now open up the call for questions.

Question-and-Answer Session

Operator

Absolutely. We will now begin the question-and-answer session. [Operator Instructions] The first question will be from the line of Justin Patterson with KeyBanc. Your line is now open.

Justin Patterson

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

Mike Cotoia

Great. Yes, Justin, in terms of navigating through the downturn and taking this opportunity to invest back into the business, that's going to help us accelerate what we believe we'll get back to normalized growth, which we've seen in the past with double-digit growth.

So there's a lot of areas that we're really focused on during a downturn, and our playbook has always been making sure that we're being aggressive with product and feature rollouts, making sure we're doing the right things internally to reallocate resources to pivot against the right initiatives and the right priorities. And then part of this is around timing of the macro, as you asked as well.

As we noted in the letter, we don't – seeing the macro improving tremendously, but we are seeing some signs of stabilization. As we mentioned last year at this time, as we went into the slowdown, it might take three, four, five quarters for companies to navigate through this. But at one point, they're going to need to feed their pipeline. And there's typically a flight back to quality around first-party data, prospect level intelligence, market alignment and proximity. And that's not really a matter of what if, it's more of a matter of when. And we think when that goes back, we will see the growth that we're used to, double-digit growth moving forward with incremental EBITDA margins expanding and overall margin expansion.

Justin Patterson

Thank you.

Operator

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

Rob Marelli

Hi. This is Rob Marelli on for Josh. Thanks for taking the question. With the cycle incrementally challenging, how should we think about trends in the second half of the year given the normal seasonality? Will it be a 10% sequential increase in revenue from Q3 to Q4? Is that seasonality still in place?

Mike Cotoia

Yes. Well, I think as we look at it, and you take a look at the current macro conditions, it's sort of changed a little bit this year, right. So we've been pretty – like if you look at the overall guidance that we reaffirmed this year of $225 million to $230 million in revenue and $65 million to $70 million in EBITDA, I don't think I see any major swings in terms of Q3 to Q4. I think you will see some growth in Q4 versus Q3. It's kind of early to tell on that, but it does go back to what we're really focused on, the investments we're making around the products, the investments we're making around the content side, the Gen AI opportunities that we're working on as an organization and then our customers that really need to focus on building that pipeline going into the end of the year and into 2024.

And the best way to build that pipeline is through quality data, quality insights at the account and prospect level. So you can really marry it out in terms of you can reconcile the range based on what we gave for guidance, which is well in line with what we had on the analyst side, and plugging the Q4 numbers that you seeing. We're going to align to that range that we announced back in May. So that's how I would look at it right now.

Rob Marelli

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

Mike Cotoia

Yes. What I'd say on that is I think in this type of math, when we talk to customers, new business cases and net new logos is always a challenge. Because as you can see in the tech market, there's been a pullback on spending, there's been layoffs and things like that. But again, this goes back to it comes a point in time, and this happens during every down cycle when our customers need to really engage and build up a believable and trustworthy pipeline. And so when that happens, I think there are three things that will bear fruit on that.

Number one, there will be a flight back to net new logo acquisition. Two, there's always going to be land and expand, protect your existing customers. And I believe three, as we get through this expense cleansing cycle, the customers are going to be very particular in terms of what investments they make to make sure they're really driving ROI through the product innovation and through our alignment to our markets and through our prospect level intelligence. We think we check all the boxes on that. So we'll see that hopefully sooner rather than later, but this is something that we're planning to go in 2024.

Rob Marelli

Got it. Thank you.

Operator

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

Bhavin Shah

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

Mike Cotoia

Sure. So Bhavin, on July 20, we announced one of our largest launches on priority engine. There are three or four key areas that we really want to focus on. Number one was our sales force integration with our new Salesforce Connector. And what we're really focused on that, we talked about this in previous earnings calls, was enabling our customers to really leverage their own first-party data and align it with TechTarget's first-party account and prospect level data, but also allow our customers who are using third-party data-driven ABM platforms to sync that data with their first-party data within their own CRM system, along with TechTarget's first-party data at the account and prospect level.

