Greg Strakosch - Chairman, Chief Executive Officer, Co-Founder Kevin Beam - President Mike Cotoia - Chief Operating Officer Janice Kelliher - Chief Financial Officer Jane Freedman - Vice President, General Counsel.

Kerry Rice - Needham Brian Pitz - Jefferies Eric Martinuzzi - Lake Street Capital Markets Louie Toma - Craig Hallum Capital Group Tommy Moll - Stephens.

Good day, and welcome to the TechTarget Incorporated, Third Quarter 2015 Earnings Release Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions]. Please note that this event is being recorded. I would now like to turn the conference over to Jane Freedman, General Counsel. Please go ahead. .

On the call today, in addition to Greg we have Kevin Beam, our President; Mike Cotoia, our Chief Operating Officer; and Janice Kelliher, our Chief Financial Officer. During this call, any statements made by TechTarget that are not factual may be considered forward-looking statements.

These statements are based on assumptions and are not guarantees of future performance. Our actual results may differ materially from expectations. Please refer to our risk factors and other factors in our annual and quarterly reports filed with the SEC.

In addition, the forward-looking statements speak only as of the date of this call and we undertake no obligation to update these statements. Also during this call, we may 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..

Great, thanks Jane. Despite a very challenging environment for many of our largest customers, we were able to deliver 12% online revenue growth, 40% adjusted EBITDA growth, 74% online gross margins and adjusted EBITDA was 24% of revenue.

We believe that these solid results in a flat budget environment are driven by the effectiveness of our innovative marketing solutions and our rapidly growing IT Deal Alert offering. It is a period of great uncertainty for many of the world’s largest technology companies. The strong U.S. dollar is a significant headwind for U.S.-based global companies.

This impacts our customers’ short term spending patterns with us. While dealing with this volatility in the short term, we are very focused on the large long term opportunity as our customers continue their migration to becoming data driven sales and marketing organizations.

Our customers are increasingly reliant on our proprietary purchase intent data to become more efficient and to grow their revenue and market share. In regards to 2016, our outlook is for double digit revenue growth and adjusted EBITDA growth of approximately 25%.

Based on our current execution and optimism about the future prospects combined with what we consider an attractive valuation of our stock, we continue to purchase shares under our stock repurchase plan. I will now open up the call to questions. .

Thank you. [Operator Instructions]. The first question comes from Kerry Rice of Needham. Please go ahead..

Thanks a lot. Maybe a couple of questions on the outlook and then maybe a kind of a broader question. So in Q4 if we start to kind of back out kind of what you said in the press release, there seems to be around the online segment about a $3.6 million short fall from our consensus.

There is about a $2 million potential revenue impact with regarding to maybe the budget flush, which leaves about $1.6 million kind of in the shortfall. How much we did there would you say was related to FX? Is that all FX related? Is it some slowdown in international or how would you kind of put that in context.

And then on the 2016 revenue growth, you say double digits so I’m assuming that’s somewhere between I guess 10% and maybe 13%. Is that fair, what you mean by double digits. Thanks. .

Yes. So in terms of the FX context, if you look at the large global IT companies and the results, they are having significant revenue declines, which causes them to cut back on expenses to maintain their profitability.

So if you look at the companies that revenues are declining, in some cases more than $2 billion in a specific quarter and if you look at their releases, they specifically are talking about how FX is going to – significant headwinds for them. And then on the cost side, wherever, if the revenue was weak in the U.S.

or revenues was weak internationally, they are doing it on a consolidated basis, so they are cutting expenses across this board.

So I think that that’s a significant factor for the companies that have a lot of their revenue coming intentionally, and you can basically, when you read any of the big global IT companies earnings reports, that’s a central theme.

In terms of 2016, yes that’s generally where we are somewhere between 10% or 13% revenue growth I think is a fair interpretation of that. .

Okay, and then just one follow-up and I don’t know if this – I’m just trying to get the impact of this.

Is the Dell, EMC merger, do you think that or Dell acquiring EMC, do you think that’s going to be impactful or what do you think the impact is to you guys?.

Well, Dell and EMC are both large customers of ours as is the VMware. So anytime you have large companies looking at a big corporate transaction like that, it tends to take a lot of attention, a lot of focus. There is often changes in budgets, changes in organizations as people prepare for that.

So in the long term I think that that merger if it goes through will be very good for us, but in the short term I’ve expected that would change short term marketing plans.

And in addition to EMC, Dell and VMware were three of our largest customers, two of our other large customers, HP and Symantec are in the middle of splitting into multiple companies. So there is a lot of reorganizations going on as you expect in those business as well.

So those are very short term, but those are – that’s the reality of the situation we are in today..

