Good afternoon, and thank you for attending today's TechTarget Reports Third Quarter 2022 Conference Call. My name is Austin, and I will be your moderator for today. [Operator Instructions] I would now like to pass the conference over to our host, Charles Rennick, with TechTarget. Charles, please go ahead.

Thank you, Austin, and good afternoon. Joining me here today are Greg Strakosch, our Executive Chairman; Mike Cotoia, our Chief Executive Officer; and Dan Noreck, our Chief Financial Officer. . Before turning the call over to Greg, I'd 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've 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, which are subject to risks and uncertainties 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 as is 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 accompanies our shareholder letter. With that, I'll turn the call over to Greg.

Great. Thank you, Charlie. For Q3 2022, GAAP revenue grew 11% to approximately $77.4 million. Adjusted revenue grew 8% to approximately $77.4 million. Net income was approximately $14.8 million, an increase of 49%. Adjusted EBITDA grew 15% to $32.4 million. Net income margin was 19%. Adjusted EBITDA margin was 42%. GAAP gross margin was 74%, adjusted gross margin was 77%. Longer-term revenue grew 25% $33 million, representing 43% of total revenue. Cash flow from operations was $22.5 million and free cash flow was $18.8 million. And I will now open the call to questions.

[Operator Instructions] Our first question is with Justin Patterson from KeyBanc. Justin, your line is open.

Great. Perhaps two if I can. First, I was hoping you could elaborate a little bit more on some of the slowdown you saw during the quarter? We've heard a lot of companies talk about longer sales cycles. So just kind of curious about what your observations have been around customer behaviour? And then secondly, really appreciate the 2023 initial outlook. Could you talk a little bit about some of the assumptions that give you confidence in mid-single-digit growth and 40% EBITDA margins?

Yes, Justin, this is Mike. In terms of the Q3 slowdown, typically, when we -- and we discussed this in previous quarters when we talk about Q3. It's a back way quarter -- its biggest back-weighted quarter. When we get out the Labor Day, you usually see a really big push with customers spending on their sales and marketing dollars in sales enablement dollars to finish off a strong Q3 for us as well as set us up to Q4. And with the global macro once when we got out of Labor Day post Labor Day, we did see a lot of deals get pushed budgets within our customers at our customers were caught or on hold, and they're really doing the reset, but they're going to evaluate what their budgets are going to be. And with the global macro uncertainty, this behavior is not surprising. I mean we've seen this before. Where they won't reset, evaluate budgets. It might take a quarter or two to go through those budgets and assessments or what we've typically seen as a flight back to quality. So we've talked about our business with our editorial content strategy, opt-in permission-based audience, first-party purchase intent data and really the resiliency of the IT market today versus 10 years ago, I went to look at the last real big downturn, I think that's really guided and it's not surprising how customers react. And we will see some customers shift their products portfolio where they may step back from brands, which fortunately for us, is only 10% of our business, but some of the larger customers may pull back on brand and some of the current campaigns, they may shift to more what we call further down sales funnel type of lead to our qualified sales opportunity…

Our next question is with Aaron Kessler from Raymond James. Aaron, your line is open.

Just maybe just on kind of the slower growth that you're seeing, I think it's kind of across the board, U.S. and international as well as by company size. And then just also, can you detail many product differences you're seeing? It sounds like priority engine is still seeing pretty solid growth of 15%. So does the slowdown more on the ad side? Just a little bit more color there would be helpful.

