TechTarget Inc
NASDAQ:TTGT
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TechTarget Inc
Earnings Call Analysis
Q4-2023 Analysis
TechTarget Inc
The company is poised for significant market expansion, with plans to enter 18 new vertical markets, augmenting its total addressable market (TAM) by more than tenfold. This strategic move is complemented by an integration that creates an entity with robust financials, projecting over $500 million in revenue within 2024 and the anticipation of reaching $1 billion revenue milestone within five years. EBITDA margins are expected to hit at least 35%, indicating efficient operational management and profitability. Shareholders have immediate gains through an $11.79 per share cash benefit while retaining a 43% stake in future value, reflecting confidence in both short-term liquidity and long-term growth.
Generative AI has been a critical focus over the past year, with investments carving out a clear path for impactful advancements in operational efficiency and customer engagement. This technological emphasis is aligned with improving measurable business outcomes, laying the foundation for a competitive edge in the market.
Q1 has traditionally been the lowest in terms of revenue, reflecting a seasonal pattern in technology spending that aligns with budget finalizations and market conditions. A dip of between 9% and 13% from Q4 to Q1 is standard, influenced by external factors such as interest rates and political events. However, there is optimism about a rebound, attributed to pent-up tech demand and a tendency for quality investment when the market recovers, signaling potential for growth rebound.
The company's product portfolio has evolved significantly with organic growth and strategic acquisitions. The focus on an end-to-end go-to-market strategy provides a strong foundation for content marketing and engagement. The integration of ESG capabilities and multimedia formats like webinars enriches the go-to-market strategy, aligning with shifts in customer demand and the company’s position to leverage recovery dynamics.
Even with a decline in the number of customers, revenue per customer has seen a slight increase, signifying resilience. The company anticipates customer count growth and plans to employ pricing strategies and launch new products to spur growth. The recovery strategy not only includes regaining customers but also utilizes regional budget reallocations and field marketing to drive the projected modest growth for 2024 and beyond.
The company has historically excelled in managing margins, targeting a $500 million revenue pro forma by 2025. With a strong track record of over 50% incremental EBITDA margins, they are aiming for robust margin expansion over the years, fostered by cross-selling, upselling, and penetrating deeper into the customer base across two combined businesses. The goal of achieving a 35% EBITDA margin over five years signifies an ambitious yet calculated plan to scale efficiently.
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Good afternoon. Thank you for attending the TechTarget Reports Fourth Quarter and Full Year 2020 Financial Results Conference Call. My name is Matt, and I'll be your moderator for today's call. [Operator Instructions].
I would now like to pass the conference over to our host, Charles Rennick, with TechTarget. Charles, please go ahead.
Thank you, Matt, and good afternoon, everyone. The speakers joining us here today are Greg Strakosch, our Executive Chairman; Mike Cotoia, Chief Executive Officer [indiscernible]
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've posted our shareholder letter on the Investor Relations section of our website and furnished on an 8-K. You can also find these materials with the SEC free of charge at the SEC's website at www.sec.gov. The corresponding webcast as well as a replay of this conference call will be made available on the Investor Relations section of our website. Following Greg's introductory remarks, the management team will be available to answer 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 most recent periodic reports on Forms 10-Q and 10-K.
These statements speak only as of the date of this call, and TechTarget undertakes no obligation to revise or update 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.
And with that, I'll turn the call over to Greg.
Great. Thank you, Charlie. Well, the big news since our last earnings call was the announcement we made on January 10. We've entered into a definitive agreement with Informa, Sigaba TechTarget with Informa Tech digital business. [indiscernible] company will have increased scale with over 8,000 customers in over 20 countries. First-party purchase intent data from over 220 leading digital brands and a permissioned audience of over 50 million people. .
The combination increases our TAM by over 10x as we will enter 18 new vertical markets with a unique end-to-end solution across the go-to market. The combination creates a company with a strong financial profile expect 2024 pro forma revenues to be over $500 million. Within 5 years, we expect revenue to grow to over $1 billion in revenue and at least 35% EBITDA margins. We structured the deal so our shareholders will get some immediate benefit by receiving an $11.79 per share in cash. and long-term benefit for providing the opportunity for shareholders to participate in the value creation through a 43% stake going forward. In regards to the current environment, we came in slightly ahead of the high end of our Q4 guidance.
