Good morning and welcome to today's TechTarget Report second quarter 2022 conference call and webcast. My name is Candice, and I will be your moderator for today's call. All lines have been placed on mute during the presentation portion of the call with an opportunity for question and answer at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. I would now like to pass the conference over to our host, Charlie Rennick, General Counsel. Please go ahead.
Thank you, Candice, and good morning. Joining me here today are Greg Strakosch, our Executive Chairman, Mike Cotoia, our CEO, and Daniel Noreck, our CFO. Before turning the call over to Greg, I would like to remind everyone on the call of our earnings release process. As previously announced, in order to provide you with an update on our business in advance of the call, we 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, including during the Q&A, 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 and from these forward-looking statements.
Forward-looking statements involve a number of risks and uncertainties, including those discussed in the Risk Factors section of our filings with the SEC. These statements speak only as of the date of this call, and TechTarget undertakes no obligation to revise or update any forward-looking statements in order to reflect events that may arise after this conference call, except as required by law. Finally, we may also refer to certain financial measures not prepared in accordance with GAAP. A reconciliation of certain of these non-GAAP financial measures to the most comparable GAAP measures to the extent available without unreasonable efforts accompanies our shareholder letter. With that, I'll turn the call over to Greg.
Great. Thank you, Charlie. Good morning. We are pleased to report we exceeded our revenue forecast and Adjusted EBITDA forecast in Q2 and achieved 43% Adjusted EBITDA margin in the quarter. In addition, we are reaffirming our annual revenue and Adjusted EBITDA guidance today. For Q2, 2022, GAAP revenue grew 24% to approximately $78.9 million. Adjusted revenue grew 19% to approximately $79.4 million. Net income was approximately $12.4 million, an increase of 142%. Adjusted EBITDA grew 33% to $33.8 million. Net income margin was 16%. Adjusted EBITDA margin was 43%. GAAP gross margin was 74%. Adjusted gross margin was 77%. Long-term revenue grew 24% to $32.8 million, representing 41% of total revenue. Cash flow from operations was $20.9 million. Free cash flow was $17.3 million. I will, now open the call to questions.
Thank you. If you'd like to ask a question, please press star followed by one on your telephone keypad. If for any reason you'd like to remove your question, please press star followed by two. Again, to ask a question, it is star followed by one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. Our first question comes from Justin Patterson of KeyBanc. Your line is now open. Please go ahead.
Great. Thank you very much, and good morning. I was hoping you could talk about just some of the trends you're seeing from customers so far. Obviously a very strong quarter, more recurring revenue these days. Enterprise IT is different, but would love to hear anything about just trends you saw throughout the quarter and what you're seeing quarter- to- date? Thank you.
Great, Justin. First of all, thanks for the compliment. Proud of the team and also grateful towards our customers who continue to modernize their sales and marketing departments with a focus on high-quality first-party purchase intent data solutions. In terms of the trends, we've seen strong growth as we reported in the numbers in Q2, as Greg just mentioned in the introduction, across all of our purchase intent-led data solutions. You know, we also understand that we can't ignore the noise about the economy. You know, we all see it, the high interest rates, inflation, consumer confidence, everyone talking about whether we're in a recession or not in a recession. So I think it's pretty safe to say that a lot of customers are probably spending more time scrutinizing their budgets.
We have some customers that are, you know, might extend some of their sales cycles as they extend and navigate through this macro. On the other hand, we have other customers that are very opportunistic and aggressive with incremental, and they want to take advantage of this choppiness to gain market share. It's hard to really put a blanket statement on these set of customers are doing X or these set of customers are doing Y. I will say that over the last couple years, what we see is customers have spent a lot of money trying new tactics or new solutions out in the market. I think as the market gets tighter, volatile, a little more choppy like we're experiencing today, those investments will be highly scrutinized. Customers will really wanna focus on quality and ROI.
I think that TechTarget solutions should hold up pretty well based on our first-party purchase intent data, as well as our permission-based audience members. We do talk about the trends, you know, in the shareholder letter, fairly healthy IT environment. The other three trends around modernizing sales and marketing departments through data and automation, sensitivity to privacy regulations, which really bodes well for us with our permission-based members, and still a long-term transition of budgets from face-to-face to online for better measurement, scale, and efficiencies. Those are not as economically sensitive, and I think in the long term, those trends are gonna continue to bode well. What I'd say on that is we have a mix of what's going on in terms of customers, some being aggressive, some being, you know, really scrutinizing their budgets.
