TechTarget, Inc.
Q1 2013 Earnings Call Transcript

Published: 8 May 2013

[Operator:]

Good afternoon and welcome to the TechTarget's First Quarter 2013 Earnings Release Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Bob Kellegrew, General Counsel; followed by Mr. Greg Strakosch, CEO, who will address the earnings call. Mr. Kellegrew, please go ahead.

[Bob Kellegrew:]

Thank you, Amy. Before turning the call over to Greg, I want to briefly remind everyone on the call of our earnings release process. As you saw, we issued our press release at 4 p.m. today. As previously announced, in order to provide you the usual update on the business ahead of the call and to hopefully save you some time and effort, we have posted a letter to the stockholders from Greg on the Investor Information section of our website and also furnished it with our 8-K filing. This letter is intended to provide supplemental information about the quarter ended March 31. On the call today, Greg will briefly summarize our financial results for the most recently completed quarter, and then management will devote the rest of the call to answering your questions. Additionally, I'd 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, guidance as to the future financial results. Investors are cautioned that any forward-looking statements are not guarantees of our future performance and involve risks and uncertainties and that actual results may differ materially from those contemplated by such forward-looking statements. These risks, along with other items, include

[Greg Strakosch:]

Great. Thank you, Bob. The steep downturn in the IT market is creating challenges for us. TechTarget is the go-to marketing partner when IT vendors are playing offense. Many of our customers are in defensive mode as they face weak demand and declining revenues. Despite this challenging environment, we are committed to stay the course and are continuing to invest in the business, specifically in our international operations, our Activity Intelligence Platform, and we'll continue to introduce innovative new products. Of course, we will manage expenses very carefully during this period, and we'll manage the business to provide double-digit adjusted EBITDA margins and positive cash flow for the year in 2013. I will now open up the call to your questions.

[Operator:]

[Operator Instructions] Our next question comes from Dan Kurnos at The Benchmark Company.

[Daniel L. Kurnos:]

Maybe digging down a little bit into the environment that you guys are seeing, obviously, not the start to the year, I think, you were hoping for. I don't know how much visibility you have in the back half of the year. Without giving guidance, your thoughts on how things might play out, what might need to change? Number one. And number two, on the event side, is there any way to maybe think about incenting people to use that channel more or to get people more involved as a possible additional revenue stream? And then I'll have a couple of follow-ups.

[Greg Strakosch:]

Sure. So in terms of the environment, I think anyone that's paying attention to the quarterly earnings reports from public IT vendors, it's very consistent. The largest IT vendors are facing very weak demand, most of them have declining revenues. Companies that are doing better aren't growing as fast as they want to. So companies -- when companies face weak demand and revenue challenges, they go -- they look at their expenses very carefully. And companies have very few discretionary levers, when it comes to expenses. They have T&E, but marketing budget is right up there as something that's -- something that they can cut fairly quickly. And when their competitors are in defensive mode and not aggressively marketing against them, that feels like it's something they can do in the short term. So that's the current environment. Everyone reads the same reports. CapEx spending are at very low rates. So this is not just affecting IT. This is across the whole economy. But when IT vendors see their pipelines growing and their revenues growing, they will very quickly turn that back on. So we're going to be -- depending -- somewhat what happens with the environment will affect us. Of course, we're doing a lot of things, despite the environment, in terms of what we're doing internationally, which is going well, in terms of IT Deal Alert and Activity Intelligence and other new products we have under development. So we are -- despite the challenging environment, we're working on a lot of things that we think can mitigate that. In terms of events, so the situation with the events, our model is most of revenue comes from sponsorships. And so in the same way we're seeing -- how we're seeing marketing budgets affected, it's affecting their marketing budgets for events. So a couple of examples, if a vendor previously was a gold sponsor an event, maybe now they're a silver sponsor or a bronze sponsor. So they're still participating but at a lower dollar volume. Or if they're sponsoring a roadshow, and previously, if it's a 6-city show, and previously, they were in all 6 cities. Maybe now they're in just 3 cities. So those are kind of the dynamics that we're seeing in the events market.

