Jane Freedman - VP and General Counsel Greg Strakosch - Chairman Mike Cotoia - CEO Kevin Beam - President.

Kerry Rice - Needham & Company Brian Fitzgerald - Jefferies Eric Martinuzzi - Lake Street Capital Markets Louie Toma - Craig-Hallum Capital Group Alan Klee - Sidoti.

Good day, and welcome to the TechTarget Q3 2016 Earnings Release Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ms. Jane Freedman, General Counsel. Please go ahead..

Thank you, [Ann]. Before turning the call over to Greg Strakosch, our Executive Chairman; and Mike Cotoia, our CEO, 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 have posted our Shareholder Letter on the Investor Relations section of our website and furnished it on an 8-K. On the call today, Greg and Mike will briefly summarize our financial results for the third quarter and nine months period.

Following Greg’s and Mike’s remarks, the management team will be available to answer your questions. On the call, in addition to Greg and Mike, we have Kevin Beam, our President; and Janice O'Reilly, our CFO. During this call, any statements made 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. Our actual results may differ materially from expectations. Please refer to our risk 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 the call, we may refer to financial measures not prepared in accordance with GAAP.

A reconciliation of these non-GAAP measures to the most comparable GAAP measures accompanies our Shareholder Letter. With that, I'll turn the call over to Greg..

Great, thank you. The weakness that we are seeing from our largest customers was reflected in our Q3 2016 guidance. We are expecting similar conditions in Q4 2016. We are buoyed by the fact that we believe these conditions to be temporary and situational.

Eventually, corporate transactions are completed and our experience is that once the integration is complete, marketing spending returns to previous levels and can grow from there.

In the meantime, we will continue with our strategy of partnering with our customers to help them take advantage of our purchase intent data as they make the transition to being data-driven sales and marketing organizations. These short-term headwinds do not diminish our view of the long-term opportunity.

That belief informs our view to continue to use our healthy financial position to repurchase our shares at attractive prices. I will now open the call to questions. .

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

Thanks a lot. Most of my questions are answered in the shareholder letter, but you highlighted that in the past you've had – you’ve highlighted the five largest customers and they've been involved in corporate transaction. It looks like the one that completed their transaction came back pretty quickly.

Is there any reason to think that the other four once their transactions are complete that they wouldn't come back as quickly as the current one? Any color there, any even timing on thinking of when those transactions might close and they can start to spend again. Thanks. .

Yes, Kerry, this is Mike. In terms of your question, yes, back in August we spoke about five organizations. One graduated -- when we talk about graduated, we mean it's been a twelve-month cycle since the time of the spin off. So it's didn’t come back overnight.

It took two or three quarters and into the fourth quarter to get it back, but then we saw the spending back to pre-transaction levels. The other four organizations and again probably can tell who they are in terms of the news in the market, we expect the same thing.

One is very recent, just started, they have a long way to go in terms of identifying their staff, identifying their product strategy, their roadmap, end of life products, and that's going to take two or three quarters. So when you take a look at the second half of 2017, we've been through this before. We've seen this happen.

When things get settled, these companies come back, and when they come back they continue to shift from offline to online and they want intent data to help their marketing and sales efforts. So it's not an overnight, it's not a flip of the switch, it will take several quarters but we expect that and we've experienced that. .

And then obviously you just talked about the large customer, you highlighted that the mid-size customers seem to continue to grow nicely.

Are the small customers still feeling soft, getting less backing and suspending spending at lower levels too?.

So in terms of the next share of customers, we continue to see growth on that, and then the smaller customers they were relatively flat. They were down two percentage points, and they feel the impact when there's not a catalyst in terms of a reinvestment cycle in IT. They can fill it as well.

What I can tell you is that some of our longer term strategy is starting to pay off, it’s early signs with some of these smaller and mid-tier accounts around longer-term data subscriptions. So, our goal is to make sure that they don't come in and then get out in terms of in quarter and out of quarter revenue mix.

So we have a pretty strong focus and emphasis in getting those next 100 as well as the small up and coming VC backed organizations into longer-term contracts. And we're seeing some early, but good signs. .

Our next question comes from Brian Fitzgerald of Jefferies. Please go ahead..

Thanks, guys, a couple of questions on Priority Engine. It was nice to see 14% of revenue coming from long-term contracts. You've stated before you believe 30% to 40% of total in a few years can be from long-term contracts. Do you still think you are on track for that? First question on Priority Engine.

