Charlie Rennick - General Counsel Greg Strakosch - Executive Chairman Mike Cotoia - Chief Executive Officer Dan Noreck - Chief Financial Officer.

Brian Fitzgerald - Jefferies Mike Malouf - Craig-Hallum Marco Rodriguez - Stonegate Capital Markets.

Good day, and welcome to the TechTarget Second Quarter 2018 Earnings Release Conference Call and Webcast. 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, General Counsel. Please go ahead..

Thank you, Phil. 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 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 on the call today 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..

revenues were a record $31.5 million up 18% versus last year, revenues from Priority Engine increased by more than 50% in Q2 versus last year. Revenues from our core offerings increased by 20% in North America and 16% globally versus last year; 34% of the -- of our revenues in Q2 2018 were derived from longer-term contracts, up from 21% in Q2 2017.

Gross profit percentage expanded to 77% in Q2 up from 73% in Q2 of last year. Adjusted EBITDA was a record $9 million in Q2 up 74% versus last year. Adjusted EBITDA accounted to 29% of revenue in Q2 compared to 20% of revenue last year. Incremental adjusted EBITDA margin was 80% year-over-year and 92% sequentially.

Today we are raising our annual adjusted EBITDA forecast to be between 30 million and $32 million. The original adjusted EBITDA forecast for 2018 was provided on February 7th was for annual adjusted EBITDA to be between 28 million and $30 million; on May 9, 2018 the annual adjusted EBITDA forecast was raised to be between 29 million and $31 million.

For the full year we are reaffirming our 2018 revenue forecast that was raised on May 9, 2018 for revenues to be between 122 million and $124 million.

Overall our customers continue to be focused on using data to make their sales and marketing organizations more efficient and competitive; customers are executing well with our data our seeing outsized results.

We are very optimistic about both our short-term and long-term opportunities, especially as the IT spending environment continues to improve which will continue to result in healthy revenue growth and even higher profitability as our margins continue to expand. I will now open the call to questions..

We will now begin the question-and-answer session. [Operator Instructions] First question comes from Brian Fitzgerald with Jefferies. Please go ahead..

A couple of questions maybe looking at a higher level, given the current environment and the increasing crescendo of talks on tariffs, how have your clients reacted to the overall -- to their tech spending and do you think that as you view those tariff conversations how do you think about that in the back half of the year and then maybe other one with GDPR it feels like it presented more of a tailwind for you guys as you're using co-opted data to drive purchase intent driven marketing was that more a kind of near-term couple of weeks type of tailwind or any lasting impact from GDPR and how it played out?.

Hey Brian, this is Mike, I’ll answer your question I am going to answer the GDPR question first if that’s okay. In terms of GDPR the way we have our business we own and operate all of our sites which means we also own and operate all the registration process.

Everything is 100% opt in and consent based, so as the EMEA laws came out with GDPR there’s always a little bit about -- the way some cautiousness on the side of our vendors and we have been through this before with the Canadian capital loss but we’re very proactive in terms of how we are -- making sure our customers feel comfortable with our opt in and our consent based registration form.

So, fortunately [submarine] caused a little bit of head ache for everybody but it did provide us with a competitive advantage and I think moving forward it will continue to provide us with a competitive advantage because again, going back to owning and operating the sites in the communities understanding and operating and owning the registration process and 100% of our audience being opt in and consent based, is a real positive attribute for us and I think it will be very challenging to a lot of list providers and contact providers out in the market.

So we see that as the continued opportunity for us. In terms of the overall IT market we’ve seen a healthy pick up in IT spending, which is created healthy budget increases from our customers.

We reported across all of our customer segments from our global top 10 global accounts to the next 100 to all other accounts, being up 19%, 15%, 25% year-over-year so we’re seeing a good healthy trend across that we’re also starting to see the impact on the full impact on the tax regulations and companies allowing -- being allowed to expense -- big IT expenses in year one, we’re not done before a year in that so we continue to see some improvement on that and that bodes well for the business.

In terms of the tariff conversations, we really haven't seen a lot of headwind on that so we feel we’re in a pretty good position..

