TechTarget (TTGT) Q2 2019 Earnings Call Transcript

TechTarget (TTGT 1.85%)
Q2 2019 Earnings Call
Aug 07, 2019, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the TechTarget second-quarter 2019 earnings release. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Charlie Rennick. Please go ahead.

Charlie Rennick -- Secretary, Vice President and General Counsel

Thank you, Ben, and good afternoon. Joining me here today are Greg Strakosch, our executive chairman; Mike Cotoia, our CEO; and Dan Noreck, our CFO. Before turning the call over to Greg, I want to remind everyone on the call 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 may be 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.

Please refer to our risk factors in our periodic reports filed with the SEC. These statements speak only as of the date of this call, and TechTarget undertakes no obligation to update them. 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'll turn the call over to Greg. Greg?

Greg Strakosch -- Executive Chairman

Great, thank you, Charlie. Before I jump into the numbers, I'd like to note that TechTarget is celebrating our 20th anniversary this month. We are extremely grateful to all of our dedicated employees and to our loyal customers. I'm glad to report that we delivered record revenues, adjusted EBITDA and margins in Q2.

Highlights include Q2 2019 revenues grew to $34.3 million, up from $31.5 five million, which is up 9%. Q2 2009 adjusted EBITDA grew to $11.1 million from $9 million, up 22%. Adjusted EBITDA margin was 32% in Q2 2019 versus 29% in Q2 2018. Gross margin was 77%, the same as last year.

Incremental EBITDA margin was 71% in Q2 2019 on a year-over-year basis. Adjusted cash flow was $7.5 million in the quarter, representing 68% of adjusted EBITDA. Long-term contracts represented 33% of revenue in Q2 2019. Priority Engine revenues were up 44% in Q2 2019 versus Q2 2018.

Based on these good results combined with our second-half forecast, we are increasing our annual guidance for 2019 this afternoon. We expect the annual revenues to be between $133 million and $134 million. We expect adjusted EBITDA to be between $39 million and $41 million. Previous annual adjusted EBITDA guidance was between $37 million and $39 million.

Also I'd like to welcome Christina Van Houten to our board. She's a technology industry veteran and is currently the chief strategy officer at Mimecast. We look forward to working with her. I will now open the call to questions.

Questions & Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator instructions] Our first question comes from Aaron Kessler with Raymond James. Please go ahead.

Aaron Kessler -- Raymond James -- Analyst

Hey guys. Thanks for the questions. Maybe first, in the shareholder letter you talk a little bit about testing, kind of how much content you should remember to protect. Maybe if you can expand on that a little bit.

Then obviously, from a couple of quarters ago we talked a little bit about the GDPR impacting a couple of customers. Just any thoughts there. And then third, just maybe general kind of macro IT spending environment and marketing outlook that you guys are seeing. Thank you.

Mike Cotoia -- Chief Executive Officer

Great. Hey, Aaron, it's Mike. Let me take those in order. First of all, in terms of content and testing the content, which we noted in our shareholder letter, we look at content in two different ways.

We have member-protected content versus non-member-protected content. And we member protect a lot of our content because at the end of the day, it's the members that we attract and recruit and get on our sites that actually drive the purchase intent insights in the data that we then monetize across all of our purchase intent-driven product lines and solutions. So it's really important that we protect that. It's really important that we drive and obtain and attract the right audience members because that's what we monetize.

There's non-protected content as well. And when you don't protect content, Google will reward you on that. And if we wanted to decide not to protect content, we can increase a lot of our traffic and our page views. But the value that we focus on are the members and driving net new members to our audience, to our sites, that we can leverage and manage.

So we're always looking at it, we're always tweaking it and finding out the right balance. And to put things in perspective, if you take a look at our overall revenue, approximately 15% of that revenue is driven through banner impressions and traffic, where 85% is really driven through the intent measures that we capture through net new and existing audience members. So that's number one. On the GDPR front, I think things are fairly consistent.

It's been over a year since they launched. GDPR I believe was May 25, 2018. Our customers are adapting to that, and we're seeing -- and we've gone through that and there's really nothing new on that front. Again, going back to the model that we own and we operate our sites, we have an opt-in consent-based registration process.

I it think puts us in a very good competitive advantage when it comes to compliance measures. And then overall, on the IT spending, the macro IT environment, obviously we still see it as fairly positive. I think we're seeing a lot of conversations obviously in the news around tariffs and trade concerns. And I think that the tariff and trade concerns create cautiousness with a lot of our larger customers who have a lot of international business, and we're buying and selling within those regions.