Second one, on the international rollout, is it occurring at the tempo that you expected and then I’ve got a couple of others. .

This is Mike, right, and in terms of the 30%, 40% growth that we've talked about in terms of the IT Deal or product offering, we're still very confident in that. I think if you noticed in the shareholder letter, we guided for the year to have 30% growth in IT Deal Alert.

If you take a look at that and you back into the numbers based on what we have, you'll be able to see that our growth in Q4 and IT Deal Alert overall will exceed our Q3 numbers. And if you go back to 2015 and 2014, the Q3 to Q4 always had a decline, so a little -- some of it’s timing and some of it’s just clear adoption.

We're seeing customers purchase the Priority Engine. We're seeing usage and adoption levels and feedback very positive, and we see that as a very good fit into our strategic long-term vision of long-term subscription data contracts. .

Yeah, so just in terms of that, we’re 11% last quarter, we’re 14% this quarter, and we believe that that will continue to grow and that over the next few years we will reach that target, 30%, 40% of revenue under long-term agreement..

And then maybe another one on Priority Engine was just around the 230% year-over-year growth, but you also increased customers, 28 new customers.

Any linkage between the Priority Engine growth rate and then how much of that was from newer customers versus older customers?.

Well, we just launched – in Q3, we launched the Priority Engine capability in EMEA. So we're seeing a lot of – again it's early. We're seeing good success on that. A lot of these organizations typically will test this out in 90 days before they transition into annual deals, though we've had a couple of annual deals already.

So we're seeing good growth on that side. Not only in the new customer front but as well as adoption and renewal and probably when I talk about renewal trying to transition some of these three-month pilots to annual deals.

So we still feel very confident on those numbers and they continue to grow and as you continue to get the annual deals, the revenue just gets back. We picked out revenue up quarter after quarter moving forward, so very bullish on that. .

Our next question comes from Eric Martinuzzi of Lake Street Advisors. .

Thanks.

With regard to the four large customers that throttled back on the IT Deal Alert spend, how was their spend on the core?.

Yes, their overall spend was down. They were down in the core as well as the online and we highlight in the shareholder letter, the amount of -- they declined $2.5 million. So there's a mix of core and online in that. So it's not as if somebody is pulling back in some way and reallocating it, so it's not really a cannibalization metric.

So it's a pullback on both front. And again as we look at these four companies and you’ve seen the transactions that got through, these are extremely material in nature.

They will take some time and they are temporary and situational in nature, so again we've been through these before, we've seen them and at the end when they get their product strategy, their organization structure in place, and their go to market ready to go, they will come back and they will be focused on intent data and they're going to be looking at that intent data – their purchase intent data to help them with their sales and marketing effort.

So again we see that as very temporary and situational. .

Based on the Q4 outlook, and I do appreciate you highlighting that point about the implied sequential growth in ITDA Q4 versus Q3 because that is counter to what happened last year, but still we are going to wind up here in a situation where even with the 30% growth in the IT Deal Alert, we are still talking about the total revenue being down about 5% in 2016.

If things do come back as you expect them to post these four large customers getting back on the spend, what's the expectation for 2017 revenue? Is this a single-digit growth, or basically more?.

Eric, this is Greg. I mean in terms of where we're at with the cycle with those four customers, so we've guided to 40% revenue growth for IT Deal Alert in ‘17. So that's in the neighborhood of $12 million of incremental revenue. On the core, I think we expect it to be roughly flat with it down a little bit in the first half and up in the second half.

But in terms of EBITDA, I would say is that the investment we make this year, expecting additional revenue, that investment will -- is kind of in place for next year. So I think we're expecting roughly flat expenses for ‘17 versus ‘16. So we're expecting a very high -- higher than normal incremental EBITDA margins on the incremental revenue for 2017..

I see. And then the international obviously the election is top of mind today.

Anything with the results of the Presidential election and potential trade changing in international trade agreements that could have a long-term impact on customer base that would have a long-term impact or medium-term impact on Target?.

I mean, this is speculation, right, but in terms of for healthy IT spend, you need two things in place. You need catalyst on the IT side which I would say that we have in stage, we have migration to cloud, we have big data, we have security, we have gained data mobility devices, so there's lots of catalysts on the IT side.

And then what you need is a reinvestment cycle. -- corporations in reinvestment cycle which we haven't had.

Now if some of the proposals that are out there get implemented in terms of things like reducing corporate taxes, another part of that proposal is to expense investment in the first year, those types of things have the potential to spur reinvestment by corporations.

