Good afternoon, and welcome to the TechTarget Second Quarter 2019 Earnings Release. [Operator Instructions]. Please note, this event is being recorded. I would now to turn the conference over to Charlie Rennick. Please go ahead..

Thank you, Ben, and good afternoon. Joining me here today are Greg Strakosch, our Executive Chairman; Mike Cotoia, our CEO; and Dan Noreck, our CFO. Before turning the call over to Greg, I want to remind everyone on the call our earnings release process.

As previously announced, in order to provide you with an update on a 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. Following Greg's introductory 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 and our periodic 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..

Great. Thank you, Charlie. Before I jump into the numbers, I'd like to note that TechTarget is celebrating our 20th anniversary this month. We are extremely grateful to all of our dedicated employees and to our loyal customers. A letter report that we delivered record revenues, adjusted EBITDA and margins in Q2.

Highlighting Q2 2019 revenues grew at $34.3 million, up from $31.5 million, which is up 9%. Q2 2019 adjusted EBITDA grew to $11.1 million from $9 million, up 22%. Adjusted EBITDA margin was 32% in Q2 2019 versus 29% in Q2 2018. Gross margin was 77%, the same as last year. Incremental EBITDA margin was 71% in Q2 2019 on a year-over-year basis.

Adjusted cash flow was $7.5 million in the quarter, representing 68% of adjusted EBITDA. Long-term contracts represented 33% of revenue in Q2 2019. Priority Engine revenues were up 44% in Q2 2019 versus Q2 2018. Based on these good results combined with our second half forecast, we are increasing our annual guidance for 2019 this afternoon.

We expect the annual revenues to be between $133 million and $134 million. We expect adjusted EBITDA to be between $39 million and $41 million. Previous annual adjusted EBITDA guidance was between $37 million and $39 million. Also, I'd like to welcome Christina Van Houten to our board.

She is a technology industry veteran and is currently the Chief Strategy Officer at Mimecast. We look forward to working with her. I will now open the call to questions..

[Operator Instructions]. Our first question comes from Aaron Kessler with Raymond James..

Maybe first in the shareholder letter, you talked a little bit about testing kind of how much content you should member protect, maybe if you can expand on that little bit. Then obviously from a couple of quarters ago, we talked about the GDPR impact -- impacting a couple of customers. Just any thoughts there.

And then third, just maybe general kind of macro IT spending environment and marketing outlook that you guys are seeing?.

Aaron, it's Mike. Let me take all those in order. First of all, in terms of content and testing the content, which we noted in our shareholder letter. We look at content in 2 different ways. We look at -- we have member-protected content versus nonmember-protected content.

And we member protect a lot of our content because at the end of the day, it's the members that we attract and recruit and get on our side to actually drive the purchase intent insights in the data that we then monetize across all of our purchase intent-driven product lines and solutions.

So it's really important that we protect out, it's really important that drive and obtain an attractive right audience numbers because that's what we monetize. There's nonprotected content as well. And when you don't protect content, Google will reward you on that.

And we wanted decide not to protect content, we can increase a lot of our traffic in our page views. But the value that we focus on are the members in driving net new members to our audience to our sites that we can leverage and manage. So we're always looking at and we're always squeaking it and finding out the right balance.

And to put things into perspective, if you take a look at our overall revenue, approximately 15% of that revenue is driven through pain on preference and traffic. What 85% is really driven through the intent measures that we captured through net new and existing audience members, so that's #1. On the GDPR front, I think things are fairly consistent.

It's been over a year since they launched GDPR. I believe, it was May 25, 2018. Our customers adapt into that and we're seeing -- and we've got through that, and there's really nothing new on that front. Again, going back to the model that we own and we operate our sites, we haven't opt in consent-based registration process.

I think puts us in a very good competitive advantage when it comes to compliance measures. And then overall, on the IT spending, the macro IT environment, obviously, we still see this fairly positive. I think we're seeing a lot of conversations, obviously, in the news around tariffs and trade concerns.

And I think that the tariff and trade concerns create cautiousness with a lot of our larger customers who have a lot of international business and were buying and selling within those regions. But the way we look at our forecast and projections, we take the current macro into consideration. We feel pretty good about that.

Also -- I would also say 2 or 3 years ago, the global 10 accounts we break out, we break out our customer concentration with the global kind of accounts the next 100 and a lot others. Today, we're pretty fortunate because our global current customers make up a much smaller percentage of our overall revenue than they did a couple of years ago.

And that's due to our product development, our marketing and our sales execution and driving net new customers and really spreading that customer concentration. So that really bodes well for the business, and it makes us less reliant on those global 10..

Our next question comes from Mike Malouf with Craig-Hallum..

Congrats on 20 years..

Thank you, Mike..

A couple of -- one of the things is kind of interesting as you roll out this Priority Engine is trying to get a little bit of feedback from these new -- I'm sorry, the Priority Engine Express from these new smaller vendors. And you said in your letter that you're in the learning stage and you're getting some early feedback. And it's been a positive.

And I'm wondering if you can just give us a little bit of color on that and kind of tell us what you are learning..