But the way we look at our forecast and the projections, we take the current macro into consideration, so we feel pretty good about that. Also, I would also say two or three years ago the global 10 accounts that we break out, we break out our customer concentration with the global 10 accounts, the next 100 and all others. Today, we're pretty fortunate because our global 10 customers make up a much smaller percentage of our overall revenue than they did a couple of years ago. And that's due to our product development, our marketing and our sales execution and driving net new customers and really spreading that customer concentration.

So that really bodes well for the business, and it makes us less reliant on those global 10.

Aaron Kessler -- Raymond James -- Analyst

Got it. Great. Thanks for that piece.

Operator

Our next question comes from Mike Maloof with Craig-Hallum. Please go ahead.

Mike Maloof -- Craig-Hallum Capital Group LLC -- Analyst

Great. Thanks for taking my questions and congrats on 20 years.

Mike Cotoia -- Chief Executive Officer

Thank you, Mike.

Mike Maloof -- Craig-Hallum Capital Group LLC -- Analyst

A couple of -- you know, one of the things that's kind of interesting as you roll out this Priority Engine is trying to get a little bit of feedback from these new, I'm sorry, the Priority Engine Express from these new smaller vendors. And you said in your letter that you're in the learning stage and you're getting some early feedback and it's been positive. And I'm wondering if you could just give us a little bit of color on that and kind of tell us what you are learning.

Mike Cotoia -- Chief Executive Officer

Yes, that's great. So we have done a soft roll out on Priority Engine Express. And if you take a look at what we've been doing over the last several years on Priority Engine, I'm gonna go back to that, we've been selling an enterprise solution to a target account list of ours, between 800 and 1,300 accounts. So we see a really good opportunity when it comes to, I'd say, that smaller market.

And therefore, we've put a lot of development and resources and some investments in looking to roll out our Priority Engine Express. So over the last couple months, we've been rolling this out in a soft form, engaging with very small customers, selling the solution, stopping during the sale, getting the feedback, understanding exactly what they are looking to do, not looking to do and how we can make sure that we really get this ready for 2020. We've learned a few things along the way, which has been very helpful. We've heard a lot of positive feedback.

Small customers lack a lot of resources. They don't have a marketing automation many times, they don't have an integrated nurture campaign. They need to understand and have a very friendly user interface, and they're also very focused on identifying and using the solution as a sales-use case with their inside sales reps and even their outside sales reps. So what we're really focused on is going to a very simple user interface, focus very much on a sales-use case and understand that we can help them build different types of lists and customize lists.

For example, an ideal customer profile list, which is really going to focus on exactly their sweet spot so we can get them the right [Inaudible] at the right time. They don't have the resources, they don't have the complexities, they need it simple, they want it toward a sales-use case, and we're learning a lot from that. So we have sold units in this, and we are tweaking, modifying, adjusting and getting ready to go in 2020. But so far, the feedback has been very positive.

When we look at that market too, just to add on a few points, this is a large untapped market for us. We are historically selling enterprise solutions into enterprise accounts and into mid-enterprise accounts. We've been able to see so far through our improvement and customer concentration, meaning less reliant on the global 10 that we have a little bit of a track record of making things like this happen. So as we head into 2020, we're excited about the opportunity.

Mike Maloof -- Craig-Hallum Capital Group LLC -- Analyst

Yes, that's great. And then maybe just a comment. These are some -- in the letter you commented on some of the enhancements that you've given to Priority Engine, including, as you said, the ideal customer profile, personalized account rankings and a couple others. And I'm just wondering, are these competitive with a marketing automation offering that maybe some of your customers have? Or based on your previous comment, you sort of said a lot of these customers don't have marketing automation.

Are you sort of moving in that direction to sort of give it that level of functionality?

Mike Cotoia -- Chief Executive Officer

So I'd say we are making some enhancements both in the enterprise, I'll call it the Enterprise Priority Engine, as well as the Priority Engine Express. I would say we complement the marketing automation market in functionality and services that other companies offer. Again, in the enterprise market. We saw a lot of things that we're rolling out and investing in Priority Engine.

And I'll get at the Priority Engine Express again in a minute. But our customers, even at the enterpriseand the mid-market level, they need simplicity, they need a good user interface. They need to really understand what they should be doing with all of their customized list that they're building within Priority Engine. So we've increased some functionality, and what we're trying to do is really service to the enterprise accounts key data points that they can see and leverage across their sales and marketing organizations our customers take Priority Engine, and they create customized lists, which might be based on account territories, install base, that might be based on verticals, company size.