And whenever there's an increase in reinvestment that's very good for IT spend and for the refresh cycle. But at this point that's speculation but I said that would be the potential upside. And as we stated in the past, we think that with flat IT spend, if it stays where it is, we can grow revenue double digits.

But we've also believed that when IT spend recovers to a relatively modest amount, kind of a normal 3% or 4% maybe 5%. What we've seen in past recoveries is a V shaped recovery to the marketing budgets.

And we think that in that environment core could go back to being a 20% grower again pretty quickly and that would also help when they come out the budgets are expanding that would also obviously help IT Deal Alert. We've been able to grow IT Deal Alert a tremendous amount in a very challenging environment.

But that growth has definitely been dampened by shrinking budgets. That growth rate could be -- it's over 30% this year, we think that could be much higher than 30% if we were in a more favorable economic environment. .

Our next question comes from Louie Toma of Craig-Hallum Capital Group..

Hey guys. I just had a couple of questions. First is the core online has been weak for a while without impacting IT Deal Alert, it seems like IT Deal Alert has been resilient and now you're starting to see an effect related to the overall weakness particularly from these big customers.

Can you talk a little bit about that? Have things changed with IT Deal Alert where it's not as resilient as it was before? Just give a little commentary, please?.

Louie, this is Mike. I think in terms of IT Deal Alert, I think it's still very resilient. I think when you look at the Q3 number, part of this was obviously due to a couple of those large accounts. But then we also talked about the fifth account that has come back and back to pre-transaction investments with us.

So we feel that’s again short term, very temporary. Also there was a little bit of timing on this at the end of Q2 as well as Q3 on some of the deals, where we took in some of the revenue inQ2 and we got a deal at the end of Q3, actually fell in Q4.

So that's why I highlighted before that the revenue shift or the revenue make up from Q3 to Q4 will increase an IT Deal Alert and if you go back to 2015 and you look at Q3 to Q4 and go back to 2014, and look at Q3 to Q4, it has always been a revenue decrease.

So we're actually seeing the increase on this, part of it is timing, and part of it is from some of these larger accounts. .

Can you give us or remind us what percent of revenues these four customers represent and relative to what they were, say, a year ago? They've been declining a lot, so I'm assuming the exposure to them has declined significantly?.

So we haven't disclosed by those specific accounts but we have disclosed that our top 12 global customers and those five companies were part of those top 12 gold customers, historically been around 40% of revenue. You are correct that that is now -- that's decreased, so it's in the mid 30s.

So that's what -- one of the things that bodes well for us in 2017 and we have less exposure to those larger accounts and more exposure to the mid-size accounts is around mid 40s now which is growing nicely. And then the other part of that is a much bigger part of our revenue now is IT Deal Alert which is growing very nicely.

So if you look at those two pieces of business which is a bigger piece of the pie growing faster that really bodes well for the overall growth rate in 2017 and 2018 and beyond. .

Our next question comes from Alan Klee of Sidoti..

I'm not sure if you kind of touched on this but what do you say if your largest customers were not going through deals, what kind of end demand do you think you would get from them?.

Well I think if you just look at what we said, we had a decline in the quarter of $2.5 million just from four customers. So if they were not going through the deals I think we would have been up with those accounts. So it’s a very significant amount of revenue. .

And what do you think is driving -- you said that there is kind of demand because of new technologies, you said cloud and a few things.

But is there a way to quantify how much that's kind of improving just overall end demand?.

Well, what's happening is those segments of the market are healthy but there's other segments of the market that are not healthy. So when you combine it all together you basically have -- basically a flat environment.

I think the best way to look at that is if you look at a large global like key vendors and you look at their results, you'll see that they see a very fast growth with like their cloud offerings or their big data offerings or their software offerings. But that's been offset by declines in more traditional parts of their business.

So in an overall – the overall environment is roughly flat. When you get a reinvestment cycle what you typically see is a big refresh of existing infrastructure as well as faster growth on the new type of areas. And that's how you kind of get to an overall healthy IT spend..

And the last question, I was just curious in the UK, did you notice any changes as a result of Brexit having any impact on you?.

We've seen a lot of concerning from our European customers and as you know uncertainly leads to delays and wait and see. And so, yes, we definitely saw some deals kind of going wait and see mode and push out. So yes, we definitely – and we saw that in the US as well. End of Q&A.

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