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TechTarget (NASDAQ:TTGT)
Q4 2019 Earnings Call
Feb 12, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, and welcome to the TechTarget fourth-quarter and full-year 2019 earnings release conference call. [Operator instructions] Please note this event is being recorded. I would now like to turn the conference over to Charles Rennick, vice president and general counsel. Please go ahead.

Charles Rennick -- Vice President and General Counsel

Thank you, Jason, and good afternoon. Joining me here today are Greg Strakosch, our executive chairman; Mike Cotoia, our chief executive officer; and Dan Noreck, our chief financial officer. Before turning the call over to Greg, I want to remind everyone on the call of our earnings release process. As previously announced, in order to provide you with an update on the business in advance of the call, we've 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 Strakosch -- Executive Chairman

Great. Thank you, Charlie. We had a very strong Q4, capping off the most successful year in the company's 20-year history. We have successfully transitioned the business from selling quarterly marketing campaigns to establishing ourselves as the leading provider of purchase intent data that IT vendors have integrated into their workflow to power their sales and marketing outreach.

This transition has resulted in TechTarget enjoying record revenues, profits, margins, and cash flow. For Q4 2019, revenue grew 13% to $35.9 million. Adjusted EBITDA grew 41% to $11.8 million. Adjusted EBITDA margin was 33% versus 26% in Q4 '18.

Priority Engine revenues grew 27%. Long-term contracts represented 35% of revenue in Q4 '19, up from 33% in Q4 '18. For the full-year 2019, revenue grew 10% to $134 million. Adjusted EBITDA grew 39% to $41.9 million.

Adjusted EBITDA margin was 31% in 2019 versus 25% in 2018. Gross margin was 76% same as last year. Incremental EBITDA margin was 92% in 2019. And adjusted free cash flow was $32 million representing 76% of adjusted EBITDA.

2019 was a breakthrough year for the company, and we have good momentum going into 2020. Our 2020 priorities are to continue to improve our product offerings, have a successful launch of Priority Engine Express and to continue to expand margins. I will now open the call to questions.

Questions & Answers:


Operator

[Operator instructions] First question comes from Aaron Kessler from Raymond James. Please go ahead.

Aaron Kessler -- Raymond James -- Analyst

Great. Thanks, guys. I think you referenced in this script kind of your vast majority as kind of first-party cookies. Maybe if you can just expand on that, kind of any exposure to third-party cookies.

It doesn't seem like much at all. And then secondly, just how should we think about kind of the incremental EBITDA margins in 2020 here? I mean, it seems like a little less versus 2019. Obviously, 2019 was a great year from an incremental EBITDA margin perspective. Maybe just talk a little bit about some of the investments you're thinking around 2020 as well.

Thank you. 

Mike Cotoia -- Chief Executive Officer

Great. In terms of the Google and the third party, they announced that they're going to be phasing away from cookies. And so vendors outside of TechTarget and publishers that rely on third-party data pools are going to have a challenge, we believe, over the next year and a half to two years as Google continues to phase that out. That's one of the reasons why we've built a very -- what I would call a competitive advantage by owning and operating our sites, not outsourcing to third-party cookies, third-party cookie pools and really focused on first-party data.

We do have some revenue. It's a very immaterial amount of revenue that's derived from leveraging some of those third-party outside networks. But if you take a look at our overall revenue in terms of how we recognize around brand and demand in our integrated programs, 15% of our overall revenue was attributed to our branding products, which is primarily online advertising that we -- online branding through our owned and operated sites. And a very small portion of that come from outside the network.

So we feel we're in a pretty good position on that front.

Greg Strakosch -- Executive Chairman

And we don't use any third-party cookies for our purchase intent data. All the purchase intent data is first party.

Aaron Kessler -- Raymond James -- Analyst

Got it. Great. And then on the second -- on the incremental margins?

Mike Cotoia -- Chief Executive Officer

Yes. On your second question, throughout 2019, we invested a lot of effort into Priority Engine, so we were able to start capitalizing a little bit more in a software development piece. We also had some onetime tax gains throughout the year. And I'd really generalize 2019.

It was a year that everything that could go right, would continue to go right, went right for us, so that's great to have. We are focusing our investments in 2020, continued focus on the Priority Engine platform and really focusing on a lot of the sales use cases that we're seeing our customers have. So we want to work on integrations with sales force, we want to make sure we're investing on the product, so we can show better attribution within our customer sales force database. And we want to make sure that we can create some enhanced products to make the product extremely, extremely easy for sales teams to use.

We're going to also continue to invest in our customer success teams through technology and people, so we can manage and monitor and track the success that our customers are having with engagement within Priority Engine because that's very important to be able to track that. And that continues to take investment, again, both on the people side, as well as on the technology side. And if you look back historically, we've typically guided to and projected and forecasted 50% plus incremental EBITDA margin. We're going to continue to do that.

I hope that we continue to beat and exceed that, but that's consistent with historical levels.

Aaron Kessler -- Raymond James -- Analyst

Great. Thank you, guys. I'll come back in the queue.