I would just say usually IT spending cycles go on 3 to 5 year cycles. So we think we’re in the beginning phases of healthy tech spending, we had a missed upgrade cycle, companies are reinvesting, the tax reform is definitely a financial catalyst. So we feel pretty good about the overall environment..

The next question comes from Mike Malouf with Craig-Hallum. Please go ahead..

I want to focus first on it sounds like you guys are going to go after this churn pretty aggressively on the IT dealer side for the smaller customers. I'm wondering if you could talk a little bit more about that and than just specifically how much you think this is going to cost you in the near term but how fast do you think you can affect the churn.

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In terms of the smaller customers so if we take a step-back and we look at the revenue renewal rates for our top 10 and then the next 100 customers those customers segments we will succeed at a 100%.

But we did as we've mentioned in the shareholder letter we did see some turnover and some churn with the smaller accounts which really isn’t surprising based on the nature and the account make-up they may lack resources, infrastructure, technology to help measure some result measure some of the investments that they are putting in with us.

So I mean we are razor focused on three of those investments as we mentioned in the shareholder letter.

On the product side we will continue to launch and develop, what I'd say are easily used feature and so that our smaller customers in particular can really better measure against their KPIs so we're providing them a data we're integrating a lot of the data with the core solutions but being able to show right the dashboard how they are doing against this vertical or how they are doing against their ABM strategy was front of them but they are not having to do it manually where they lack resources is going to be very important.

Number two we really enhanced our customers success team which is really focused on-boarding so when we have a more and account executive sell a priority as if the deal is going to come the first thing that we will be able to do now is really surround that account to make sure that the on-boarding process is seamless it's smooth and then really focused on leveraging the one or two or three use cases or best practices in terms of what they really bought priority engine for so now that you that hand off it get a little bit sloppy and people forget what they really did so it was very important for that.

And then on the third part just to dive into this little bit more.

We recently launch the dedicated sales team and what we are able to do that what we were able to do was reallocate some of our senior sales rep resource internally and have them exclusively focus on renewals and up-sells within those accounts so we will always take a look at different pockets where we can reship and use our own internal resources to do that they will work very closely with our client and consulting management team hand in hand on that to focus on the renewals and the upsells.

What that will also do is to provide our account executives who sold the initial deal to have more time to focus on net new pockets within existing accounts as well as net new logos.

So in terms of cost it's really not going to cost us a lot of money because we have the resources on hand and we can very quickly ship those resources based on need and on timing in terms of the dedicated sales team we just launched that a few weeks ago and I was very quickly to do and mobilize that's the beauty of the business in terms of the product side it was in our product road map and that will promote in a couple of months to really focus on helping our customers really show results and help them measure their results.

So that's really the game plan. I think that we can see results relatively quickly because we have the formula figured out with our midsize and large customers where revenue renewal rates are well over a 100%.

So we just need to customize a little bit for our smaller customers that don't have the same loan of resources and maybe the same amount of specification, so I agree with Mike that, talking about that process much at all, and I think we’re going to be able to see results fairly quickly..

And then as you look into IT Deal Alert, sort of the average of the last four quarters was about 13.8 million you did sort of 14.1 million this quarter, has growth sort of plateaued for you on IT Deal Alert do you see there’s still a lot of opportunity going forward, in the past you gave us some guidance on growth I am just wondering as you look forward over the next year do you see that still with some pretty good robust growth?.

I still think there’s a lot of opportunity ahead of us and we’re still -- I would say in the very early innings of having our customers fully transition from the legacy approach to market to being pure data driven marketers and leveraging the number one piece of data that we have on our own which is purchase intent insights from our owned and operated sites and content investments, the other thing on IT Deal Alert there’s a couple of things we should feel back, IT Deal Alert has several different products, qualified sales opportunities, there’s deal data, but the flagship product is Priority Engine and the Priority Engine Solution is what we’re really -- we’re focusing on all of our business but we’ve a really keen focus on making sure we’re integrating our Priority Engine solution into our customers workflow and the Priority Engine revenues year-over-year grew at over 60% and continue to be very healthy; the other thing that’s important to the Priority Engine side is that is really the foundation as we transform from a 90 day campaign revenue model to a longer-term subscription model and as Greg spoke earlier 34% of our revenue was within the quarter was attributed to longer-term subscription revenue which was up from 21%.

