TechTarget, Inc. (NASDAQ:TTGT) Q4 2022 Earnings Call Transcript

TechTarget, Inc. (NASDAQ:TTGT) Q4 2022 Earnings Call Transcript February 9, 2023

Operator: Hello and welcome to the TechTarget Reports Fourth Quarter and Full Year 2022 Financial Results Conference Call and Webcast. My name is Lauren, and I will be coordinating your call today. . I will now hand you over to your host, Charlie Rennick, General Counsel, to begin. Charlie, please go ahead.

Charles Rennick: Thank you, Lauren, and good morning. Joining me today are Greg Strakosch, our Executive Chairman; Mike Cotoia, our CEO; and Dan Noreck, our CFO. Before turning the call over to Greg, I’d 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 a Form 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 filing 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 effort, accompanies our shareholder letter.

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

Gregory Strakosch: Great. Thank you, Charlie. For the full year 2022, GAAP revenue grew 13% to approximately $297.5 million; adjusted revenue grew 9% to approximately $299.2 million. Net income was approximately $41.6 million, an increase of 4,285%; adjusted EBITDA grew 16% to $122.4 million; net income margin was 14%; adjusted EBITDA margin was 41%. GAAP gross margin was 74%; adjusted gross margin was 77%. Longer-term revenue grew 18% to $123.5 million, representing 41% of total revenue. Cash flow from operations was $90.7 million; free cash flow was $76.7 million. For Q4 2022, GAAP revenue was approximately $73 million, a decrease of 5%; adjusted revenue decreased 7% to approximately $73 million. Net income was approximately $7.2 million, an increase of 145%; adjusted EBITDA decreased 9% to $29.5 million.

Net income margin was 10%; adjusted EBITDA margin was 40%. GAAP gross margin was 73%; adjusted gross margin was 76%. Longer-term revenue grew 5% to $29 million, representing 40% of revenue. Cash flow from operations was $19.8 million; free cash flow was $16.6 million. I will now open the call to questions.

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Q&A Session

Operator: . Our first question is from Justin Patterson from KeyBanc.

Justin Patterson: Two, if I can. First, just with respect to the macro environment, you’ve been through cycles before. So could you give some context on just how the current environment compares to past periods of anxiety and elongated sales cycles that you’ve seen? And how long do you think that could last and pressure some of the KPIs that you said deteriorated a bit in Q4? And then secondarily, I just wanted to talk about efficiency. I saw the head count reduction in there. You alluded to some other potential savings on excess office space. So kind of walk through what savings is contemplated in the guide today and where you think you have some further opportunities over the course of the year.

Michael Cotoia: Great. Yes, Justin, in terms of the macro cycles, what we’ve seen is — I think it’s been highlighted and documented over the last 45 days, how quick and material companies are laying off and it’s very widespread. So we started seeing signs of that a little bit after our Q3 earnings call in November, but it really was the middle of December and all the way through today where there is widespread, quick and very deep cuts. So when we see that — and I don’t recall in past cycles, the material cuts and the deep cuts and how fast they came. So there’s a behavior element to that where when customers cut head count, they were also very nervous on allocating any budget, and they made those quick decisions to hold on.

So everything that our brands seeing, conversations with customers, partners, so even some of the competitors is Q4 got worse. It got really bad at the end of December, worse than Q3, and Q1 is off to a slow start because of this behavior. So I think that’s something that we’ve seen on that. And that’s obviously going to elongate sales cycles, budget reviews, approvals, and that’s continuing as we see in today currently. In terms of efficiency, yes, we had a reduction in head count in December of about 5% of the workforce. And as we go into this year, we’ve announced a 90-day hiring freeze and a budget freeze on that, only imperative business travel for customer and employing customer engagement. We are looking at lease and subletting some of the buildings and office space.