We don't wish for a recession by any means, but I think based on our quality of our data and our audience, we're better positioned than most.
Thank you.
You're welcome.
Thank you. Our next question comes from the line of Aaron Kessler of Raymond James. Your line is now open. Please go ahead.
Great. Thank you, and congrats on the quarter. First, just on the Priority Engine made for sales teams, if we can get an update there, just kind of what type of traction you're seeing with this product. Also just obviously a lot of companies have reported kind of lower brand advertising budgets. I'd be curious what you're seeing just on the more of the brand advertising side of the business as well in this environment? Thank you.
Sure. In terms of the Priority Engine sales use case, that was a big focus heading into 2022. Aaron, as you remember, historically, we focused on the marketing buyers, where they would use it for their ABM strategy, nurture strategy, building their account database and their prospect database. On the sales strategy, we've seen really good traction on that, where the information that marketers have, we wanna make sure that it's into the sales use cases. Very focused on territory management, making sure that we have the right prospect-level intelligence, so when a customer goes in there, and they're using it for their marketing sales case, and then they start leveraging the reps to use Priority Engine.
What we've done really well is go in, engage with the reps in their whether they're BDRs, SDRs, inside sales reps, or even outside reps, to work and train them on how to use the data. We've seen really good traction in terms of once we show them how to use the data, which accounts in their territories should be focused on, and which of the individual prospects within those accounts they should call because they have all the information at their hands, what they're researching, which competitors are influencing those accounts within a rep's territory, and their key entry points of research. We're seeing good adoption on that. We're gonna continue for training. We're investing heavily in customer success and our sales enablement training to empower the reps to leverage within our vendors, our clients' accounts, to leverage the data in the optimal way.
We are also very focused on, and I've mentioned this before, of getting tighter bi-directional integration into Salesforce as well as other marketing and sales technologies. I mentioned Salesforce. We've done Marketo. You know, we work with Marketo, Eloqua, HubSpot, but we're now really working on partnerships with integrations around sales engagement and sales enablement platforms such as Salesloft and Outreach. As we continue to get that data into our customers' Salesforce's workflow, we expect to see continued traction. In terms of the brand, you know, the one advantage that we have, it's you know, first-party data where our branding or ad revenue is high quality, and it's also high value, and it's high price. We've seen a continued momentum on the brand side.
You will see, and I expect to see some of these accounts may pull back a little bit on some of their branding expense and really focus more on the data and the demand generation and the project confirmation type of data. The brand revenue's fared well, and it's grown well, and, you know, we've all seen the announcement of, you know, the announcements and the vision of, you know, Google eliminating third-party cookies later on. I think that brings good attention to us, and I think our customers will continue to evaluate their brand strategy. The last thing I'd say is the branding piece of our overall revenue is a very small piece of the overall TechTarget revenue.
Yeah. I would just add in, so branding is 10% of revenue or less. The second thing I would add in is just in the B2B branding world is very different than the B2C branding world. It's basically an opposite business model. You know, Consumer Branding is basically unlimited web inventory with kind of low prices. In the B2B world, in the IT space specifically, you know, we benefit from a scarcity of inventory. You know, there's a finite number of million-dollar purchases going on at any one time. It's low quantity, very high quality, premium pricing. We're definitely much more insulated than the consumer internet. In Q2, branding revenues were very healthy growth.
Great. Thank you.
Thank you. Our next question comes from the line of Bhavin Shah of Deutsche Bank. Your line is now open. Please go ahead.
Good morning. Thanks. This is Dan on for Bhavin. I wanted to just touch quickly on the guidance and, as it relates to macro. I know you mentioned some kind of deal cycles elongating or maybe greater scrutiny on deal cycles. It was good to see you though reaffirm the full year revenue guidance, but maybe you could just help us think about kind of what's embedded in that guidance in terms of a continuation of some of those trends or, you know, additional conservatism that you've built in should macro get incrementally worse throughout the rest of the year?