This reflects a macro technology environment, which customers remain cautious regarding their sales and market investment levels. We expect this dynamic to continue throughout 2024 because of uncertainty surrounding inflation, interest rates, the presidential election and geopolitical issues internationally. I will now open the call to questions.
[Operator Instructions] The first question is from the line of Jason Kreyer with Craig-Hallum.
This is Cal Bardon for Jason. First one for me. I was just wondering if you could just talk a little bit on the AI capabilities across Tech Target and lymphoma. If there's any kind of differences in approaches between the 2 companies and how complementary those capabilities can come to cover?
Carl, this is Mike. I'm going to focus on the AI capabilities with TechTarget right now. because we've been working with Generative AI capabilities and road map for the last year plus. So I really want to focus on that. And I see this really 4 areas that we are -- we see the benefits of Generative AI in creating measurable impact on the business. On the first side, I'd say, would be on our product side. In Q4, we launched our intent mail AI, which is under our personal Assist product suite. And what that does is hyper-personalized and out to generate e-mails or sales reps to leverage for the outreach. Sales reps who work for our customers. So what we're doing in that it leverages AI to blend TechTarget prospect level, purchase intent insights and behavior along with what we call recent product aligned customer information to personalize our reps outreach. And what this does, it increases response time, reduces the time to create the e-mails.
And as part of their products, we also have different entry points or points of interest at the individual prospect level, so a rep can build a cadence that has multiple entry points to engage with a prospect that he or she is targeting. We've seen good adoption in terms of reps leveraging that, reducing their time to create e-mails and leveraging the first-party prospect-level intelligence. We've also seen internally leveraging across our internal functions within TechTarget. We have a content marketing department his goal is to help promote customers' content to our audience and to their prospects.
And everything that we do is 100% indexed by topic, by content, we rate the performance, the promotions. So what we've done on that is we've built a model that now instead of hiring more junior copy riders. We're taking on more experienced copywriters help train the models to do the promotion and subject lines for the white paper and [indiscernible] assets that we want to promote to our customers. So we've taken that. We've seen success on that. And now we're evaluating and rolling out Gen AI internal control for internal procedures and processes across all 5 other different functional areas. I think in terms of member and audience and clearly better user experience for our members who come to our sites. We've built a private LLM driven out of our own content and first-party data, which is all behind the firewalls to provide what I would call a micro experience. which will be driven by comp intelligence. So when a user or a member comes to our sites, we can then put them to find out what other information that would be relevant for them for their research and then guide them to our knowledge base of content, whether it's editorial content, vendor content, analyst written content, webinar content to make sure it's a better user experience.
And as we create a better user experience for our members, we also gained relevant first-party purchase intent signals. And then I would say, whenever there is a disruptive or an evolution in the market, that benefits that target quite well. We see that -- we're celebrating our 25th anniversary -- we came into the business. Storage is big virtualization became a big mover, cloud, now AI. And if you take a look at the content that we produce, we have 1,000 #1 rankings around the topic of Generative AI and vendors and customers need to cut through the noise because there's a lot of noise on how to leverage it, what are the regulatory concerns, how does it work in enterprise tech, that is all and it's been beneficial and a driver for our TechTarget business. So those are the 4 areas I would say that we implement it and continue to implement and evolve around the business.
Perfect. And then just last one for me. It looks like the guide implies something like a double-digit decline in Q1 but flat or better for the year. Is there anything that you would call ou t that's kind of signaling that you could see spend free up a little bit in the second half?.
Yes. So I'd say Q1 is always historically the lowest and you align us to the technology market. Q1 is always the the smallest revenue quarter for the year and analyze the technology market. When you see Q4 to Q1 over the history of our business, typically between 10% and 13% decline from Q4 to Q1, it will predict in between 9% and 10%. And I think it's still, as we mentioned in the shareholder letter, there are not a lot of with big catalysts in the market right now. We've seen the high interest rates be inflation. We have a geopolitical situations going on, and we have an upcoming election. But what we also are seeing is our customers are spending a lot of money in R&D.
And there's always going to be a pent-up demand when that shift goes from cost tuning to growth because there will be a pent-up demand for technology as well as for marketing and sales typically a flight back to quality, and we've seen this through several downturns over the course of 25 years. And we're seeing some -- again, very consistent with our November call, like pretty stable and no surprises right now. So as we've seen that stabilize versus last year going into Q1, we saw a big dip, this is some signs that the market stabilized a little bit.