Good. Thank you. .

You’re welcome. .

The next question comes from Brian Pitz of Jefferies. Please go ahead. .

Great, thanks for the questions. Greg you launched Click-IQ in October. Can you give us additional color around that product given that it’s involved in the banner world which is currency facing a fair amount of headwinds.

How do you think about the importance of banner ads in your overall core online units? And then separately, TechTarget Research also launched during this past Q.

How are the initial reactions levels of interest been for the product? Any takeaways you could share with us on vendor customers purchasing the product and how has the initial interest been for the new investor clients overall. Thanks..

Yes, good. So in terms of banner ads, banner is one of the places where the large, our largest global customers tend to spend. So some of these headwind issues we could potentially – we are facing. But in terms of our business in terms of banners, we benefit from scarcity of inventory. So it’s very different from the consumer banner industry.

We have very premium prices and Chick-IQ is a very innovative product where we are basically able to identify for our customers which companies actually view their ads. So all of our customers are very focused on being able to measure the marketing investments, as much as possible and this product really helps them do that even more.

So it’s again everything that we are doing with all of our lead gen, our branding or everything we are doing, we are talking advantage of this tremendous amount of purchase intent data that we have, which is a good segway into the research business, because that is also taking advantage of this unique situation that we have with all this purchase intent information.

So we released a preliminary report on the flash storage market last quarter. We got a lot of good interest from that. It opened a lot of doors for conversations. We got our first few orders in the door. We hired a couple of sales reps on the vendor side. We are talking to a lot of investors as well.

On the investor side, as you imagine, the more historical data that we have the more valuable the data becomes, so they can see patterns over time, whereas the vendors, the historical data is not as importance to him as to what’s happening right now. So good progress on both fronts, both with the vendors and investors.

And the feedback that we continue – we pretty consistently are getting is that the research data that we have on this post deal results is very unique. No one else is doing it, no one else is really in a position to do it, and will be very valuable to both vendors and investors. .

Hey Greg, just a quick follow-up on a different direction. Just on the ad blocking, any impact there. Obviously you have a more tech savvy user base, but is that offset by less of a mobile presence, maybe if you could comment on any of this. .

Yes, I mean most of the ad blocking is iOS and a very small percentage of our traffic is iOS and then it’s a pretty small percentage of people that have iOS that use ad blocking. So for us that hasn’t been an issue. If you think about people researching $1 million purchases on the web, that’s primarily done from people in their office..

Makes sense. Thanks..

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

Thanks. Curious to know about the – you talked about IT Deal Alert acceleration in 2016. Well based on the outlook for full year 2015 I’ve got you know Q3 at 34%, Q4 roughly 38% on IT Deal Alert.

So curious to know what’s behind the expected acceleration in 2016?.

Sure. So we expect qualified sales opportunities to continue to grow; that’s the majority of the revenue in 2015. With Priority Engine, which is subscription based, we keep adding new customers and new annual deals. So revenue that we are selling now, we’ll recognize next year and we continue to – we’ll be adding more revenue each quarter as well.

So that revenue stream should grow significantly, and then as we get these sales people ramped up on the research side, that’s all new revenue for 2016. So when you put the growth from those three revenue streams together, that’s what gets us to another year of very healthy IT Deal Alert growth. .

Okay, and then shifting to the margins, if I look at Q3 ’15 versus Q3 ’14 and I’m focused on the online – the adjusted gross margins for the online business.

It was down year-over-year despite the higher revenue, what’s behind that?.

It’s really just given by the fixed cost associated with it. It’s very subject to the revenue fluctuation because of the fixed cost basis. .

Okay, maybe I’ll take it offline. Last question for me, you guys have obviously made a big investment in content.

Do you see any of your traditional competitors stepping up their content investment?.

Well, it’s actually being going the opposite way. So this challenging environment has been extremely tough on our competition. It had a broad content model. So that’s one of the reasons why I believe that our traffic is up so much.

Our organic traffic was up over 50% in the quarter and it’s because we continue to invest in very strong targeted content, so we continue to get rewarded by the Google Algorithm, because the content is so good, but I also believe that part of that growth is that our competition is doing less relevant content, which is also – which is another reason that helps us with the Google ranking.

So that’s a place where I think one of the key things to take away from this quarter that in a really tough environment and everyone sees all the big company’s IT results, so it’s not a – I’m not saying there isn’t anything surprising; it’s a really tough environment out there.

Our performance in terms of things like traffic and content and translates into 12% revenue growth, which is really basically all market share gain, because there isn’t – marketing budgets are flat at that, it really talks about how strong our position is and how strong our opportunity is going forward as we continue to take market share..

Understand. Thanks for taking my questions..