[Daniel L. Kurnos:]

All right, that's helpful. And then maybe just a little bit more granularity in the online side. Could you give us some insight into how well maybe your mid-tier partners are performing? We know that there's -- the large vendors aren't performing particularly well right now. And then also, are there still any categories -- we know that the hot categories have continued to perform well. Are there any other particular verticals that are doing well in this environment, even with the challenges you're facing?

[Greg Strakosch:]

Yes. So in terms of segments, in terms of company size -- large, mid-market or VC-backed, I think that what's going on in the IT market in terms of demand is affecting companies of all sizes. So this isn't something that's just affecting the largest companies. I think it's an overall decrease in IT spend, which is affecting all size companies in the space. And in terms of category, yes, there's certainly some categories that are performing very well. Things like cloud computing, business intelligence, big data, some of the places that are -- where there's new markets. So you have lots of IT professionals researching. You have existing vendors trying to build share in a new space. You have new players in those markets. So there's definitely several areas within our network where things are pretty robust.

[Daniel L. Kurnos:]

And then you've talked historically -- well, not historically, but you've talked before about getting -- tapping into the sales part of the budget through new product launches. And I'm curious if, without asking for specific product roadmap, if you could give us maybe some more color on the timing of new product launches, how they might ramp up and any incremental expenses you expect to foresee in conjunction with those?

[Greg Strakosch:]

Sure. So on the incremental expenses, I'll channel it to take that first. The products that we're introducing, things like IT Deal Alert and then new derivative products from IT Deal Alert, really take advantage of the investment that we're already making in terms of developing content and then that content that attracts audience. So incremental investment is pretty minimal in terms of these new products. In terms of traction and timeframe, we just -- we announced IT Deal Alert at the very end of January. We started rolling it out to customers in February and March. We're learning it has a 60-, 90-day sales cycle. Tough selling a new product in an environment where budgets are being cut because they're already cutting things that they like to do. But we have to -- we're having success convincing customers that this is something they should test. So we have over 20 customers running pilots right now. So those efforts, a lot of those efforts and those customers are with company sales teams. So it's early days there, but we're getting very good feedback when we're meeting with the sales teams about the products that we have. In terms of new products, I think that it's -- we'll definitely have another pretty good-sized product announcement in the second half of this year. And then I think it's safe to assume that every 6 months or so, we'll have another new product that is derivative from the Activity Intelligence Platform and the IT Deal Alert service and the idea of recurring revenue products that tap into the intelligence we have and the data analytics that we're running against all of our activity to help sales and marketing teams be much more efficient.

[Daniel L. Kurnos:]

Great. That's helpful. And I guess, maybe just one more on the cost side. You talk about managing expenses in this downturn. I'm just curious where you think you have the most leverage by line item and where you think you'll still have to invest in order to continue to drive long-term growth in the business?

[Greg Strakosch:]

Yes. So we're going to continue to invest in our international operations that we think that we'll be able to grow international online at a very healthy clip, 30%-plus this year. We're obviously going to continue to invest in the Activity Intelligence and IT Deal Alert and the new products because we're very bullish on that opportunity. So places -- we'll looking at discretionary places where we can be very careful. So we run the business pretty lean as it is. But we're definitely, when it comes to discretionary expenses, we're obviously watching every dollar, as you expect. And you can see in our guidance that we're expecting about 13% EBITDA margin in Q2 at the midpoint. So we're very confident that we can run the business at double-digit adjusted EBITDA margins. And when we achieve that, that will translate into positive cash flow for the year.

[Operator:]

Our next question comes from Colin Sebastian at Robert W. Baird.

[Gregor Schauer:]

This is Gregor Schauer. I'm filling in for Colin, he's on another call. Greg, I guess one thing that I just want to understand -- when you guys look at your portfolio of sites, and I've seen the press release that you launched some new sites, are you seeing any fundamental differences in terms of the traffic patterns or something? And is there a correlation between the traffic of certain sites and the revenue and the leads that are being generated through those sites?