And when the pent-up demand is there, There'll be a flight back to quality, and we're putting ourselves in the best position to take advantage of that flight back to quality and focus on the recovery.
Next question is from the line of Kunal Matkar with UBS.
A couple, if I could. One is on the permission audience. So what percentage of your traffic in any given month is permissioned audience? And how much of the provision audience have you kind of maybe potentially lost because of all the layoffs? That's what Second is with regard to the guide, I wanted to understand seasonality and what's going into your guide in terms of the 1Q that you've done explicitly and the what are the Q-on-Q trends in revenue that you're kind of anticipating.
Okay. Let me talk on the permission-based audience side, I would reflect that to our organic traffic. And so we saw an increase of 14% year-over-year of organic traffic man. And that's actually coming off a that's actually coming off a high watermark for '22, Q4 and '22 where we saw 51% growth in the previous year. So in terms of audience and permission-based audience, whenever we running program for our customers in terms of lead gen or delivering prospect level intelligence, 100% of our audience is permission-based. In terms of the layoffs, we're seeing layoffs at the vendor side, not necessarily at the buying team side. So the announcement that you see continuously throughout 2023 and even into Q1 of 2024. Tech vendors with a lot of layoffs around sales and marketing because of rare numbers in near demand that they have, and that doesn't really impact what we see in terms of the traffic on a permission-based audience. .
On your second question in terms of seasonality, if you go back to historically what we see and you can go back into our financials for us 16 years, 17 years ago in public is that is typically the smallest revenue quarter. Vendors are not done finalizing their budgets. A lot of the vendors are year-end or December year end. So budgets might not get finalized until February or March. So -- and in terms of their world, that's typically the lowest revenue quarter. In Q2, it ramps up. You see a lot of product research and updates being presented by customers. You'll see them have more trade shows in April and May. Q3 levels off with Q2. Typically, you have some of the summer months, especially in Europe, where people are taking vacations. And then Q4 is typically our largest revenue quarter, both for us and target but that directly aligns the enterprise tech market as well. So we're starting to see some signs with that coming back slowly in terms of those patterns, and that's what we're focused on in terms of our investments and the opportunity to get back to.
Next question is from the line of Justin Patterson with KeyBanc.
Two if I can. First, just going back to guidance. When you think about just kind of the bit of recovery over the course of the year. Is that driven primarily by customer growth within there, are you making some assumptions in terms of just pricing impacts around Priority Engine and the rest. So that's question number one. And then question number two, just philosophically, the product portfolio you have today is very different than what you've had in the past coming out of downturns, whether it's ESG or even just the Bright talk asset. So if you kind of look at the tech target that exists today, how do you think a recovery might -- an enterprise recovery might differ today versus what you've seen in the past?
Great. Justin, I'm going to start with your second question first because you bring up a good point, the product portfolio is much different than it was 3 years ago, 5 years ago, even 2 years ago. And that's been part of our strategic road map. It's very important and what we've been very conscious about is making sure whether it's through our organic capabilities and launches on our product side or through acquisitions. We want to be the premier provider to help our customers with their end-to-end go-to-market strategy. So when the recovery comes back, you're going to have customers that are going to increase their demand around content marketing. They need really relevant content to talk about the technical or the economic validation and positioning within the market to engage with the right buyers. So now getting into that end-to-end go-to-market strategy earlier with not only the ESG capabilities, but the Bright talk capabilities through multimedia format, making sure we can do this through webinars.
We can do this through PDF. We can do this through infographics to make sure that we're helping our customers earlier in their go-to-market stage. Then being able to take that content and put those into very effective programs that will be delivered and put in front of prospect level prospects and buying teams that we know who they are. We know their permission base. We know everything that they're looking at and then being able to capture all that intent to deliver both on the sales and the marketing organizations to help them prioritize not only accounts but the individual prospects within those accounts. So combining that together and into being able to plug into the health care vertical with Xtelligent and create additional peripheral content.
That's been really important for us, and that's a big focus. So when you have an opportunity to play in the whole end-to-end go-to-market strategy for a vendor, put yourself in a really good position. In terms of your first question, how we see the modest growth I think it's a combination. So like we reported, the number of customer count was done and that reflected in terms pretty close to the decline in revenue for this year.