And we feel that we’re in a pretty good shape. It’s really important that even during a downturn that we stay opportunistic around the key priorities that will help, which we’ve seen historically covered us for a while, where we take an opportunity to take market share by making the right investments. So yes, we’ve down — we’ve lowered our overall EBITDA margin guidance to 35%. Could we have maintained at 40%? We believe we could, but I don’t think it would have been the right decision in terms of addressing the short-term opportunity to take advantage and gain market share for the long-term growth opportunity because the overall trends that we’ve seen and we’ve talked about over the last 3 years haven’t changed. When you look at our customers, their sales and marketing departments have to be modernized, and they really want to focus on first-party data, having access to real first-party data, not only at the account level but the individual prospect level, is really critical to our customers.

And privacy and compliance concerns that continue to go — address this market really put us — those long-term elements and those long-term, I’ll call it, tailwinds don’t really go away even during a downturn in the macro. So…

Operator: Our next question is from Aaron Kessler from Raymond James.

Aaron Kessler: Maybe a couple of questions on kind of the guidance as well. Just in terms of kind of the reduction in spend, is that kind of across all client types, all sizes? And second, any product areas you would call out specifically where you see more pressures are more in the advertising side versus Priority Engine, et cetera?

Michael Cotoia: Yes. We’re seeing reduction across all customer bases from SMB, mid-market to enterprise. It is — like I mentioned in the previous answer, it’s been really quick and really wide and really deep on that. So we’ve seen that across the board. I think customers are trying to reset their costs, manage their budget, figure out what’s going on. And I’ve seen probably the highest level of uncertainty than I’ve seen in previous downturns. In terms of product mix, yes, we actually do see a mix in product spend and product mix. The first thing that will absolutely get pulled back is the brand. And we’ve talked about this in the past. It’s less than 10% of our overall business, really hard to measure for companies, and they pull that back.

When markets get better, that’s probably one of the first things they come back on, and they will increase their brand investments on that side. We also see a reallocation. We’ll see that some of the long-term contracts, which might be a Priority Engine, might get reallocated to short-term product needs. So we have a qualified sales opportunity HQL type of product, where our customers are trying to win any deal that they can see right now and they want to have more form of the funnel type of product mix that they can do. So we’ll start seeing that mix. I’ve talked to some customers where they had allocated to appointment setting for the short term. What I would say on that is it’s really important for customers to manage their pipeline because this is what we typically see.

We see customers will retreat, leverage their own data right now, try to orchestrate it in a very organized way. And they are looking at a pipeline that they appear to be healthy. And if that pipeline doesn’t progress over the next quarter or 2 quarters and it doesn’t progress into closed deals, they then realize that they still have numbers to hit. They have to quickly get that pipeline built up. And what we’ve seen historically, and we’ve predicted this will happen again, there’s a quick flight back to quality. And that’s where our first-party intent data at — not only at account level but at the prospect level is really what we believe is the quickest path and the truest path to our company’s next deal, our customers’ opportunity to land the next deal.

Aaron Kessler: Got it. Great. And any more color you can provide — or, in the letter, you talk about investments in the Content Enablement Services as well as the Content to Close concept. Can you just provide a little bit more details around that?

Michael Cotoia: Yes. We believe that, that is still a really good growth area, and we’re seeing that part of the business continue to grow. We talked about the dynamics and the demographics of today’s buyer. Today’s buyer, we’ve seen in multiple studies and what we’re seeing in our own research, a majority of those buyers today want a rep-less experience when they’re dealing with their next purchase or their next opportunity. And what does that mean? They want to engage relevant information, relevant content, project-based content really to help guide them without having to take a call for the sales rep. We made the acquisition of ESG a couple of years ago, and we really focused on our efforts around making sure that our customers have a good content experience to help them position their product, position their overall company’s value prop against the competitive set.

But also, and especially in times like this, there’s economic validation. Why should you be buying my solution right now in a downturn? And our customers are really craving for that, saying, we need to make sure that we’re taking advantage of the downturn to capture market share as well. So that’s all part of this end-to-end Content to Close concept: helping our customers build, create and execute on the right content and messaging strategy, putting that content into the right executable programs to engage the right buyers, and then helping prioritize those buyers in accounts back into their sales force through our Priority Engine and other platforms that we can then help them close more deals quickly.

Operator: Our next question is from Joshua Reilly from Needham.