Bob Kellegrew - Gregory Strakosch - Co-Founder, Chairman and Chief Executive Officer Janice Kelliher - Chief Financial Officer, Principal Accounting Officer and Treasurer.

Kerry K. Rice - Needham & Company, LLC, Research Division Brian J. Pitz - Jefferies LLC, Research Division Michael Fawzy Malouf - Craig-Hallum Capital Group LLC, Research Division Marco Rodriguez - Stonegate Securities Inc., Research Division.

Good afternoon, and welcome to the TechTarget Third Quarter 2014 Earnings Conference Call. [Operator Instructions] Joining us today is Bob Kellegrew, General Counsel, who will begin with a forward-looking statement. He will then turn the call over to Greg Strakosch, CEO, who will make some opening remarks.

After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Bob Kellegrew. Please go ahead, sir..

Mike Cotoia, our Chief Operating Officer; Janice Kelliher, our Chief Financial Officer; and Kevin Beam, our President. And I'll now turn the call over to Greg..

Thanks, Bob. We're pleased that our online revenues were up 29% in the quarter. We continue to see strength in our 2 major areas of investments, Direct International Operations and IT Deal Alert.

Based on our results for the first 9 months, combined with our Q4 guidance that we're issuing today, we are revising our 2014 revenue forecast to be between $104 million and $105 million. We are raising our adjusted EBITDA forecast to be between $19 million and $20 million for 2014. I will now open the call to questions..

[Operator Instructions] And our first question comes from Kerry Rice of Needham..

Great quarter. Maybe just some more details around IT Deal Alert. I know that you said in your press release 175 customers -- I think. That's up from 150 last quarter. Can you talk maybe a little bit about our renewal rate and if you're seeing customers come back and order multiple segments on those renewal rates? That's the first question.

The second question is, maybe more color around international growth outside IT Deal Alert, particularly, as it relates to your launch in Continental Europe and Asia Pacific?.

So our renewal rate, as it says in the letter for the Top 100 customers continue to be in the neighborhood of 75%, which we think is very good for a new product as customers are continuing to test. The customers that are renewing, we're having good success with that. And the revenue renewal rate was in excess of 200%, again, in the quarter.

So we continue to get very positive feedback from our customers about IT Deal Alert, and that's reflected in the revenue growth. In terms of international non-IT Deal Alert, that continues to go very well. And the biggest growth is as you would expect is coming from our newest geographies.

So in Europe, we've been direct in France for about 2 years and less than 2 years in Germany. We're seeing very good growth in both of those areas. As well as APAC, we do a lot of regional sales out of our Singapore office. It covers Australia and China, where we both have direct -- where we have direct operations as well.

So we continue to see growth -- good growth in all of those geographies and good growth in the U.K. as well where we've been the longest. And we still believe we have a lot of runway there. It's approximately 32% of revenues right now. But it represents more than 50% of the IT spend.

So we expect to continue to see that share of international revenues grow..

And maybe just a follow-up with that, the question is a little confusing. I know you launched IT Deal Alert, I think, in Continental Europe and Asia just recently.

Any kind of early indications of uptick there?.

Yes. So we are -- we launched IT Deal Alert in Asia this quarter. The Continental Europe will be -- we've been selling it in English-speaking, in Europe. But the new launch this quarter was APAC. And yes, we had good uptick with, many customers are testing it right now. So it's -- we start really selling that in mid-quarter.

But we're definitely happy with the number of customers that tried it. And we'll expect to see that grow each quarter as we go forward..

The next question comes from Brian Pitz of Jefferies..

A couple of questions. Greg, on Account Watch, we're hoping you could give us some more color on the progress you're seeing in terms of the rollout there. Are you seeing customers using both QSOs and Account Watch? And then, I'll have a couple of follow-ups, too..

Yes. So Account Watch is still very early days in our rollout. And I would say most of the customers that are using Account Watch or using Qualified Sales Opportunities were happy with it and want to get more depth with that. So we're pleased with how that's going. Almost, most of the revenue is IT Deal Alert, at this point.

But we think that Account Watch can be -- will be a meaningful contributor to revenue in 2015..

Greg, then maybe a bit of follow-up to the previous questions on the revenue renewals.

Curious, how many of your IT Deal Alert clients are paying for multiple categories? Are the larger clients, the guys who are exposed to 60-plus categories, are they ramping up to 10 categories plus? Or is it the renewal rate, you mentioned it's good, is it more than expanding into more into the current categories you're using?.