We started seeing the overall revenue per customer leveled up was actually up a little bit. And I think it's a combination between, yes, there will be some customers that are coming back to net new. I think there's some pricing capabilities that we have on our technology. I also did some of the new products that we'll be launching as part of our road map with Priority Engine, some extensions of what we're doing and having some of these regions that may have been consolidated into a global spend on North America. If the market starts picking up, public late in the second half, that there's more budget being allocated to field marketing. We mentioned in the last 2 earnings calls. Whenever we see a pullback, I just get centralized.
We tend to take them out of the region. They want to centralize them typically in the U.S., then they allocate some dollars on that. Well, the reasons they have numbers to hit to, they have sales, they have field marketers down there. So between yes, customer -- increasing customer count, some pricing -- new product solutions, that's the affect that we see for 2024, more [indiscernible] to 2025 and beyond.
Next question is from the line of Josh Riley with Needham.
This is Rob Morelli on for [indiscernible] the question. Regarding the acquisition of Informa, 2025 pro forma model assumes about 500 basis points in EBITDA grew year-over-year. in the combined company, assuming linear progression with the margin. So we expect the margin progression is linear over the next few years? And can you just touch on some of the key items that will drive the anticipated margin improvement.
Okay. So you were a little broken up on that. I think you were talking about the margin expansion over the years. And what we say is we targets had a really good history of making sure that we manage our margins. And when you have a $500 million -- if you look at the numbers and it's a pro forma $500 million going into 2025 and the ability to take on revenue growth, which we have shown improvement in over the history of out of time, we have a greater than 50% incremental EBITDA margin. It's A lot of that revenue ends up all in the bottom line. So we'll be able to expand the margins on that side. Getting into the real key on this is a lot of growth through cross-selling and upselling our platforms into new customers. Also, if you take a look at the 2 businesses when they combine, .
There are over 8,000 customers that we have an opportunity to both cross-sell and upsell the solutions that we have, respectively, to get a deeper footprint into existing customers. In terms of the India business, which I can't really comment on them, that new product in, but it really does align with our strategy that we're talking about getting into our customers earlier to help them with their end-to-end go-to-market strategy. So to revenue growth, driving 50% plus incremental EBITDA margins. If you do the math over the 5 years, you get to your 35% EBITDA margin. That won't be in year 1 that gets over the period of several years to the growth and the opportunities that we have.
,
Got it. Thats' helpful. And then regarding some of the products coming from Informa, industry dive some nice diversification from an industry perspective, while Omdia is solely focused on the tech industry. Does it make sense to bring some of industry dies, 20 verticals into the business model of Omdia given it's a pure subscription and expand their business coverage beyond tech verticals.
Yes, I cannot comment on the informal business in each of the divisions on it. What I can comment on is what our strategy has been and has been publicly announced, although getting into adjacent markets, making sure we have our content enablement services, making sure we have an end-to-end solution and having the platform to reach across all the opportunities, including adjacent market. So that being said, that's been a vision that we've stated pretty clearly around permission-based audience, first-party insights and a comprehensive and go-to-market strategy. And so when we have the combination, we'll be able to -- when that's finalized side, we'll be able to dive into that a little bit more with the public. .
Next question is from the line of Andrew Marok with Raymond Jeans.
I wanted to dig in on the customer count a little bit. So that decline seems like it accelerated in 4Q. It was down 100 in 3Q, down about 300 in 4Q. What do you think is the floor here? And I guess to the extent that you know how much of the decline over the course of '23 is kind of involuntary like companies going out of business versus voluntary cutbacks.
So I would say the decline -- if you look at the overall decline throughout the year, you had a lot of customers that may have signed annual deals in 2022. And it was the second half of 2022, really in Q3 when we started seeing some of the decline. So you didn't have a lot of organizations sign up for annual deals going into Q4 of 2022. That's when the market started to send signals that it was slowing down. So that's probably one of the reasons why Q4 was a little bit higher people had signed annual deals up to May, June, July, that expired, they were dealing with the macro, they pulled back. .