The next question comes from Louie Toma of Craig Hallum Capital Group. Please go ahead..

Hi guys, thanks for taking my question. So just wanted to touch a little bit more on the FX impact. You guys had the same issue with FX in Q1 and then in Q2 you had a nice bounce back and now the FX seems to be becoming an issue again. Can you just talk about, is this any different than Q1 and did you see a similar bounce back in Q4 like you saw in Q2.

What are the difference in the way FX was impacting the quarter?.

Yes, so I mean I think in terms of Q3 the results were very strong, like the 12% revenue growth.

I really think that what we’re looking at is, the weakness, how that plays out into Q4, because what we get in many years, which we got last year is trying to get this end of the year “budget flush.” That budget flush doesn’t show up until December, so we don’t know if it’s going to come or not come, we won’t know until December.

So what we decided to do this year is we’re not forecasting it, because of how challenging the environment is in terms of FX for our largest customers and what’s going on with some of our biggest customers with just specific business transactions that we’re in the middle of.

We said we wanted to be very conservative and not count on that to come this year. Maybe it will, maybe it won’t, but that’s a little bit of a specific thing that only really happens in Q4.

So in terms of the environment, I think if you look at the largest IT vendors and look at their results in Q1 and Q2 and Q3, you’ll get a pretty good sense of what the ebb and flow of how the market is effecting those companies. .

And just putting into perspective, when you look at the things that impacted FX, you have the consolidation, you talked a little bit about each of those is – is any one of those significantly greater than the other or are they more evenly impacting the spending of your clients..

The FX your saying or the specific business transactions?.

The transactions that have been taking them….

Yes, I mean I think the biggest factor is the FX in the overall environment, because it’s very challenging for our customers, when their revenue is down by hundreds of millions or even billions of dollars. That forces them to change their short term marketing spend. So that’s the biggest factor that’s affecting the whole market..

Got it. And can you just talk a little bit. I know you last quarter you mentioned that two-thirds of your IT Deal, your priority engine customers, you were doing annual contracts and a third of them were doing short term periods.

What is the ratios like right now and for the short term customers, what kind of renewal rates are you seeing?.

Yes, so that is roughly the same, two-thirds, one-third, and the migration of the short term to renewing at a longer term is very good. Now keep in mind it’s a pretty small sample, but those results are very encouraging.

Priority Engine is a really revolutionary product and our customers, once they get installed and we train them on how to use it and they get using it on a day-to-day basis are really seeing really fantastic results, and that explains why the renewal rates are very strong..

Got it.

And the last question, can you just give us a sense for, when you look at IT Deal Alert in total, how much of the revenues is recurring the 10% [ph] approximately?.

At this point it’s still less than 10%, but its growing every quarter. For the Priority Engine was 15% of revenue, Priority Engine deal there is 15% of revenue this quarter. It was about 10% of revenue than last quarter, so that’s growing very rapidly. The research offering, the primary offering is on an annual basis as well.

So we expect with that the percentage of revenue that is subscription will be significantly higher in 2016 and then significantly higher again in 2017 and beyond..

Okay, thank you..

You’re welcome..

Your next question comes from Kyle Evans of Stephens. Please go ahead..

Hi, this is Tommy in for Kyle. Thanks for taking the call. First question Greg, you mentioned a few times the headwinds that some of your largest dozen or so customers are facing right now. I wonder if you could comment on the outlook for some of your smaller customers outside of that group. Then separately, I wanted to talk about QSOs for a minute.

How many active customers did you have in the quarter and can you give us any insight on what the outlook is like for that process. Thanks..

Yes, so in terms of mid-sized and smaller customers, they are growing faster than the large customers, but the challenge is if you look to the overall market where you can measure the decline, and by the largest customers in the billions, you measure the increase in revenue from the medium sized and smaller customers in the tens of millions or hundreds of millions.

So unfortunately they are not growing fast enough to fill the hole that’s being created by the largest companies, but we are doing. Listen, we are doing well with the large customers too from an execution, market share basis. We are still growing with our largest customers.

It’s just their budgets are decreasing, so it just makes it – it’s a hard climb. But we are out and we are doing good growth with the medium and small sized customers. In terms of IT Deal Alert, we don’t break out the specific number.

Like qualified sales opportunities or some Priority Engine and Deal Data, but we had 280 customers in the quarter, up from 175 customers a year ago.

So we continue to have good success with this product going in and out and signing up new customers; customers really like it where - qualified sales opportunities, we still are very confident that we’ll have a healthy growth with our product next year as well and then where you get the hyper growth, this is we’re layering in the newer products Priority Engine and Deal Data and the research..

As there are no further questions at this time, the question-and-answer session has concluded. The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect..