Charlie Rennick - General Counsel Gregory Strakosch - Executive Chairman Michael Cotoia - Chief Executive Officer Daniel Noreck - Chief Financial Officer.

Kerry Rice - Needham & Company, LLC Brian Fitzgerald - Jefferies LLC Allen Klee - Sidoti & Company, LLC Louie Toma - Craig-Hallum Capital Group LLC.

Good afternoon and welcome to the TechTarget Second Quarter 2017 Earnings Release Conference Call. All participants will be in listen-only mode. [Operator Instructions] 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 Charlie Rennick. Please go ahead..

Thank you, Brian. 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. Also joining us today on the call is Dan Noreck, our CFO.

Following Greg and Mike’s 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 Annual and Quarterly 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 and Mike..

Great, thank you. IT Deal Alert continued strong performance in Q2 2017. IT Deal Alert revenues were $11.7 million in Q2 2017, up 39% versus Q2 2016 and up 45% year-to-date versus the first six months of 2016. Revenue from Priority Engine and Deal Data were up 101% in Q2 2017 versus Q2 2016.

The number of IT Deal Alert customers in Q2 2017 was over 525, we had 59 new Priority Engine and Deal Data customers in Q2 of 2017. We continue to gain traction with Priority Engine outside North America was 70 international customers utilizing the service in Q2 2017. Greater than 20% of the revenue Q2 2017 was derived from longer-term contracts.

Our transformation to a data subscription company is well underway. We expect 1/5 of our revenues will come from IT Deal Alert products by the end of 2018. We continue to invest aggressively in our products that we think will payoff significantly in the coming years.

We have fortunate that the margin structure our business model provides us with the ability to make smart investments by still maintaining healthy profits and free cash flow that allow us to repurchase our common stock reducing our overall share count which we feels in the continued long-term best interest of our shareholders.

I will now open up the call for your questions..

We will now begin the question-and-answer. [Operator Instructions] And first question comes from Kerry Rice with Needham. Please go ahead..

Thanks a lot. Greg I guess two questions kind of related to each other. So still facing some pretty stiff headwinds from spending or none, lack of spending from top four customers.

Can you talk a little bit about what gives you confidence in the second half 2017 revenue ramp and may be as it to that – I know that you didn’t necessarily explicitly call out full-year guidance for 2017. If you can give us an update on what you're thinking about in the second half of the year for that? Thanks..

Hey, Kerry, it's Mike. I'll take that if you don't mind. In terms of the top four and the stiff headwinds I think we've got to start first with the – let’s look at IT Deal Alert first because that continues to exceed the expectations. It makes all progress across, really, all of our customer segments.

So as an organization, we're going to continue to focus and lean with IT Deal Alert in longer-term data subscription contracts, which have resulted, as Greg mentioned, close to 40% growth year-over-year and over 45% growth in the first half.

As it results – we reported that our core was down in Q2, which had less of a decline in Q1 and the majority of the decline is attributed to the global accounts. So let's drill that back a little bit.

If you take a look at what we mean, A, by the global accounts, our 10 largest accounts that I would call legacy hardware and software vendors that operate primarily across every major country and across the globe. These accounts continued to get hit for a couple of reasons.

Number one, IT environment continues to be a challenge, the lack of spending and investment in IT. I think we reported a couple of months ago when Gartner came back and revised their enterprise IT spend for 2017, they cut it in half from about 2.7% to 1.4%. So fairly anemic on that.

The strong dollar continues to have a negative impact for these larger accounts outside the U.S. And these accounts are conducting pretty close to, if not more than, 50% of their business outside of the U.S. So the strong dollar impacts them.

So those two areas have a direct impact on their earnings and their financials, as you've seen over the last several recent earnings calls from these legacy accounts. So when they get into a cost-cutting mode, one of the things they will cut is their core advertising budgets. And that will impact us on the core.

Lastly, as you mentioned, we talked about four of those major transactions. Last year, we were talking about five, one graduated out of that. We've been talking about four. And if you look at the global accounts, we're really about to graduate out of another one of those.

So it really leaves us with that last, I'll call it, mega-transaction that's been out in the market for a while and they're still working through the transition. If you take a look at the core and the decline in global, approximately, or roughly one third of the global decline in core is a result of that last major transaction.

So do we expect it to turn? Yes. We've been thinking and hoping that it would turn in the back half, as we've been saying throughout the year of 2017. They ultimately going to have to get their positioning done and their messaging laid out.

So we hope to see that in the second half of the year, but we would probably – if not, we'll definitely see that in 2018.