Yes. I mean we're seeing the slowdown. Again, when we reported Q3 numbers, we had a report to 11% growth. I think if you look at constant currency, it will be close to the 13% growth. You see it for pull back in the U.S. I would say EMEA, as we've all seen, we think the economy is challenging right now in North America, I mean, EMEA is a pretty tough shape. I mean with the recession, high prices cost, the war in Ukraine. I mean there's a lot of challenges going over there as well as some of the political turmoil. So we're seeing that across the regions. I would say the hardest region is probably EMEA right now. And in terms of products, we saw some good growth of priority engine. As I mentioned in the previous question, we are seeing some shifts in product or budget allocation from the branding of the ad spend, which again is roughly 10% of our overall business, but customers that spend in that, they will quickly pull back on that because that's probably the hardest product to measure and show our line. They may shift on some of their programs demand gen programs and we shift that budget to what I'd call further down the sales funnel types of products. We've got qualified sales opportunities and HQLs, high-quality leads. And that's really what they're doing that or they're trying to get as much opportunity to close any outstanding deals that they have in their pipeline, so they're trying to drive immediate revenue because driving net new logos and closing deals has taken longer for that. So that's kind of what we're seeing in the product mix, but we're keeping an eye on it. What we are also seeing is the customers will meet really good content to make sure that they're getting their message out there, but we're navigating this right now based on what we see those are some of the shifts and we're seeing the impact on the slowdown in EMEA as well as North America.

And then any changes to your kind of expense growth plans for '23. It sounds like you're going to maybe take a little bit more careful approach, but any plans change in hiring plans, et cetera?

Throughout our 23-year history, part of our DNA is to invest wisely and smartly. We'll make sure that we continue to invest in the right areas and the right priorities that will help grow and support our long term -- short and long-term priorities around the company. But we do keep a close eye on expenses. As you'll see, we'll finish the year at 40% EBITDA margin. We're projecting 2023 at 40% EBITDA margin. So we'll manage the expenses in accordance with the revenue projections. We have a good track record of doing that as well as spin on free cash flow. We'll continue to execute on what we've done in the past, and it's really paid well paid dividends for us.

Our next question is with Bhavin Shah from Deutsche Bank. Bhavin, your line is open.

Just kind of focusing back on the guide for 4Q and I guess it's '23. Can you just maybe elaborate a little bit more? I know you talked about it a bit about, but just in terms of some of the underlying assumptions in terms of the macro, are you expecting the macro gets worse and budgets to get worse, like kind of what's embedded as we think about the guidance and we think about that deceleration in the revenue growth in 4Q and the first half of the year?

Yes, Robin. I mean what we look at is we look at our customer behavior and based on the real-time global macro uncertainty, this behavior is not surprising to us. And it's kind of predictable. So when we got into September, when we saw a pullback and you saw the global markets really drop. I look back and say, okay, how has our business performed over the last couple of years all the way into the summer of 2025 where we were booking our growth penetration across the different regions is going really well. When this happens and this happens quickly, we first really saw this was coming back from Labor Day where deals were delayed and deals with port budgets and budgets were cut, not for all customers, but we sort it across small, large and midsized customers. What typically happens is they do a reset. They get direction from their management that things are on hold, you're reducing your budget, you're cutting your budget, you're putting things on pause. They take a look and they not reassessing what I would call the must-have quality investments versus the nice to have. Going a high tide rises all growth, right? So a lot of companies went out and made extra expenditures and investments in different areas. I'm not saying that they didn't scrutinize ROI, but they're a little bit more free in terms of investing on that. Well, now they're going to reset. They're going to take a look at every single one of the investments. How long will that take? I really can't tell you what I've seen in the past, it could take a couple of quarters to really get that reset. You'll identify the best solutions, data and partners that can help them accelerate and meet those numbers that they're going to have to hit. And so in the next quarter or two, we see them really trying to scrutinize reset and then drive back to that flight -- flight to quality. And I think it will end up in the long term, probably being good for our customers and good for us as well in terms of the flight back the quality and assessment must have ROI-driven solutions.

And then I guess there is a quarter in post-Labor Day, like, have you seen any outside impact from any of your larger customers? And have a more pronounced impact on your business, whether it's on the brand side or anything else? Like are there one or two specific customers that materially pulled back open?