In terms of voluntary or involuntary, you got to understand, there's a couple of things. We're less than 1 year out from the Silicon Valley Bank collapse, and they are 100% focused on technology companies. So some of those companies went away. A lot of those companies are still in business but they are navigating through the environment and they have to make sure they are managing their costs very closely. So if the market picks up, as we talked about, and the demand picks up, which it will, it's not a matter of if, it's a matter of when. A lot of those companies will come back. Also during the customer panel, and I mentioned this earlier, you might have an organization that's spending in North America, EMEA and APAC. And the APAC region may have cut back. And EMEA may have cut back. But North America was still going. That would decrease our customer count based on those regionals that we treat as separate businesses because we're working on separate contracts and agreements -- when the market comes back, you typically see that centralized budget plus back into the field. So that's the color I could give you. I can also tell you, if you look at the total customer panel, the revenue -- and in the -- I think the overall revenue per customer was actually up slightly in 2023 versus 2022. So it's -- and again, it's another sign we talked about in November, we're saying, no, no major surprises right now. And this is what we're seeing right now. We're navigating it, and we don't see things follow up, and we don't see big catalysts spoon up right now in the first half of 2024.
Really appreciate the color. That's very helpful. And one more, if I could. I mean, I understand that it's very early days right now, and this may not even be that much of a client-facing effort at this point. But has there been any meaningful feedback from your clients so far in terms of the reaction to the announcement of the Informa deal?
I mean we're not really allowed to discuss, but we're really focused on business as usual here and making sure we're doing the right things for the business. But listen, I will tell you this. In my own view, I think it's a pretty -- like when we talked about our M&A strategy for the last 3 years. I don't think this is a really big high get factor. And that's, again, from my own point of view, we talked about our strategy of driving our first-party purchase intent data, permission-based audience and content. And so we've been very clear over the last few years and also getting into adjacent markets. So we've been discussing this publicly over the last couple of years as part of our road map strategy, and this is the announcement that we [indiscernible], and they can interpret how they want about we can't really share what we get for feedback. .
Next question is from the line of Bruce Goldfarb with Lake Street.
With Google Chrome's new treatment of cookies, have you seen any increased lift in budget from longtime customers allocating more to target spend versus legacy cookie-driven spend?
So we all know Google announced the phasing out of cookies starting in January and accelerating that throughout the end of the year. It was just a knowledge in terms of them putting that in action, definitely talk about playbook. I mean we are all first-party data, both at the prospect level and as well as at the account level. We're going to take advantage of that in terms of our go-to-market strategy and making sure that customers -- and we believe and even part of some of our product strategy, which you'll see us announce in Q1 will be the will be account only insights, remember most of our customers have always bought prospect level intelligence from us, and we've identified the accounts of those prospects work in. You have a lot of accounts that buy -- a lot of our customers also want modeling, propensity modeling, ABM strategies with account-only information. So as part of our road map strategy and our product launches, you're going to see some announcements around our account insight fees, which could be at the account level only and tying that into our first-party data versus Google phasing out third-party cookies, we seen that as a pretty big competitive advantage.
And then post -- I don't know if you can answer this, but post Informatec combination, should we expect the new Board Chairman to be elected from the post-close directors? Or could it be a new director? .
I mean it could be a new director.
It could be. Okay, and then lastly, when do you expect demand in the legacy business to stop contracting, do you think like Q3, Q2 or Q3 or Q4.
Yes. I mean, like you said it. I mean the numbers in the guidance we gave this year are relatively flat, up 2% heading into 2024, we still have -- on the tech industry -- on the enterprise B2B tech industry, we still have high inflation, high interest rates and a lot of layoffs right now. That's not going to get sold. What I do know on this is, we've seen pullbacks before. And we're seeing customers who spent a lot of money, invest a lot of money in R&D. We also see technology initiatives such as AI. We've seen it with virtualization and cloud and other things before that create a pent-up demand. And it's not a matter of if, it's a matter of role the market turns around, where customers turn from, "Hey, I got to watch everything I do on cost, so I really need to focus on growth through sales and marketing efforts regionally and globally. And when that turns, and I wish I had a crystal ball on that. I mean we've seen some signs like I mentioned in the last couple of quarters to stabilization. .
When that turns, they will be quickly cover, in my opinion. And we've seen that in the past. And when we see that recovery and whether that's Q3, Q4 '24 or the beginning of 2025. Our goal is to be ready for that recovery to take the upside in that. And that's -- as you can see, some of the investments we've made, the analysis that we've made, that is a real focus for us right now. .
Thank you for your question. There are no additional questions waiting at this time. So that will conclude the conference call. Thank you for your participation. You may now disconnect your lines.