[Greg Strakosch:]

Yes. I mean, as far as the traffic patterns, it's interesting. Even though IT spending is down, traffic is very steady. And then in specific areas, it's growing. So what that tells me is that IT projects aren't being canceled. They're being delayed, and IT professionals are staying abreast of new technology, so when they get the green light on CapEx budgets, they're ready to go. And then yes, as you would imagine in -- if you take a topic area like cloud or big data, 2 things that are -- or desktop virtualization, another area that's pretty hot right now, that's where there's a lot of demand from the audience to have as much content -- as high-quality content as possible. So we're putting our content assets -- our content and resources there to produce content in those areas. And then as you expect, there's also a lot of vendors jockeying for position, and there's advertiser demand there. So those things tend to go in lockstep because where the IT revenue is, is where the marketing dollars is as well.

[Gregor Schauer:]

Right. And I guess related to that, I'm wondering one of the probably more difficult things to assess is what is the potential opportunity cost that may be lost in maybe some of the newer segments that are emerging that are maybe not being addressed there? Or do you guys feel like you're fully covering all the newly emerging segments with the net cloud computing space? Again, SDN, the software-defined networking, I know, is very current, very relevant, et cetera. But in your sort of overall assessment, do you guys feel like you've sort of you've covered all the bases that there are? Or do you think there's more work to be done in terms of assessing the allocation of resources and [indiscernible]

[Greg Strakosch:]

Yes. No, I think we're definitely covering the new topics appropriately that we have, I think, 6 sites dedicated to different cloud topics. This SDN site is a perfect example. So we have a portfolio of 100 sites. We've -- have hundreds of people producing content. So we -- we're very fortunate because we have over 20 million IT professionals per month coming onto our websites. We can -- we're tracking every search that they do. We're tracking every piece of content that they consume. So we really have an early indication of what's hot, what's bubbling up, what's new. And then what we do is we allocate our resources. If something is falling down, we'll allocate content resources from that towards the places where it's bubbling up. So we've been pretty consistently launching 4 to 8 new websites per year to cover these -- to cover the new topics. So I would say that, that's one of our strengths and that we're definitely -- I don't think there's any hot new topic that we're not covering.

[Operator:]

Our next question comes from Paul Szczygiel, Columbia Management.

[Paul Szczygiel:]

Greg, why do you expect international revenue growth to accelerate to 30% for '13 from the 20% that it did in the first quarter?

[Greg Strakosch:]

Yes. So one of the things that happened in Asia-Pac, we added some new salespeople, and we reorganized the existing sales territories. So it was a little bit of a short-term hit for a long-term gain by reallocating -- readjusting those sales territories. So we've got a good forecast for that, for APAC in Q2. And then we're very -- we've also added new salespeople in EMEA. So I think that when you put those together and -- there's sort of 2 dynamics are

[Paul Szczygiel:]

Okay. IT Deal Alert has 20 customers running test programs, and the monthly run rate for me was $150,000. If they ramped those up to real programs, would that result in incremental revenue?

[Greg Strakosch:]

Yes. So most of the customers are running short-term tests and small tests. They want to get -- understand how it works in the field. So there's definitely upside for those customers once they've been able to prove out the ROI to make those programs larger. And then we -- we're talking to a lot of customers about running new tests. So I think there's growth -- revenue growth from both of those categories. New people trying it and then people that are trying it after they go through their test phase and seeing the success and the power of this product, that they'll invest more. Definitely, still -- with the headwinds, we're trying to do this in an environment where budgets are being cut, which makes it slower. But definitely, we're very optimistic about the outcome that we're going to see here.

[Paul Szczygiel:]

And is the difference between a test and a real purchase, is that 10% more or multiples of the test?

[Greg Strakosch:]

That's really account-by-account dependent. Some companies might be running a test for what they're -- what they would be on an ongoing basis, and some companies might be running a test on something where it could be 2x or 3x bigger. So there'd be a mix of those scenarios. A lot of that depends on the company size. A big company, so they might be running a test in just one division. And if it's successful, we can roll it out to multiple divisions. So that would really vary from company to company. But the upside, there's certainly lots of opportunity and lots of upside with IT Deal Alert.

[Operator:]

At this time, we show no further questions, and we'd like to end the conference at this time. Thank you for attending. You may now disconnect.