That helps with cadences, workflows, ABM strategies, sales outreach because you want to combine all the data sets and really understand not only at the account level, but which prospects that you can – should focus on based on their activity. So that's been a pretty big enhancement for us.

We also launched a new UI/UX interface to help on the sales side, reps within our accounts have a shortcut to the most critical countless territories data. For example, they can favorite some of their accounts and store them, favorite some of their prospects and have it right in front of them with one click. They can add to the CRM. They can view contacts now and identify context who actually view their marketing content to have a quicker or more engaged conversation.

The other thing that we launched was our account journey visualization. It's been really key for us because we want to show how the account is engaged in across the TechTarget network, what buyers are researching, when are they researching, when they become a lead. And also is the sales reps within our clients, how and when and what are they doing to engage with those accounts.

So now we have insights that help them show this is what your marketing investments have done with TechTarget. This is the outreach that we are seeing. This is what your sales teams are doing or not doing. So it's all about attribution, visualization and hauling everybody accountable. That was really a big launch.

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

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

We can walk in there with webinar capabilities not only to promote to our members, but to help our customers promote their own database where we’ve re-launched and updated our whole FastReg, which one click to register based on the information we know about prospects from that customer’s database that are already opted in and permission based. We walk into our branding elements, our content marketing elements, demand generation elements.

So now when a customer says, I can’t commit to X, but I have these problems at Y and Z, we have a reason to engage and deliver value. I would say we’ve seen some shiny points with some of our strategic accounts, those larger accounts, and we talked about this last quarter, how we revamp the sales organization where we created pods that we have an ESG, which is our content enablement services opportunity and capability set, a BrightTALK and a TechTarget all engaged within these accounts so that they are bringing that end-to-end capability set, but entering with a customer needs or has a demand pain point or a value that they need.

So we’re seeing some signs on that. I think as somebody else mentioned on the call, I think a lot of our clients are being very – staying very close to their existing clients. They want to be in front of their existing clients. I think as this market can turn continues to go from stabilization to growth, you’ll see a flight back to net new logo focus, penetration as well as land and expand.

Bhavin Shah

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

Mike Cotoia

Yes. That’s a great question. So I mean, when you look at GenAI, you got to look at the market that we serve, and we get a lot of questions around generative AI. And the markets and the constituents we serve are the technology buyers, the technology vendors. And on technology buyer side, we’ve all seen the demographics of their buyers driving towards a millennial stage buyer, wants really deep insightful content. There was a Harvard Business Review study that came up at the end of 2022 that’s in millennials. 54% of millennials in the tech buying stage wanted rep free experience. They want to get engaged with relevant content.

We serve an unbelievable opportunity and when you remember why people go to TechTarget, it’s because of our market alignment, our content that we serve up. We dominate an organic – Google organic search, and we’re serving the buyers information. So one of the things that we’ve worked on, we hired Paul Healey, who’s running our Generative AI Strategic Strategy on this, is when customers go to Google, which we continue to dominate come to TechTarget site, we’re going to be able to as part of our roadmap, set up a prompt type capability set through GenAI to help serve up all the knowledge based content and the insights around that particular topic that those researchers are looking at.

And I’ll say this, like there’s nobody else that I can think of in this enterprise B2B tech area, because of their lack of investments in content and our strong investments in content, they can serve that up. So if I go in there as a buyer, I go to Google, I search X, Y, Z, I end up on a TechTarget community, I’m reading my articles and I get prompted, and what else are you looking for? What else can we help you with? Ask a few questions. Then we can serve up content from our BrightTALK community, which is protected right now. Vendor content, our enterprise strategy group research content, market insights, everything served up for that buyer. So it provides a better experience. And then the flip side, it drives more engagement, more insights and more capabilities for us to productize to our customers at the end.

Bhavin Shah

Great. Thanks for taking my questions.

Operator

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

Bryan Bergin

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

Mike Cotoia

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

So we’re seeing that I would say, we don’t disclose it, but we’ve seen it, the trend in bookings too. We’ve seen deals that have if you looked in the past quarter where they may have committed and we had an a certain percentage in our sales force forecasting that got pulled back, we’re seeing some of those or a lot more of those come to fruition in terms of signage. So it’s early, I don’t want to say we’re out of this, but the signs that we’ve seen over the last 30, 45 days are trending cautiously optimistic.