In terms of the brand, we definitely saw the brand business pull back. Again, that's the fastest thing that customers can pullback on and cancel because it's also the hardest product to measure. Now if you look back at our business 10, 15 years ago, it was probably close to 30% of our business. And right now, it's approximately 10% of our business, maybe even a little less than 10%. So yes, it impact us, but it doesn't impact us like something that's 100% advertising ad marketing business. And it's not one customer that's said, okay, we don't have a 10% customer. So it wasn't where somebody just pulled back and cancelled. You're seeing -- and I think you're seeing this as well across the market where customers, whether they are small or minor large, it just really managing scrutinized and every expense that they are going to look to put -- invest in, and it's going to take a little bit of time to assess that. But again, as I go back to when we've seen this back in the last financial pullback. Customers still have numbers and targets to hit. They have a pipeline of feed. They have sales reps to make sure that they are supporting. And there is always a flight back to quality in terms of data and insights for both sales and marketing organizations.

Just last quick one, and it's great to see that 40% EBITDA target for next year despite the uncertain macro. But how committed are you to that target? I mean, if the macro gets worse and revenue kind of continues to be impacted? Will you continue to kind of expenses to kind of hit that target? Or given some of the longer-term opportunities you have to kind of rebalance from that?

Well, think look at it. The good thing about it is we have a 23-year DNA of investing wisely, not over spending in areas that are not going to impact the business. And I think having that DNA and that type of discipline has played well for us. We made a lot of key investments in 2022. We doubled the product, the software and development teams to help us with our priority engine enhancements and features and road map. And we're glad we did that. We don't want to pull back on that. And there are some other investments that we're making towards our content enablement services that we know that our customers are going to need really good content to engage with a self-service buying team that we want to keep going. So the way we've managed our expenses over 23 years, we'll keep an eye on it. If there's something that provides an opportunity to accelerate growth, and we have to -- it's a percent here and there, we'll look at that. But we have done a really good job. We are well disciplined in cost management, and it's also we're very well disciplined investing in the right business areas, and we're going to continue to execute on that path discipline.

Our next question is with Jason Kreyer from Craig-Hallum. Jason, your line is open.

Carl here on for Jason. You kind of talked about a little bit earlier with the customer behaviors, but I was just wondering if you could kind of talk about the business metrics around that, like contract duration, sales cycles, churn? And if you're seeing the macro have any impact on these KPIs?

Yes. I mean what we're seeing on our -- what I could share with you is that we've seen some of the deals that we have forecasted. And as you saw in our shareholder letter, this is the first time since Q3 of 2010, 46 quarters over 12 years. Yes. TechTarget has missed both the quarterly revenue and adjusted EBITDA numbers. So what we're seeing is a delay in terms of budgets. Customers are also telling us that their budgets are frozen, so if we had something in the forecast that we committed at 70%, we have a really good track record of knowing when that's going to come in, when that's going to land and when that's going to run and recognize. And so some of those deals have been delayed, and we've seen customers just pull back on budget where they want to reset and make sure they're assessing the right quality investments. And again, I can't repeat enough, flight back to quality will eventually happen, and that's what we're seeing through customer behavior. We've also, as I mentioned, have seen some customers shift their product strategy in terms of what they are investing with TechTarget from, yes, some of that brand or demand gen campaign focus to more bottom of the funnel, lower end of the funnel, qualified sales opportunities and HQLs to help their sales teams and the lowest hanging fruit that they can get right now to support their current numbers because they go through the same thing. I'm sure you've seen that on some of your real calls. But that's the guidance I can give you and that's what we're seeing, and we're keeping a close eye on it.

Perfect. And then just last one here for me. As you went through COVID, we kind of saw more TechTarget products or prospects up for shorter duration engagement as opposed Priority Engine deals. Just wondering if you're seeing any of that here in the early stages of this recession?

I think we're seeing some of that where people are -- some of our customers are not going to -- they're going to delay making long-term commitments, 1, 2, 3-year commitments. There are some signs of that, so we'll give it an eye on that. But I think that, that's a safe assumption over the next quarter or so as people navigate through this that you might see similar patterns and behaviors at the beginning of 2020.

Our next question is from Joshua Reilly from Needham. Joshua, your line is open.