And what we're trying to do is take all those lists that they're creating, along with our customer success team and highlight and point out and surface some really key qualities that their sales and marketing organizations can jump on right away. So we talked about like enhanced qualification intelligence. We want to let them know right on the user interface who is engaging with you versus competitors. Personal account rankings and improved engagement signals.

Are they integrating with not only us, TechTarget's content, but are they integrating with your own content marketing? Or are they looking at your website and going to your website traffic or engaging with your banner? The key is to triangulate all this information and serve it up to our customers so they can action upon this. In terms of Priority Engine Express, we're really trying to make this as simple, streamlined and scalable for our customers that fit under that small to maybe mid-sized category, depending on how you pocket them.

Mike Maloof -- Craig-Hallum Capital Group LLC -- Analyst

Yes. That's great. Thanks for the help. Appreciate it.

Mike Cotoia -- Chief Executive Officer

You're welcome.

Operator

Our next question comes from Marco Rodriguez with Stonegate Capital Markets. Please go ahead.

Marco Rodriguez -- Stonegate Capital Markets -- Analyst

Good afternoon, guys. Thank you for taking the questions. Hey, just following up on the prior question here on the Priority Engine Express. The value propositions that you're basically providing thee smaller enterprise companies.

It looks like it's obviously starting to resonate a little bit and you're starting to learn some positive attributes to how to structure this particular product. And in the letter, you talked about increasing the sales people that are just trying to get some clarification on, one, are there going to be additional heads; or are you shifting people out of other areas?

Mike Cotoia -- Chief Executive Officer

Good question. So, Marco, if you recall about a year and a half ago, actually two years ago, we started investing in a sales development rep program. We never had that before. It was recruiting and hiring sales.

We call them SDRs that will work on building and booking appointments that can be handed off to our outside sales reps. And we've built that with a vision that we're going to be looking at additional products that we're going to roll out and we're going to be able to -- and we want to make sure we have the resources on the bench. So a lot of the things that we're doing here are shifts. We take our sales development reps, we start increasing their position into whether it's a field account executive role, which might be some of those mid-market accounts; or it's an opportunity to look at our Priority Engine Express opportunity.

So we'll ship, reallocate some resources test this out, set this up so if we continue to see success, we can quickly mobilize with the bench that we have to go out and support the opportunities that we see in front of us. With that being said, we're continuously hiring sales development reps because we want to train them under our umbrella, our training course, our methodology so they're ready to make and take action when we see fit.

Marco Rodriguez -- Stonegate Capital Markets -- Analyst

Got it, that's helpful. And then in terms of the full production roll out for the Priority Engine Express, I know you're talking about 2020 as the kind of a target time. Any, maybe a finer point in terms of when in 2020 you might be doing this? Is this just kind of like a Jan 1 or first-half, second-half tech roll out?

Mike Cotoia -- Chief Executive Officer

We're shooting to have this ready for the first half of 2020. January.

Marco Rodriguez -- Stonegate Capital Markets -- Analyst

Got you, OK. And then on the Priority Engine, the enterprise priority engine, to kind of borrow your phrase there, these additional enhancements that you're probably consistently adding to that particular product line, are you using those enhancements to increase pricing? Or is this more of enhancements that drive the product to make it look more attractive to acquire?

Mike Cotoia -- Chief Executive Officer

Well, the real focus on our enhancements are probably two-fold, right? It's really important for us to be able to show our customers transparency and attribution. So I mentioned earlier that we can provide -- Priority Engine provides all the intent signals that we're delivering that we -- from our owned and operated sites. We can identify those folks that are in Priority Engine, those active prospects who have also engaged with our customers' content, who have engaged or view their website, who have clicked on their banners. And to be able to triangulate that and to show our customers that your content marketing and your Priority Engine efforts, which are bought in an integrated basis, working and supporting each other, makes those customers stick and allows us to grow those customers on that end.

As we see that, we believe we have pricing power. We've had a couple pricing increases year over year, and we believe we're in the best position to deliver real and observed purchase intent, make it very clear who's in market, by which technology segment, by which region and help our customers rank, prioritize and mobilize their sales and marketing efforts again. We hope that that creates some pricing leverage. So...

Marco Rodriguez -- Stonegate Capital Markets -- Analyst

Got you. And last quick question on cash flows and your priorities for the remainder of fiscal '19 and as you move into fiscal '20. Just trying to get a little bit better sense as far as your capital allocation priorities between reduction of debt, additional stock buybacks and further investments into the company.