Yeah, that's a good question. I mean, we're keeping a close eye on the overall macro. We have a lot of, you know, conversations with our customers. As I mentioned earlier, yes, there are some customers that might extend or scrutinize some of the budget spends, but on the other hand, there's still a lot of customers that are very opportunistic and, you know, finding incremental and accelerating their spend. It's like what I mentioned earlier, it's not a one size fits all right now. I think we're taking some of that into consideration and, you know, things can change quickly for the up or down. I mean, over the last six months it's been a self-fulfilling prophecy that we're gonna be heading into a recession. Everyone talks about it.
When everyone talks about it, everyone starts thinking about it, and then they start scrutinizing everything that they're looking at. You know, we'll see how things turn, and there could be some upside to that, but there also could be some pause and some fits and starts to that as well. Things can change quickly in this, but we've provided guidance and you've seen how we've done against our guidance in the past, and we feel this the, you know, the right guidance and keep reaffirming our annual guidance for the year is the right thing at this time.
Great. Thank you.
Hi, Jason. Please go ahead.
Okay, thank you. Two questions for me, guys. Any commentary on international markets? I know we, you know, we've heard that Europe's been a tougher market lately. You seem to buck that trend in the quarter. Is there any commentary there? Then the second one, can you give any like usage rates around like video or webinar? I'm just curious because as face-to-face events come back online, I think there's a fear that people are gonna use video less. I'm wondering if you've got any metrics that can validate, you know, more usage on that platform.
Right. Jason, on the international side, you know, again, healthy growth in the quarter. When we talk about those secular trends, especially around privacy regs with GDPR and all the European privacy laws, this really bodes well, you know, short and long term with our permission-based audience members. I also think we've identified that in the international markets, this whole transition to online and data-driven is probably a little bit behind the North America market. So again, we look at long-term secular trends and what's gonna benefit us and our customers in the long term. I think that bodes well for us. You're right, on the face-to-face markets, face-to-face events, it was heavily concentrated face-to-face events pre-COVID, tried to navigate and a lot of them navigated online during COVID.
We are seeing some face-to-face in the short term, but as the market gets tight here, you take a look at these companies are trying to build a digital transformation to leverage data online tactics for better scale and measurability and ROI, and that bodes well for us. Now, there are also some short-term headwinds. There's obviously some tighter markets, recession-based markets right now in EMEA. You also have a war going on right now. When we had these conversations in February, there was no impact, but you have macro inflation and heading into a recession, definitely in EMEA, you have the war in Ukraine, and you have some short-term macro headwinds.
There is a little bit of pause and hesitancy, but we're still seeing good growth across the board, and that's the call that I can give you today. Again, as I mentioned earlier, you know, we'll take a look at this market over the next, you know, 30, 60, 90 days. I really focus on the long-term trends and those long-term trends still bode very well for us. In terms of usage rates, you know, we don't track and monitor the video and webinar usage rates versus face-to-face events. We do see that there's been a pickup in some face-to-face events, but every study that we've seen and what we've looked at, and when we talk to our end user group as well as our customers, it's really being driven by the end users.
The actual technology buyer that does not have the enthusiasm as much as the vendor to go to a trade show, to spend three days out of the office, to go out there and travel, and to be there. Yeah, we expect that there'd be a pickup in face-to-face events, but if you look at the long term on this and how today's buyer is a little bit different than yesterday's buyer, they're very familiar and comfortable with online leveraging data and okay with researching purchases, large purchases on their time, and by leveraging the online capabilities with information and content, you know, we still believe that that's a long-term opportunity for TechTarget in this market. People that have good content and leveraging online and leveraging data are gonna fare well.
You know, what we've seen with the events that have been held, they've been relatively poorly attended, certainly attendance well less than pre-COVID. This whole trend in, you know, people wanting to do as much self-service research as possible kind of goes against the trade show model, which is to interface with vendor sales reps. All the research we're seeing is that the buyers wanna minimize that. Now these are million-dollar purchases, so there's gonna be some involvement, but they want it to be as late in the process as possible. You know, we don't see any bounce back to face-to-face events, face-to-face events being a threat to our business. Long term, we think they're just gonna just like they were pre-COVID, we think that the business is gonna continue to shrink.
Thank you. Our next question comes from the line of Joshua Reilly of Needham & Company. Please go ahead.