Lastly I’d also say is that we lead with our data solutions and our data insights and our goal is to focus and sell more data but those also really support the core offerings.

So, there's we’re integrating a lot of the data in the core offerings together because again if we see each of those products, which we’ve said in the past support each other understanding insights and the intent and prioritizing those accounts and then controlling your messaging from content marketing and content syndication and branding that will start propelling topline growth and as you’ve seen that results in good margin expansion.

So the answer to your question we still see a lot of upside on this but there’s a lot of integration there’s a lot of focus on long-term contracts and we’re still in the early stages of this data transformation..

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

I kind of wanted to follow-up on the last question just in terms of the IT Deal Alert customers and your traction there.

I believe in the shareholder letter, you mentioned some effects in the quarter where some of your larger customers shifted spend from IT Deal Alert to Core Online was that something sort of expected is that sort of a trend you might be expecting to happen over the second half of the year can you kind of help us think through that?.

What we saw in Q2 was some of our 10 global accounts shift some of their spend from IT Deal Alert to Core but more specifically, we saw a shift in the qualified sales opportunity investment, which is a point in time contracts that we see to the inside sales teams those are confirmed projects out in the market.

And what we’ve seen is when the IT environment increases and the budget increase for those large global accounts they will take some of those dollars and what they really want to do is because they have big name brands they want to control the messaging so they'll shift and they'll start really investing heavily in content syndication and branding and content marketing.

So, we saw their overall growth year-over-year was 19%.

Where we saw the shift though was in the qualified sales opportunity product into core where it was in the priority engine long-term subscription revenue over the core and that's it's not surprising because when they get an increase in budget as long as we are capturing the increase overall we are okay with some of the shift because again it helps us to with our gross margin and our margin expansion.

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So that margin or that mix shift if you will that's the main driver for the 77% gross margin you saw in the quarter?.

While the main driver of that is revenue and our operating leverage so we have a fixed cost model and we exceed the revenue numbers it will extend in our margin and we have a very it's been typically 74% or 75% when we beat the numbers and have top line growth a result in the margin expansion between the 77% this quarter. .

And then shifting again here also to just some of the other comments you have in your shareholder letter in terms of the incremental margin, the EBITDA margin you talked about seen up side to that 50% to 60% are you seeing that maybe you come to the higher end of that range or is the business model in some form kind of changing?.

We've always had we've always projected that our incremental EBITDA margin remains between 50% and 60%.

Again because of the operating leverage that is built in to the company any time that we see the revenue leverage increase those dollars can drop right to the bottom line so we saw an 80% increase in incremental EBITDA margin year-over-year and over 90% sequentially because it doesn’t cost us any more we have the content we have the data so as we increase our revenue output it's not impacting our cost of sales per se and that increase in revenue is going to drop right to the bottom line.

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I guess what I'm trying to figure out or understand is that there is a certain point where you need to invest back in the company to support the growth you are seeing and how that kind of impacts your incremental EBITDA margin going forward?.

So basically what we do is at the beginning of the year we have a revenue forecast. And then we will take 50% to 60% of that amount and will drop it to the bottom line and then another 40 to 50% is our reinvestment budget. So we continue to reinvest aggressively in the business.

But as we go through the year and we exceed that forecast, we don't need to increase the reinvestment budget, so that was incremental dollars fall to the bottom line at a very high rate. So that the one thing. The second thing why the margins will increase overtime.

You know as revenue starts growing at bigger amount it's not only a larger percentage you might be investing $5 million out of 10 million would be 50% but if we think revenue is going to grow 50 million we grow $5 million just as the numbers scale the incremental margins get larger and the number scale our gross margins expand as well, and that’s why you’re seeing such a dramatic increase on the adjusted EBITDA line.

Because we’re basically a fixed cost model with very little incremental cost of goods and the money just flows through the bottom line at a very high rate across the board. So that's certainly one thing that we’re hearing a lot from -- why investors are interested in the stock is because of the expanding margin profile of the business model..

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