Yes. That's great. So we have done a soft rollout on Priority Engine Express. And if you take a look at what we've been doing over the last several years with Priority Engine, I'm going to go back to that. We've been selling an enterprise solution to a target account list of ours between 800 and 1,300 accounts.

So we feel really good opportunity when it comes to come, I'd say, that smaller market, and therefore, we put a lot of development and resources and some investments and looking to roll out our Priority Engine Express.

So over the last couple of months, we've been rolling this out in a soft form, engaging with very small customers, selling the solution, stopping during the sale, getting the feedback, understanding exactly what the -- they're looking to do, not looking to do and how we can make sure that we really get this right for 2020.

We have learned a few things along the way, which have been very helpful. We've seen a lot of -- we've heard a lot of positive feedback. Our smaller customers lack a lot of resources.

They don't have a marketing automation many times, they don't have an integrated nurture campaign, they need to understand and have a very friendly user interface, and they're also very focused on identifying and using this solution as a sales used case with their inside sales reps and even their outside sales reps.

So what we're really focused on is doing a very simple user interface, focus very much on a sales used case and understand that we can help them build different types of list and customized lists, for example, an ideal customer profile list, which is really going to focus on exactly there sweet spot so we can get them the right updates at the right time.

They don't have the resources, they don't have the complexity. If they need it simple, they want it towards sales used case, and we're learning a lot from that. So we have sold units in this, and we are tweaking, modifying, adjusting and getting ready to go in 2020. But so far, the feedback has been very positive.

When we look at that market too, just to add on a few points, this is a large untapped market for us. We are historically selling enterprise solutions into enterprise accounts and into mid-enterprise accounts.

We've been able to see so far through our improvement in customer concentration, meaning less relying on the global 10 that we have a little bit of a track record of making things like this happen. So as we head to 2020, we're excited about the opportunity..

Yes. That's great. And then maybe just a comment. These are some -- in the letter you commented on some of the enhancements that you've given to Priority Engine, including, as you said, the idea of customer profile, personalized account rankings and a couple of others.

And I'm just wondering, are these competitive with the marketing automation offering that maybe some of your customers have? Or based on your previous comments, you said a lot of these customers don't have marketing automation.

Are you sort of moving in that direction to sort of give it that level of functionality?.

So I'd say we are making some enhancements both in the enterprise or called the Enterprise Priority Engine as well as the Priority Engine Express. I would say we complement the marketing automation market in functionality and services that other companies offer, again, in the enterprise market.

We solve a lot of things that were rolling out and investing in Priority Engine. And I'll get into Priority Engine Express again in a minute. But our customers even at the enterprise in the mid-market level, they need simplicity, they need a good user interface.

They need to really understand what they should be doing with all their customized list that they are building within Priority Engine. So we've increased some functionality and what we're trying to do is really service to the enterprise accounts key data points that they can see and leverage across their sales and marketing organizations.

Our customers take Priority Engine and they create customized list, which might be based on account territories, install base, they might be based on verticals, company size.

And what we're trying to do is take all those list that they're creating along with our Customer Success team and highlight and point out in surface some really key qualities that your sales and marketing organizations can jump on right away. So we talked about like enhanced qualification intelligence.

We want to let them know right on the user interface who is engaging with you versus competitors, personal account rankings and improved engagement signals.

Are they integrating with not only us TechTarget's content but are they integrating with your own content marketing? Or they are looking at your website and going to your website traffic or engaging with your banner? The key is to triangulate all this information and serve it up to our customers so they can action upon this.

In terms of Priority Engine Express, we're really trying to make this as simple, streamlined and scalable for our customers that fit under that small to maybe midsized category depending on how you bucket them..

Our next question comes from Marco Rodriguez with Stonegate Capital..

Just kind of -- just following up on the prior question here on the Priority Engine Express. The value propositions that you're basically providing the smaller enterprise companies. It looks like it's obviously starting to resonate a little bit and you're starting to learn some positive attributes to how to structure this particular product.

And in the letter, you talked about increasing the sales people there.

Just trying to get some clarification on, one, are there going to be additional heads? Or are you shifting people out of other areas?.

Yes. Good question. So Marco, if you recall about 1.5 years ago -- actually 2 years ago, we started investing in a sales development rep program. We never had that before. It was recruiting and hiring sales. We call them FDRs that will work on building and booking appointments that can be handed off to our outside sales reps.

And we built that with a vision that we're going to be looking at additional products that we are going to roll out, and we're going to be able to -- and we want to make sure we have the resources on the bench. So a lot of the things that we're doing here are shifts.

We take our sales development reps, we start increasing their position into whether it's a field account exec -- a field account executive role, which might be selling into those mid-market accounts, or it's a -- an opportunity to look at our Priority Engine Express opportunity.

So we'll shift, we allocate some resources, test ourselves, set this up so if we continue to see success, we can quickly mobilize with the best that we have to go out and support the opportunity that we see in front of us.

With that, being said, we're continuously hiring sales development reps because we want to train them under our umbrella, our training course, our methodology so they are ready to make and take action when we see fit..