All right. Thanks, guys, for taking my questions, and nice job on the quarter here. If you look at your mix of customers, it's shifted a lot more towards cloud vendors who, you know, as we all know, raised a lot of capital in the last five years and generally still have large net cash balances. Do you see this cushioning any potential macro weakness versus prior downturns when you had a greater exposure to large global top 10 IT vendors that had more sensitivity to the strong dollar?
Yeah. Joshua, I think today's customer segmentation definitely is a competitive advantage for us right now. You know, you take a look at today's market where it's a lot of IT is spending and investing in cloud, SaaS, utility type of solutions. Today's IT is helping drive and run businesses. If you look at five or six or go back to, you know, 10 years ago when there was downturns, if you were a hardware company and you were selling server storage and networks, and it was a downturn, people would just delay the purchase. They would push it off for six months, 12 months, a year, and they would just deal with, you know, older equipment. Today's IT environment is they're running their business, whether it's finance, sales, marketing, you know, customer experience through these cloud types of solutions and these SaaS-based solutions.
Very hard to stop investing in that or stop not completing a project because it'll be very impactful in a negative way to the business. You know, right now, IT is a competitive advantage. People that invest in technology and do it for their business will gain a competitive advantage, and they don't wanna lose that. I think today's customer segmentation is much better. We feel much better about that today than we did 10 years ago, and I think that'll continue to be in that movement.
Yeah. Besides that, those companies are financially very healthy. The business models are just different. It's all subscription. You know, in the past, as Mike was saying, tech companies would see their revenue decline in a downturn. That's just not. We're not seeing that today. The subscription revenue is very stable. You know, while it may get harder to win new deals, their base of revenue is very steady. If you you know, one thing to always remember about technology companies, they're always under intense pressure to generate revenue, no matter what the environment is. If you have stable revenues with your existing subscription and you're under intense pressure to generate new revenue, we don't believe that's a formula for people to reduce investments in things like the.
We provide purchase intent data that makes your sales team more strategic, more intelligent, more productive, helps them win deals. You know, we think we're in kind of the sweet spot of services we provide really for any economic environment.
Okay. Great. I have two more quick questions. One, how are you thinking about Priority Engine price increases this year given that you've had some you know good price increases in the last couple of years, but you know it's really matched the innovation that you've delivered? Second, are there revenue synergies between TechTarget and BrightTALK playing out as you expected? Thanks, guys.
Great. In terms of the price increases for Priority Engine this year, we'll evaluate that going into 2023. You know, our focus right now, Joshua, is to make sure that we expand on the sales use case. This year was the first year that we launched where we would charge a seat license for additional sales reps. Our reps and our product teams and our customer success teams are really focused on adoption and onboarding and making sure sales reps that are leveraging Priority Engine are getting the most value out of that. As we continue to do that, we'll be able to sell more seat licenses, which we haven't done before. In terms of price increase, we'll evaluate that at the end of the year. In terms of revenue synergies, yes.
We've done a really good job, and it's not just BrightTALK and TechTarget. We have ESG, BrightTALK, and TechTarget, where we continue to introduce each of our opportunities to the other folks across the company. When I look at the business today, I see there are so many entry points for us to get into an account, whether it's on, you know, web-based, video-based, text-based, database, demand generation, Priority Engine, branding, content enablement strategies. Our reps are really well-equipped to make sure that they're aligning with their resources across the entire organization to say, "Okay, this customer has this pain point," where two years ago we might not have been able to really address that pain point in the most effective manner. They are introducing each other into those accounts, having joint conversations, working together collaboratively, and we've seen good success on that.
Okay, thank you. Our next question comes from the line of Brian Bergen of Cowen. Your line is now open. Please go ahead.
Hi, thanks. This is Zach Aisman on for Brian. A couple questions, both on Priority Engine. The first one, what was the growth in the quarter, and is the expectation for the year still high teens to 20%?
The growth in the quarter was 20%, and we're still maintaining the overall expectations on the growth.
Got it. As a follow-up on Priority Engine, how should we think about the macro sensitivity here? Understand there are structural tailwinds and using more data and insights during the sales and marketing process. At the same time, do you think that some clients become more averse amid the macro uncertainty given its higher price point and longer-term in nature?
You know, I think customers that are really, you know, getting spun up and understand the value of not just intent data, but first-party purchase intent data, and not only at the account level, but at the individual prospect level, there's a high get it factor there. Because no matter what type of environment you're in, IT companies need to grow their revenue and grow their market share. If the markets get tighter, it's gonna be really hard for them to find those deals because there are fewer deals that are gonna land in the quarter. Having a competitive advantage or a head start to identify those opportunities or see those accounts that they should be focused and prioritized on should bode well.