Operator

The next question comes from Eric Martinuzzi from Lake Street. Please go ahead.

Eric Martinuzzi -- Lake Street Capital Markets -- Analyst

Yes. I had a question about 2020 revenue outlook. Obviously, the guidance comes out to about 10% on the top line. I wanted to get your perspective on what could cause that to maybe come up short.

If we wind up at 8% when all is said and done and then take me to a more rose-colored glasses scenario where maybe it's 12%, 13% growth in 2020, press out a little bit further in both directions for me, if you would.

Mike Cotoia -- Chief Executive Officer

Sure, Eric. I think we're tightly aligned to IT spending, right? So we are very aligned, our business is very aligned to the enterprise IT spending in the market. We obviously grew the business. Our revenue growth exceeded the IT spending projections in 2019.

And if IT spending continues to grow and do extremely well, budgets for our customers will continue to grow and do well. And they want to capture more market share and drive more revenue and hit new targets. That will be very positive for us. And then the line that will be positive for us is the adoption and implementation of our Priority Engine Express into that SMB market.

As I recall, that's the lower end product of Priority Engine. We saw it at a typically about one-third price of the average price for Priority Engine standard subscription models. We feel that there's a big opportunity in the SMB market. Now, on the flip side, the IT spending declines, or there's a pullback in it, or there's massive trade wars or tariffs.

That always has a macro impact and has an impact on us because it has an impact on our customers. So Greg, is there anything you want to add on there?

Greg Strakosch -- Executive Chairman

Yes. I mean, there's one more thing I would add on the upside is, our customers are in the early innings of this major transition to becoming data-driven sales and marketing organizations. And our customers are in the process of optimizing their systems and their processes to take advantage of this purchase intent data, and we've seen customers that have done this well have outsize ROI, and we've seen them really increase their investment in our data. And that's why we've made such a big investment in customer success.

So I would say if we continue to do -- if we can do a good job there, that's another place where we could see upside as our customers adopt more data as they execute well and measure their results.

Eric Martinuzzi -- Lake Street Capital Markets -- Analyst

OK. You mentioned in the shareholder letter about seeing a little bit increased level of interest in pursuing M&A. Just wondering, are you seeing is it people approaching you with maybe noncore/distressed assets? Or is it more kind of tuck-ins, VCs unable to gain scale, decent content but no scale? What's showing up in the prospects list?

Mike Cotoia -- Chief Executive Officer

Yes. We're having people that are approaching us, companies that have tech communities that are what I would classify more of as a tuck-in, and we want to make sure that that aligns well with our overall goals and objectives as a company. We look at sites that might not have been well monetized and well managed, but they have a good community of enterprise IT in line of business users, aligned to a specific market. That is very attractive to us, and I would say, over the last six to nine months, we've been approached several times.

We want to make sure on a couple of things. It makes sense for the business, and it's a valuable tuck-in that we're going to be able to get more intense signals. We want to make sure that those intense signals can help enable and empower our Priority Engine investments. We look at things that are also, I said, not managed in accordance with what we would see them to be managed in and there's operational efficiencies to be had.

And then we look for any complementary revenue opportunities with that. What we won't do is take a look at something to make an acquisition that's disruptive against the organic momentum and throw us off track, so we're very careful on that. We do get approached quite a bit. We've had more companies approach it.

So we look at the right balance across the revenue mix, the community mix and the intent signal mix.

Greg Strakosch -- Executive Chairman

And so, Eric, your question about distress, we don't buy distressed properties. So there's other companies that that's part of their strategy. We're looking for things that are high-quality and that we think, and as Mike said, we can use our scale to monetize it better or it will contribute product-wise, but we're not really shopping for distressed properties.

Eric Martinuzzi -- Lake Street Capital Markets -- Analyst

OK. Good. Congrats on the quarter and the good outlook. Thanks.

Greg Strakosch -- Executive Chairman

Thank you.

Operator

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

Marco Rodriguez -- Stonegate Capital Markets -- Analyst

Good afternoon, guys. Thanks for taking my questions. I was wondering if maybe you can talk a little bit more about your product road map for 2020. If you could, perhaps, just talk about those particular new features, kind of a road map as far as when you expect to kind of release them.

And then is there going to be an incremental spend, or is that just something that will be expensed as you go along.

Mike Cotoia -- Chief Executive Officer

Great. Yes, Mark, historically, we've done several product releases throughout the year. And over the last couple of years, what we've done is try to do -- continuously adding on new features and functionality that we can put into the product and get it into -- for our customers. So I'd say a big focus for 2020 and beyond for Priority Engine is putting some of our development efforts into the sales use cases for Priority Engine.

We have a very strong relationship with the marketing departments within our organizations. They know how to use our integrated campaigns. They know how to use our intent data, our branding, our lead gen content marketing efforts, you name it. And they use that really well for ABM marketing strategies or multi-touch nurture campaigns or adding on and building up their database builds and messaging, contextually aligning their messaging with our most appropriate editorial sites.