I wanted to hit on the customer base difference. I think this is an interesting point to highlight with investors that 4, 5 years ago, we all know you had a very different customer base back then. Are you surprised that some of these more software-oriented customers are pulling back maybe a bit more than we would have expected given their secular growth versus the legacy guide who had a little bit more cyclical growth?

Yes, Josh. Yes, it's a good point. 4, 5 years ago where you didn't have as many cloud, you had a lot of on-prem hardware customers, where when they pull back, they pulled that for a while, and we had a bigger percentage of our customer segmentation allocated to those folks. So I would say that over the last few years, too, we've also gone from if you look in the last 10 years, almost 1,000 customers to over 3,000 customers. We have different product suites. We have reentry points. We have different capabilities, which is really involved in our business and also having 42% of our revenue in long-term contracts, all very favorable. But when you also get hit with a global macro uncertainty, you will see a lot of these customers at least pull back. They won't necessarily cancel and be gone, but they will pull back, and you're seeing in the market, cost cutting and reductions that they're doing across small PC back firms, midsized growth firms, even some of the largest stalwarts that you see out in the market are all doing that. And it happened so fast that if you look at some of this data from the middle of September till today, I think it's really these folks trying to assess, reset and reprioritize and making sure that they're focused on ROI. So yes, they're more insulated from what's happened versus five years ago, but they're not immune to it. So there will be some pull back.

And then if you look at the 15% growth in Priority Engine, how much of that -- you had been trending pretty consistently at 20% for a long time. How much of the decel is due to weakness in the SMB Express product versus just more general demand there?

I think you see it across more of the general demand as people are looking to whether they're renewing and saying, I want to hold off and see how this goes for another couple of quarters or a month. I think it's across -- you see it a little bit across the board. We've also seen some of our Priority Engine customers increase their spend, their investment, their commitment. But I think it's not just in one area right now because of the sudden pullback in the global macro environment that you're seeing across different customer segments to say, let's stop, let's assess, let's make sure that we have the right investments. And again, what plays well for us is that we've always seen a flight back to quality, when you have first-party intent data, you watched google announcing the elimination of third-party cookies, got a permission-based audience, you really got a strong content investment. My prediction on this is at play as well as we navigate through this and come out picking up market share on the back end.

And then maybe I'll just sneak 1 more in here. You mentioned in the letter that you're investing here in the downturn, which makes a ton of sense. How should we think about your appetite for M&A here versus buybacks given the stock is obviously down and the valuations come down, and you have to have a pretty high threshold in terms of growth and returns from an acquisition to make an acquisition versus buying back stock here?

That's a good question. I mean so we're going to manage and be opportunistic. We announced a $200 million buyback. But we're also very involved in looking for the -- we've talked about this in the past, and we think there's going to be some really good opportunities based on the recent valuation resets with companies around content, intent, audience, peripheral capabilities as well as adjacent markets. And so we are going to be opportunistic on that. And when we see the right organization that can help TechTarget at the right valuation, that's our playbook, along with the buybacks.

Yes. So I mean we're fortunate. We're in a position we can do both. So we've got $384 million in cash. We think we'll generate $100 million of cash flow next year. So we think that we're going to be able to do both in terms of be aggressive with buybacks and also take it -- actually taking advantage of any downward valuations in our share price, but also downward valuations and acquisition targets. And again, as Mike said, we have a good history on this of taking advantage of downturns previously in terms of reinvesting to take market share, buying back shares at good prices. We have a good history of that, and making smart acquisitions at good prices. So that's the silver lining of these global pullbacks. It gives strong companies the opportunity to really strengthen themselves. And we look forward to taking advantage of that.

Our next question is with Bryan Bergin from Cowen. Bryan, your line is open.

This is Derek Caseta on for Bryan. I just wanted to touch on Priority Engine. I was hoping for an update on the overall progress of the sales use case version now that we're lapping year 1 anniversary and maybe going into how the performance has been versus your expectations, where there have been positive surprises and then maybe where things might be a little bit bumpier?