Now, with that being said, I've said this over the last several quarters. Priority Engine is at the catalyst of all of our purchase intent, first-party purchase intent data solutions. We could walk into a customer, show them all the data in Priority Engine. Let's say they're not ready to do and integrate, you know, a long-term deal and invest in Priority Engine. It dovetails really nicely into the other offers that we have. Whether it's content enablement services, activating that content into a demand generation, you know, program, looking at contextually aligned and relevant banner placements, as well as some other solutions. It's really important to understand. I mean, I got asked this question the last couple of quarters, you know, is Priority Engine grow 20%, 21%, 19%?
At the end of the day, all of our products are first-party purchase intent driven and led. Priority Engine really highlights the value across all of our solutions and gives us the ability to walk in and get the right introductions, and sell the right solution for that customer at that time.
That makes sense. Thanks.
Thank you. Our next question comes from the line of Eric Martinuzzi of Lake Street Capital Markets. Your line is now open. Please go ahead.
Yeah. I wanted to focus on the cost structure. The 77% adjusted gross margin was kind of in line with what I was expecting. Just could you remind us of what are your costs of revenue and then any inflationary impacts on those costs?
The cost of revenue is on the content producers. Dan, what else are we costing by handling?
It's mainly, excuse me. As it relates to cost of revenues, you're mainly talking about salaries and headcount. In terms of inflationary pressures.
Yeah. In terms of inflationary pressure on our expenses, I mean, well, what we see right now is I think what everybody's seeing. It's on the employee side. We know it's an employee market out there. We just did our mid-year comp reviews. We try to be as aggressive as we can. We wanna reward our top employees. We made some hires that were, you know, focused on the key investment areas, Eric, in May and June, that we'll see a full cycle in the back half. A lot of those hires were on product development, engineering, product marketing, customer success, as well as sales.
You know, we might pay a little bit more now in the market than we did two years ago, but we're making the right investments with the best, you know, our best employees and with the right people that we have to, you know, continue to invest. Again, that's across engineering, products, customer success, sales, and product marketing.
You're experiencing wage inflation, but your retention rates are in line with historical norms?
Yeah. I would say, you know, retention is probably a little bit of retention pressure, but we're, you know, we're pleased where we are. We're seeing, you know, wage inflation, but we're also managing the business really well as you see in the 43% EBITDA margin. I think it's, we're doing the right things for the business and investing in the business as well as managing against the financials.
Mm-hmm. Okay. Then shifting gears, you talk about gaining share. Obviously, there's the organic growth rate of the business. There's also the M&A avenue, which you guys have experience with. Are you seeing, you know, what's the level of activity there? We have any near-term prospects? Have valuations come in a bit, or is it still, kind of longer-term, share gain opportunity?
Yeah. I would say we'll look at a couple things. With the cash on hand that we did through the convertible back in December with the 0% coupon. We have a lot of conversations on the M&A side, and we have consistent conversations. When we have those conversations, we're looking at several things. Do they fit into our content model? Do they fit into our permission-based audience model? And are they gonna help accelerate our lead in the first-party purchase intent model? However, we also know that valuations are moving. Especially in the private markets where it takes a little longer to catch up in the public markets. Everybody sees what's going on in the public market. Private companies, it takes a little bit longer for them to see.
We're starting to see those valuations get more in check, come more in line. Those conversations will continue to happen, and it also has to be the right deal for the buyer and the seller. We are very active in those conversations. We're gonna continue with the buyback. We've done this. You've known us, we've done this historically over the course of our for a long time, and it's been very accretive for our shareholders, and it's been good for the business, so we're gonna continue with the buyback.
We also know that we have some converts coming up in 2025 and 2026 that our goal is to make sure we'll leverage the, you know, free cash flow, the strong free cash flow that we generate to pay a lot of that off when it comes due in cash versus, you know, in stock. That is our goal with our cash.
Good. Thank you for taking my question.
Thank you. Ladies and gentlemen, thank you for joining us on the TechTarget Report second quarter 2022 conference call and webcast. Have a great day ahead. You may now disconnect your line.