Bryan Bergin

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

Dan Noreck

Yes. So no real change in strategy. We’re looking at M&A opportunities and as we said in shareholder letter, we’re looking at share buybacks and potential buybacks. So we’ll continue to be opportunistic on both fronts there.

Bryan Bergin

Thanks.

Operator

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

Bruce Goldfarb

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

Mike Cotoia

Thanks, Bruce.

Bruce Goldfarb

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

Mike Cotoia

Well, I would say we don’t break it down, but I would say Bruce, that’s 4.5 months, so there’s still some repercussions going on to that. What I would tell you is, we haven’t run in any cash collection issues that we report on that. We’re still engaged with conversations as they are. Some of those accounts or a good amount of those accounts are spending, they’re watching their budget, like of all people, I don’t want to say of all companies. But when you VC-backing, you’re running to grow at all costs and then the brakes get jammed to a halt. You are very careful on what you spend and you want to make sure that you’re getting ROI and you can attribute your investments to that ROI. I believe as we continue to navigate this is only four, 4.5 into the March 8 collapse on that, our conversations are about that.

But what do you need to do? What do you need to accomplish? What do you need right now and how can we help you? And then here’s the breadth of products that not everything might fit for you, but we’re going to put the right products with the right solutions in front of you versus, I would say, pre-SVB collapse. We could be in those conversations and their appetite might have been bigger than it should have been where they wanted to get everything. So we’re going to see this gradually, I think pick up and we haven’t seen an adverse impact right now. But in terms of conversations and go forward opportunity, but it’s still fairly early. It’s four plus months since that March 8th date.

Bruce Goldfarb

Thank you. And do you believe that the install base could support a price increase in 2024? I guess assuming macro – I guess, a significant improvement in the macro, I guess?

Mike Cotoia

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

Bruce Goldfarb

And then have you seen any change in your search rankings with the arrival of AI assisted search, like ChatGPT?

Mike Cotoia

No, we see our search rankings continue – our search rankings continue to grow. I’ll say, we have a – we dominate in enterprise B2B tech. Our search traffic to our enterprise AI site was like 120%. If you type in GenAI or generative AI or what is GenAI or what is generative AI? TechTarget is ranked number one. We have a lot of articles, I don’t know the exact, but it’s hundreds that are ranked known organically. So we continue to do really well on that. And Google and Microsoft they will continue to drive researchers to trusted and sourced communities and publishers, and that’s a really key differentiator from what we offer.

Bruce Goldfarb

Great. And thank you. And then my last one is, I mean, you guys were active on the buyback during the quarter. Do you think you’ll be active or do you think you’ll have appetite at current prices, current stock price?

Dan Noreck

Yes, I mean, we’re going to – like I said, we’re going to continue to be opportunistic. And that’s been our track record. And so, I wouldn’t – I would expect us to continue to pay the course on that strategy.

Bruce Goldfarb

Great. Thank you. Congrats again. And thanks for taking my questions.

Mike Cotoia

Thanks Bruce.

Operator

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

Jacob Staffel

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

Mike Cotoia

Jacob, as you’re probably well aware, we made a few acquisitions over the last couple years, and so there on disparate systems. And one of the things that we had a real big focus on this year was streamlining those systems, the efficiencies, the reporting, the customer experience. So for example we had – so we had three different sales force instances. We continue – we’ve integrated that into one. We’re looking at other workflow management tools and solutions. The way we deliver our data to our customers or way we capture it, we’re streamlining that, which then we can take some of those resources and reallocate them to other projects that are priorities. We don’t plan a rift. We plan on making sure we believe we’re at the right head count, we plan on driving the most efficiencies, but we also want to make sure that we’re properly staffed to align with those priorities and those opportunities that we have. And that’s what we meant by that.

Jacob Staffel

Awesome. Thank you so much.

Operator

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