As part of the ramp in the second half, a lot of that really focuses on and depends on the continued focus and execution on our long-term contracts that we're landing each day, each week, each month that will have a direct impact on Q4. So with that being said, a couple other things I'd like to highlight on this.

Our second half revenue will be higher than our first half revenue that we'll project. Our Q3 revenue will be higher than last year's Q3 revenue. And last year's Q3 revenue had events tied into it. Our total online revenue in Q3 this year should be up double-digit versus last year. IT Deal Alert, we feel will grow in excess of 40%.

And when you combine these and when we start graduating from this last transaction, it gives us the opportunity to hit some of that back half revenue growth ramps that we've projected..

And regards to the specifically about the full-year guidance, yes, there's no change there. And so just to reiterate what Mike said on the core with those four accounts, the second half of 2017 will be higher revenue than the first half of 2017. And revenue in 2018, we expect will be higher than 2017 with those accounts..

Okay. Thank you..

Next question comes from Brian Fitzgerald with Jefferies. Please go ahead..

Hi guys. Thanks for the question. Any dynamic to call out with regards to the engagement of Priority Engine customers maybe looking at the customer cohorts? Are any earlier Priority Engine customers using it differently than newer ones? Any kind of things to call out around that? Thanks..

Thanks, Brian. Our first initiative was to, obviously, lead with IT Deal Alert Priority Engine and get that entrenched in our customers' marketing workflow. Over the last, I would say, couple of quarters, we've seen some very specific use cases. A lot of our accounts, our customers, are really focused on an ABM strategy.

So we can leverage Priority Engine, which integrates seamlessly into their existing ABM strategy to enhance that, where we can identify the active accounts and the active prospects across their company's marketing initiatives, and let them know when they're active by topic, by region, who they're looking at in terms of competitors, related topics.

And we also recently launched or integrated our HD Data, which is a third-party, which is helping our customers really focus on installed base.

So you know Priority Engine's going to let our customers now across our 100 plus technology topics by region, which accounts have the highest propensity to buy based on direct observed and real purchase intent data.

But our clients also want to know who's installed in those accounts, because there's two real main marketing initiatives, marketing and sales initiatives. I want to do a competitive takeout.

So I want to be able to identify who's installed at an account that's active in this area or ranking in our top 200 accounts that week as well as who is some of my key partners that are in the account, where I can work and have a marketing initiative program to really enhance the value of our product as it relates to that partner in technology that they're aware off..

The other thing I would add, Brian is that we recently announced that we're further integration, so we're basically now integrated with every major sales force automation system and every major marketing automation system.

So as we update our purchase intent data, that is seamlessly updated into our customers' systems that they're currently using, and it's becoming part of their daily workflow. So I think that's another very positive trend that we see in terms of customer usage..

Great, thank you..

Next question comes from Allen Klee with Sidoti. Please go ahead..

Yes, hi. It looks like your international business on the quarter and on the IT Deal Alert accelerated pretty nicely, sequentially.

Could you maybe just some delve into a little about why that is?.

Yes. Allen, this is Mike. IT Deal on the international side of the business. I mean we are still not even out of the first inning with that product. So there's been wide acceptance and early adoption of the product to be able to have access to this purchase intent data. What we typically – and so we expect that to grow.

We've added segments in the regions that we cover, all the major, throughout EMEA and throughout the key APJ markets. And again, as I mentioned, it's very early stages. Our clients want access to this type of data. They've never had the opportunity to access this type of data. So the adoption rate has been very, very positive.

In terms of the core, what we've noticed is when you lead with IT Deal Alert and you focus on getting that engaged, and I'll talk really outside the non-global accounts because that's really the rest of the universe, the core tends to do fairly well, at least they even – would tend to penetrate a little bit better when we can lead with our data products and then tie in the core.

So we expect to keep to that game plan and that playbook. I think last time we're on the call, you brought some of the – you'd asked a little bit about why that matters.

And what's really important to understand is when somebody implements a Priority Engine, our Priority Engine platform, not only are we showing them the top-ranked accounts and the active prospects within those accounts, but when you start layering on your core, meaning your lead gen and branding, we can show you right in the engine, right in the platform, which accounts are now engaged with you.

So not only do you know the ranking of accounts, 100 to 200, not only do you know the active prospects who are active in researching this topic over the last 90 days, we're now highlighting right in the platform, who is not only in active prospect within the account, but who's engaged with you as a lead. So nothing gets lost. And it's a full circle.

You can close the loop and understand accounts, active prospects and leads that have dropped you through your content marketing..

That’s great.