Got it. That's helpful. And then in terms of the full production rollout for the Priority Engine Express, I know you're talking about 2020 as kind of the target time. Any -- maybe as a final point in terms of when in 2020 you might be doing it.

This is -- just kind of like Jan 1 or first half, second half type rollout?.

We should have this ready for the first half of 2020. Jan 1..

Got you. Okay.

And then on the Priority Engine, the Enterprise Priority Engine to kind of borrow your phrase there, these additional enhancements that you're fairly consistently adding to that particular product line, are you using those enhancements to increase pricing? Or is this more of enhancements that drive the product to make it look more attractive to acquire?.

Well, the real focus on our enhancements are probably twofold, right? It's really important for us to be able to show our customers transparency and attribution. So I mentioned earlier that we can provide -- Priority Engine provides all the intense signals that we're delivering that we own -- from our own and operated sites.

We can identify there those folks that are in Priority Engine, those active prospects who have also engaged with our customers' content, who have engaged or viewed their website, who have clicked on their banners and to be able to triangulate that and to show our customers that your content marketing and your Priority Engine efforts, which were bought on an integrated basis are working and supporting each other makes those customers stick and allows us to grow those customers on that end.

As we see that we believe we have pricing power.

We've had a couple of pricing increases year-over-year, and we believe we are in the best position to deliver real and observed purchase intent, make it very clear who's in market, by which technology segment, by which region and help our customers rank, prioritize and mobilize their sales and marketing efforts again, and we hope that, that creates some pricing leverage..

Got you. And last quick question on cash flows and your priorities for the remainder of fiscal '19 and as you move into fiscal '20, just trying to get a little bit of sense of as far as your capital-allocation priorities between reduction of debt, additional stock buybacks and further investments into the company..

Yes. I mean I'll chime in on this, and I hope Greg and Dan will also look in. We're going to continue with our capital investments, I mean, they're fairly modest and consistent year-over-year.

We have a 10b5-1 where we are -- we are in the market for buybacks and if we see opportunistic opportunities to invest in other areas within the company and outside of the company, we will look to do that.

We think we do a good job in managing our cash, we will pay down some of the debt which we had that we took out a couple of years ago to really be the catalyst for the buyback, and we'll continue to be financially responsible around the way we leverage the cash..

Your final question today comes from Ryan Meyers with Lake Street Capital Markets..

This is Ryan Meyers stepping in for Eric Martinuzzi here.

First question, can you give us some color on the demand you expect to see from your 10 largest customers in the back half of 2019?.

Yes. I think it's going to be fairly consistent with what we've seen in the first half of 2019. You might see a little bit -- Q3 is never a -- we've been in business for 20 years. Q3 has never recorded that you make hay in, right? Because there's a lot of summer months. These large global accounts have offices throughout Europe and Asia, North America.

And you really start seeing them pick up in September and October heading into the last quarter of the calendar. I would say they're barely consistent.

It's -- we're in every one of the accounts, I think every one of those accounts that deal with international business are dealing in -- taking a fairly cautious approach because of the tariff and trade talks.

And as I mentioned earlier, it's been very important and we're very fortunate as a business that we are less relying on those top 10 global accounts quarter in and quarter out. If you look back at our business 3 to 4 years ago, between 40% and 45% of our business was derived from those accounts.

So if they were down a little bit or they were flat and we -- that would really impact us.

Today, we have a very well balanced, and I would almost say -- describe it as a bell-shaped curve, we are -- roughly 25% of our business is coming from those top 10, roughly 50% of the business is coming from the next 100 accounts and approximately the remaining 25% is coming from the remainder of the accounts.

So I don't project anything that is going to be huge vertical leads in terms of improvement or declines with the top 10 global and that's projected and it should be in our forecast and our projections..

And that's -- and we don't really count on those global 10 accounts for our growth, right? The growth is really coming from the midsized companies and the smaller companies that are in the fastest-growing parts of the IT market. So -- and as Mike assured, we're less reliant on them than ever before. So that's really no change there.

But that's kind of been the status quo for the last 3 quarters with the global 10 accounts..

Okay. Great. And then just one more from me. So your organic traffic declined 13%, but the revenue was up 9%.

Can you talk a little bit about what was behind that traffic decline?.

Yes. I mean so when you take a look at the traffic decline, it -- we do not have a direct correlation between our revenue and traffic. Now we take a look at our content that we produce on our sites. And obviously, Google will reward you if you do not member protect or gate the content. They want free access to everybody.

And that will drive page views up and go from there. But as we mentioned earlier, only approximately 15% of our revenue is really derived from page views and traffic. That'll be considered in our branding revenue.

We as an organization always evaluate how much content we want to protect and when I mean protect, when an end user comes in, they need to opt in and then they need to register and when they register, we now capture their purchase intent behavior, their insights that we monetize across the other 85% of the business.

So if traffic is down 10%, 13% of pages, it's not keeping me up at night. We have plenty of traffic to address and fulfill the revenue needs, the demand needs based on the branding product line..

End of Q&A:.

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