Yes, great. In terms of the sales use it, yes, we watch that, it's coming up in 1 year. We've seen really good success on that. As you know, historically, we've sold Priority Engine to marketers and markers would leverage that for the nurture e-mail strategy. So at the beginning of 2022, we launched our sales use case modular from Priority Engine. We've seen really good adoption on the sales side. We've seen great usage trends on that. Reps using it for various different ways, whether it's around customer retention, making sure it's net new logos, territory management, and we're going to continue to build upon that. What I'd like to also as -- I mentioned earlier, and we also brought it up in the shareholder letter that we put a lot of investments in 2022 and a lot of them in the back half, midyear into the back half around our developer software team working on Priority Engine. And some of the key areas that we're really focused on is the integrations of our data through Priority Engine into our customer sales force. Now we have that today, but we want to expand on that, make it easier, enable our customers to leverage our information and their workflow but also in a bidirectional manner for TechTarget to be able to have access to certain key data points within their sales force to help drive ROI and analytics dashboards and updates such as open pipeline, close one loss opportunities, where are these deals in the pipeline, how do we set up our sales reps within our customers' environment to make the most appropriate and relevant follow-up. We also want to make sure that we are working with our customers to provide more insights across their total campaign with TechTarget, both on the sales side and on the marketing side. So what you're doing with their lead generation and demand gen, their content, their branding, the visitors on their website to really bring that end-to-end view into Priority Engine to help fuel and help modernize, which we've been talking about for a couple of years, both sales and marketing. So there's a lot that we're doing on the platform. We like where we are with the sales use case. We're going to continue to expand on that, but we're also not forgetting the market as well.

And if I could just add one more here. I know you talked a lot about kind of clients pushing back their budgets and reevaluation, but I was just wondering if you could kind of go into if you're seeing any pushback from clients on pricing and maybe what leverage you guys might have to kind of navigate a more cautious consumer?

Yes. We -- we don't see a lot of pushback in terms of our pricing. I mean, once in a while, we do. I think our customers understand that where the highest price and the highest value based on how we get our data at both the account and at the individual prospect level. So I think they see that. There are low-cost providers where sometimes we will if a customer comes back and says, "I want you to drop your CPL to X". If we -- if they're not embracing the current value of our port, we might not take that deal and walk away from it. And I think that's a strategy that we've been very -- we've been consistent with, and we're going to continue to do that. And like I said, when people and customers navigate through this, they reset, they need a flight back to quality, and that means having the most accurate, precision, quickest and transparent path to get to their prospects, to get to the right accounts as well as to engage with their existing customers because it's a big customer retention focus and having access to our data and our capability set through content, campaign activation, insight, intent, I'd call content to close capabilities enables our customers to have that. So we really want to comment to the pricing pressures.

Our next question is from Max Michaelis from Lake Street Capital. Max, your line is open.

Just one for me. Just given the guide in Q4 and the outlook into 2023, what are your guys' expectations for gross margin as well as are you guys -- should we plan on taking any wage inflation into operating expenses for next year as well?

Yes. I think that our gross margin will be relatively consistent with what they are today, and we've guided to 40% -- early projections 40% EBITDA margin. So I would -- we baked out in the model, and I don't think there's going to be a lot of change to that.

And then on my last part of my question, though, just like OpEx, just wage inflation, should we plan on making any of that into 2023 as well?

I really wouldn't take that much into it. I mean there's I think you're seeing some of the markets turn right now, and you see a lot of companies out there really trying to manage expenses all across the board, including headcount, employees and [indiscernible], so I wouldn't take much of a change.

Our next question is with Greg Burns from Sidoti & Co. Greg, your line is open.

Looking at your guidance -- revenue guidance for '23. Does that assume growth and Priority Engine?

We don't break it down, Greg, by the product, but it's -- we gave a preliminary how we feel this will run quarter-to-quarter and throughout the year and well the mid-digit growth, but we don't break it out by product.

And then of your 3,200 customers that you called out, what percent of those are currently deploying the sales use case?

Again, we don't break down

It's very small that's still 1 year within the first year, growing nicely but still a small base.

That concludes our Q&A. Thank you for your participation. You may now disconnect your lines.