That's a good thing. However, a lot of the data that the marketing departments have been buying from us have been going down to their sales teams. And their inside sales teams and BDRs and outside sales teams have a tighter alignment to marketing, where they're leveraging what marketing is producing and throwing and generating for them to help them grow their own pipeline and work in their own territories and drive their own revenue. And we've seen a lot of successful sales use cases.

And remember, when we first got into this, it was really focused on the marketing use cases. We watched this transition where sales teams within our client environment are seeing and leveraging the data that we're providing through Priority Engine and the integrated subscription, some of them with wild success. So we want to focus a lot of our product efforts to drive more successful sales use cases. When the sales teams that use our data use it the right way, they win, and when they don't, they miss a really big opportunity.

So we're going to be focusing a lot of our efforts on that. We want to make sure that we have tied integration into our client sales force. Today, we do a widget plugin, and we're going to be looking more to do of a connect app so that we can leverage the data that our customers, sellers have within their own territory database, along with what we can deliver in Priority Engine and be able to provide more ROI metrics and attribution. And then lastly, a key focus for our product development road map has got to be ease of use.

We need to make it easy for sales folks to not only use the product but know how to use it and be identified when to use the product. Sales teams get very busy, and they focus on -- they have a territory, their account territory. They're focused on different deals. We want these sales folks to be in the platform every day and every week.

We want to make sure that we can help alert them to not only enter the platform but to go to these accounts within their territory or their patch for these specific reasons to engage and, hopefully, drive new revenue opportunities. For example, a couple of weeks ago, we launched our email sales alerts. And we now can focus and reach out through email directly to sales reps that are signed up for Priority Engine to let them know, "Hey, right now, these three accounts in your region or in your territory have these reasons to call based on the intent signals that TechTarget has captured this week." Also not only within the account at the individual prospect level. We can let them know, "John Smith is now starting to look at your content," or possibly worse, "John Smith is looking at your competitors' content." You need to reengage and get back in the Priority Engine.

So with the click of a link, they're viewing those accounts and those people that are -- we're telling them that it's relevant and it's important for you to go after today. So that's a really big opportunity for us because this is a newer type of constituency for us because we've historically been focused on the marketing folks, and this is a good opportunity on sales and getting sales adoption and sales growth. The second part of that question, in terms of the expenses, these are baked in, in terms of 2020 budget. We have head count.

We have technology that we're looking at to build and add on into the Priority Engine development, as well as some of the other areas that I spoke about earlier, and we've built that into the annual and quarterly numbers.

Marco Rodriguez -- Stonegate Capital Markets -- Analyst

Understood. On Priority Engine Express, can you maybe talk a little bit about what that margin profile looks for that particular offering versus the enterprise version, if you will? And if maybe you can share with us if you have any sort of expectations or goals or markers that we can kind of take a look at as that product gets fully launched here in fiscal '20.

Mike Cotoia -- Chief Executive Officer

Yeah. So just as a reminder, the Priority Engine Express, this is our lower-end Priority Engine subscription offering, and it's geared toward SMB, SMB accounts and regional resellers. We have dedicated reps selling that. They started selling Priority Engine express in the second half of 2019, and the price of that is roughly one-third the price of a standard Priority Engine deal.

The other thing I'd tell you on that is more color. 100% of Priority Engine Express subscriptions are annual subscriptions, so those cannot be sold quarterly and those were all annual subscriptions. In terms of the margin profile, it's the same margin profile. Because we're leveraging all the same intent data that we have, the power is our entire universe of product and solution offerings.

The only difference on it is the pricing and some of the features and functionality that we don't allow and put in into the Priority Engine Express that we have in the other offerings. And can you repeat the second question that you had on that?

Marco Rodriguez -- Stonegate Capital Markets -- Analyst

Yes. Just wondering if you have any sort of goals or metrics that we can kind of follow along as you progress in fiscal '20 with the full launch.

Mike Cotoia -- Chief Executive Officer

Thanks. We don't break out the individual products. I mean, we do bake it in as part of our overall Priority Engine numbers, and we do report on the Priority Engine numbers. I could tell you that we've seen some good adoption.

We're happy with where we're at, and we're continuously focused on this area, too, because we believe it's just an untapped opportunity with a lot of greenfield with a lot of smaller-size companies that we've really never had a product offering that really aligned well for those folks. So I would answer that question that it's baked into the overall Priority Engine number.

Marco Rodriguez -- Stonegate Capital Markets -- Analyst

Got it. And just last quick kind of a housekeeping item. I don't know if I missed it in the shareholder letter, but do you have the revenue figures for the regions for Q4 for North America and international?

Charles Rennick -- Vice President and General Counsel

That'll be in the Q.

Marco Rodriguez -- Stonegate Capital Markets -- Analyst

OK. Great. Thanks.

Operator

[Operator signoff]

Duration: 23 minutes

Call participants:

Charles Rennick -- Vice President and General Counsel

Greg Strakosch -- Executive Chairman

Aaron Kessler -- Raymond James -- Analyst

Mike Cotoia -- Chief Executive Officer

Eric Martinuzzi -- Lake Street Capital Markets -- Analyst

Marco Rodriguez -- Stonegate Capital Markets -- Analyst

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