Yes. So the way it works is, we have very specific -- within IT Deal Alert, we assist 60 specific categories. So most of the growth on the revenue renewal rate is customers adding additional categories..

Got it. And then, one quick one on IT Deal Alert, thinking about this and being used in the reseller channel.

How big is the opportunity there on the timing here? When should we start to see resellers really start ramping in terms of using Deal Alert?.

It's a -- that's a gradual process. We're seeing good progress with it. We started a dedicated sales team into the reseller community over the summer. And so that's a place that we've done some business with historically.

But a lot of those relationships that we're developing now are newer than the relationships we've had with software developers and hardware manufacturers. So we're seeing that in 2 different places. We're seeing some of our OEM customers by IT Deal Alert and distribute them to their channel partners.

And then, we are also seeing channel partners buy them directly from us. And the nice dynamic in both those situations is they're being paid with MDF dollars, which from the OEM perspective, those are already committed dollars. So they're happy to spend them on something that provides good ROI.

And from the resellers, they get reimbursed with MDF dollars. So obviously, that's a good thing that they like to do as well. So we continue to think that, that's a new budget opportunity for us that we haven't previously penetrated very much. And we're on plan where we expect to be with that..

And next we have a question from Mike Malouf of Craig-Hallum Capital Group..

Great quarter. I'm wondering that can you talk a little bit about the domestic online revenue? I know that it seems to be pretty stable there. But where was it kind of relative to last year, when you just look at specifically domestic? I know that if you take a look at, say IBM's results recently they were pretty weak.

And I'm wondering if you can comment a little bit on that, how businesses, right now does it feel like it's still stable, like it has been for the last couple of quarters?.

Yes, so in terms of the domestic core revenue taking out IT Deal Alert in North America that was up 1% in the quarter versus last year. So obviously, modest growth, but it's a return to growth, which is nice compared to what we've been seeing. And then, when you add in IT Deal Alert revenues into North America, North America revenue was up 28%.

Very good performance by our North American sales team. In terms of the macro, a lot of our customers continue to be revenue challenged, as everyone knows CapEx spending continues to be depressed and that, obviously, affects IT spending and that affects our customers. So I would say that we haven't really seen -- we haven't seen any near-term change.

We've kind of been operating in this kind of environment where customers are revenue challenged. They are very conservative with their marketing budgets. But it's been that way for several quarters. So I wouldn't say that we've really seen any sort of material change there..

Okay. And then just a kind of a granular question. Sales and marketing were up quite a bit sequentially.

Is that just number that kind of bounces around a bit? Or is that 41.5% that we're -- at a normal level?.

I'll let Janice comment on the percentages. But the one thing I'll say is, in the quarter, in June, we added a new sales training class of 20 people. And so that is a Q3 expense, it wasn't a Q2 expense..

Yes. And then the additional piece is really the variable cost piece relating to the additional revenue..

And the next question comes from Marco Rodriguez of Stonegate Securities..

I wanted to kind of talk a little bit more here about IT Deal Alert and your answer to one of the first questions, on the renewal rates. It seemed like pretty healthy renewal rates here for your Top 100.

I was just wondering is there some things you've learned through the process here thus far that maybe you weren't doing a certain few things correct from the sales standpoint and how you might have adjusted that?.

Yes, so one of the factors is, how our customers execute on the opportunities that were delivering.

And so the best practices that we've seen is where our customers take these opportunities and they either give them to their channel partners to follow-up on, they give it to outside field sales reps to follow-up on, or they give it to a dedicated inside team of people that have been specifically trained to understand how these opportunities are unique from anything else that they're being provided.

And then, in turn of what we've seen is kind of not a great practice, is when these opportunities are just turned over to the normal inside sales team and are treated similar to other leads that they might get be white paper downloads or webcast downloads, or someone that visited a trade show booth, et cetera.

So what we have changed is our whole kickoff process, where before we'll deliver the opportunities to a customer, we have a kickoff call and the sales manager that's responsible following up on the opportunities is present in that call.

So we can really coach them on what the best practices are and how important it is if these get put into the right-hand. And they're very open to that because these are premium priced and they want to get a good ROI on them. But that's definitely something that -- that we've learnt during the course of this year.