So maybe the follow-up with that since the strategy is to try to lead with the IT Deal Alert and bring core – how do I think about what the opportunity is? Maybe – have you looked at like what percent of your business has both of them? Or how much is there as a green space that you could transfer to that?.

Yes, I mean it’s basically what were – we have about 1,200 overall customers and we’re up over 525 in terms of IT Deal Alert in the quarter. So what the clear strategy is just to try to get as many of those 1,200 customers as well as new logos to buy Priority Engine.

Because we know once that they have Priority Engine, we're doing a really good job of integrating in the core, because the purchase intent data works best when you also complement it with branding solutions and with demand generation.

So that's why we're so bullish on the overall opportunity because we think we can sell IT Deal Alert to a lot more customers. And when we know when we do that, we also improve the metrics with the brand. So it's something we're extremely, extremely focused on. And it's a key part of the strategy.

And the other part of the strategy besides integrating it, is not only then – is to integrate IT Deal Alert with the core but then also to sell it on an annual basis, which we're really proud of the – how that's progressing for us.

So as you know, if you went back a couple of years ago, there's basically hardly any of our revenue was under annual contract. And then this past quarter, we ticked over 20%, and we expect that to continue to grow each quarter..

Okay.

And then maybe finally just on the core type of advertising, where you're talking about display ad – like that, what are the trends on, kind of, pricing versus usage that are impacting it?.

On the core, yes, that result is what we call, just put you in to, say, display advertising as well as lead generation, where people would put content on our sites and were promoted to active buyers and they would engage with that content.

We've been able to remain relatively whole in terms of our pricing, and we have a very limited amount of inventory. The inventory is very valuable because we don't really outsource any of that inventory. 90%, 97% of the track that we have is organic through true enterprise IT buy.

So we're holding serve on our pricing and we have enough inventory to align and fit and meet any growth needs..

Yes. So it's very different than the consumer, internet business where there's just an incredible amount of inventory. And that in the business-to-business market and the enterprise IT market, there's a limited number of people that are searching $1 million purchase, will be searching $1 million purchase at any one time.

So that scarcity of inventory has allowed us to maintain very premium pricing..

Okay. Thank you so much..

You are welcome..

Next question comes from Louie Toma with Craig-Hallum Capital Group. Please go ahead..

Hi guys. Thanks for taking the call. So just a couple of quick questions. Going back to the online core revenues. I was wondering if you can give us a little bit more color, and I guess what I'm wondering about is we keep waiting for the business to come back, some of the big customers and the transaction that you have going on that are disrupting that.

If you look at what Q2 revenue number was, we're at about $60 million run rate for that business that compares to $82 million going back to 2015.

So my question is this, is when things come back and everything more normalizes, what’s the new normal, where would this be under normal circumstances where your big customers are back, spending normal and you don't have transactions going on? How do you think about that?.

Yes, when I think that – what we’ve said is that if the IT environment stays the way it is, and Mike laid out all the issues there, weak demand, strong dollar, transactions going on, that’s kind of a flat revenue environment with declining marketing budgets.

In that environment, we believe we can grow revenues low double digits on the strength of our purchase intent data.

If IT spending grows a modest amount, let's assume that companies start reinvesting again, maybe the catalyst is tax reform or something else and we think of IT spending grew 3%, 4% that market budget would have a V-shaped recovery and grow double-digits and then we would very quickly see our growth rates probably double.

So we might be at 20% – 20% growth. And as you know, with our operating leverage, if we were growing revenue 20%, we'd be growing EBITDA 40%, 50%, 60%.

So we think in fact – you decry is normal, if we get back to kind of a 3% to 4% IT growth rate, we would expect to see our core business grow significantly, our IT Deal business grow even faster and the whole business would be growing in that 20% type range..

Got it. Thank you. And just one more question on this. So you did $15 million this quarter, which was up about 15% sequentially, which is better than you did sequentially last year, which was up about 11%.

Is there a seasonality to the June quarter and should we read anything into that or it was March – is artificially weak?.

Louie, it's Mike. I think the seasonality that you look at is Q3. July and August tends to get a little bit slower in the core, the overall business, IT spending, budgets, vacations, internationally, a lot of these regions shut down and takes some time off. So I won’t look too much into it.

What I would focus on and I think the right approach on this is, is that the second half revenue on overall would be up in the first half and on second half core revenue should be greater than in that first half..

Yes. I mean if you're going to look at our normal seasonality, we would roughly have 20% of our revenue in the first quarter; 235%, 26% in the second quarter, 24%, 25% in the third quarter and then 30% or even more in the fourth quarter. So that would kind of be normal seasonality for us..

Got it. Thank you for taking my question..

You’re welcome. 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..