Mike Cotoia -- Chief Executive Officer

Yes, I mean I will chime in on this and I'll have Greg or Dan also look in. We're going to continue with our capital investments. I mean, they're fairly modest and consistent year over year. We have a 10b5-1 where we are -- we are in the market for buybacks.

And if we see opportunistic opportunities to invest in other areas within the company and outside the company, we'll look to do that. We think we do a good job of managing our cash. We will pay down some of the debt which we had, we took on a couple of years ago to really be the catalyst for the buyback. And we'll continue to be financially responsible around the way we leverage the cash.

Marco Rodriguez -- Stonegate Capital Markets -- Analyst

Got it. Thanks a lot guys, I appreciate your time.

Mike Cotoia -- Chief Executive Officer

Thank you.

Operator

Our final question today comes from Ryan Meyers with Lake Street Capital Markets. Please go ahead.

Ryan Meyers -- Lake Street Capital Markets -- Analyst

Hi guys. This is Ryan Meyers stepping in for Eric Martinuzzi here. Thanks for taking my questions. First question, can you give us some color on the demand you expect to see from your 10 largest customers in the back half of 2019?

Mike Cotoia -- Chief Executive Officer

Yes. You know, I think it's going to be fairly consistent with what we've seen in the first half of 2019. You might see a little bit -- Q3 is never a -- we've been in business for 20 years. Q3 is never a quarter that you make hay in, right? Because there's a lot of the summer months, these Internet, these large global accounts have offices throughout Europe and Asia, North America, and you really start seeing them pick up in September and October, heading into the last quarter of the calendar.

I would say they're fairly consistent. We're in every one of the accounts. I think every one of those accounts that deal with international business are dealing and taking a fairly cautious approach because of the tariff and trade talks. And as I mentioned earlier, it's been very important and we're very fortunate as a business that we are less reliant on those top 10 global accounts quarter in and quarter out.

If you look back on our business three or four years ago, between 40% and 45% of our business was derived from those accounts. So if they were down a little bit or they were flat and we didn't -- that would really impact us. Today, we have a very well balance and I would almost say describe it as a bell shaped curve where roughly 25% of our business is coming from those top 10, roughly 50% of the business is coming from the next 100 accounts, and approximately the remaining 25% is coming from the remainder of the accounts. So I don't project anything that's going to be a huge vertical leaps in terms of improvement or declines with the top 10 global, and that's projected and issued in our forecast and our projections.

Dan Noreck -- Chief Financial Officer

And we don't really count on those global 10 accounts for growth, right? The growth is really coming from the mid-sized companies and the smaller companies that are in the fastest-growing parts of the IP market. And as Mike said, we're less reliant than ever before. So that's really no change there, but that's kind of been the status quo for the last three quarters with the global 10 accounts.

Ryan Meyers -- Lake Street Capital Markets -- Analyst

OK, great. And then just one more from me. So your organic traffic declined 13%, but the revenue was up 9%. Can you talk a little bit about what was behind that traffic decline?

Mike Cotoia -- Chief Executive Officer

Yes. I mean, so when you take a look at the traffic decline, we do not have a direct correlation between our revenue and traffic. Now we take a look at our content that we produce on our sites. And obviously, Google will reward you if you do not member-protect or gate the content.

They want free access to everybody, and that will drive page views up and go from there. But as we mentioned earlier, only approximately 15% of our revenue is really derived from page views and traffic. That would be considered our branding revenue. We as an organization always evaluate how much content we want to protect.

And when I mean protect, when an end user comes in, they need to opt in and they need to register. And when they register, we now capture their purchase intent behavior, their insights that we monetize across the other 85% of the business. So if traffic is down 10%, 13% of pages, it's not keeping me up at night. We have plenty of traffic to address and fulfill the revenue needs, the demand needs, based on the branding product line.

Ryan Meyers -- Lake Street Capital Markets -- Analyst

Great, thanks. That's all for me.

Mike Cotoia -- Chief Executive Officer

Thank you.

Operator

[Operator signoff]

Duration: 25 minutes

Call participants:

Charlie Rennick -- Secretary, Vice President and General Counsel

Greg Strakosch -- Executive Chairman

Aaron Kessler -- Raymond James -- Analyst

Mike Cotoia -- Chief Executive Officer

Mike Maloof -- Craig-Hallum Capital Group LLC -- Analyst

Marco Rodriguez -- Stonegate Capital Markets -- Analyst

Ryan Meyers -- Lake Street Capital Markets -- Analyst

Dan Noreck -- Chief Financial Officer

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