And its something that we continue to work on. And really, our success is really relying on how well our customers execute on the opportunities that we give them. So we have a very significant vested interest in making sure that goes as well as it can..

Got it. That's helpful. And then kind of in the same line on the Account Watch, I understand, obviously, it's still pretty early days, maybe 7 to 8 months of sales share.

But can you kind of share some sort of color on the feedback you're receiving from customers? And then, also, what sort of success have you had on up selling, if you will that the QOS guys to the Account Watch?.

So feedback on Account Watch is customers really like the integration with Salesforce.com. They like that we can show the activity on any accounts, any prospects that they have in their prospect and customer database. So very, very positive with the concept. And the early customers that have used it had good success.

And there's definitely a lot of learning going on there on how marketing teams can use this data, how sales teams can use this data. Our customers are doing a lot of different innovative things once they get their hands on the data.

And yes -- so we are, primarily, selling Account Watch to customers that have already used qualified sales opportunity because they've already understand that this data is highly accurate, it's very predictive.

And we can really get our hands around active opportunities that we didn't know about or get more information about the opportunities that we did know about. So where -- qualified sales opportunity could be somewhere between 75 and 150 opportunities per quarter in a specific segment.

Account Watch will give data anywhere from 2,000 to 5,000 accounts in a quarter. So, definitely, value proposition is very strong. On Account Watch, there's definitely -- the sales cycle is longer than qualified sales opportunities because you have the Salesforce.com integration, which takes time in this business, extra people that we need to talk to.

And also, there is a use case for marketing as a use case for sales. So having a lot of conversations with sales and market departments about where it should reside? Who should the ownership be? What budget it comes out of? Where qualified sales opportunity is a quicker sales cycle because its very cut and dry.

It's very clearly -- it's coming out of the sales enabling budgets coming out of channel budges, it's very sales oriented..

Got it. And one last quick question here, if I might. From a gross margin perspective, over the last 3 quarters, you've been trending much better than last year's performance.

Can you talk a little bit about the drivers that are behind that year-over-year improvement?.

Yes, I mean, the main driver is revenue. It is basically, that's very little cost of sales. It doesn't cost as more money to sell another additional segment of IT Deal Alert or to put up more banner adds or to post more white papers. So basically, the way to think about it is really a fixed cost expense model. And then, revenue above that is profit.

So as we grow the revenue, expenses are growing slower than revenue, so it increases gross margin. Also, with the EBITDA margin, you see with the high incremental margin, so that's why we -- as you know, we have a target EBITDA -- incremental EBITDA margin on an annual basis of 50% to 60% of revenue..

And our next question will come from [indiscernible] Capital..

Just a quick question about the -- on the IT Deal Alert space, you have a 100 -- over 175 customers. Just trying to better understand the makeup of those customers.

So the question is, of those customers, how many would you put in the category of diversified technology companies, where we have 7 or more segments you could sell into in the future, companies that are smaller that might only have 1 or handful segments?.

Yes, I mean, it's a mix. So we have the way we think about how we segment the market, we've got about 12 to 15 customers, they compete in most of the segments that we operate in. There are approximately 150 customers that operate -- compete in maybe 5 to 10 segments. And then, another 700 or 800 customers that would be in 1 or 2 segments.

About -- in overall -- in general about 40% of our revenue is from the -- those 12 to 15 very large customers. About 40% of our revenue is from mid-market customers and then 20% is the other VC backed customers. So I think that our revenue for IT Deal Alert would be similar to our overall revenue mix..

Got it. Okay, fine. So you're not 100% sure, but you're just summarizing that. Fair enough..

Yes, I mean, it's generally. I mean, that's not a way I analyze the revenue from that specific way. But generally, I'm pretty confident that it falls in that -- those types of buckets..

Okay. And just to get hopefully better traction going forward with the new customers.

To what degree you have been able to get customers to agree to give you enough information, so that you'd actually have more case studies that you can publicize to really make the ROI that much more clear to prospects?.

Yes, I mean, that's always challenging. I mean, that's the thing we always try for, but the IT industry is so competitive. Customers don't really want to get up on the mountain top and shout about what strategies are working best for them.

So we do that, but more of it is under the covers, where people will take a reference call from 2 or 3 customers and -- versus having a public case study that gets posted for everyone to see, although we do have some customers that are willing to do that. And it's obviously an effort that we'll continue working on..

This concludes our question-and-answer session. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect..