Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and accompanying notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors including those discussed below in this Quarterly Report on Form 10-Q, in our Annual Report on Form 10-K for the year ended December 31, 2022 under Part I, Item 1A, “Risk Factors,” and in the other documents we file with the Securities and Exchange Commission. Please refer to our cautionary note regarding “Forward-Looking Statements” section on page 32 of this Quarterly Report on Form 10-Q.
Overview
TechTarget, Inc. (the “Company”, “we”, “us” or “our”) is a global data, software and analytics leader for purchase intent-driven marketing and sales data which delivers business impact for business-to-business (“B2B”) companies. Our solutions are designed to enable B2B technology companies to identify, reach, and influence key enterprise technology decision makers faster and with higher efficacy. We offer products and services intended to improve information technology (“IT”) vendors’ abilities to impact highly targeted audiences for business growth using advanced targeting, first-party analytics and data services complemented with customized marketing programs that integrate content creation, demand generation, brand marketing, and other advertising techniques.
Our goal is to enable enterprise technology and business professionals to navigate the complex and rapidly-changing enterprise technology landscape where purchasing decisions can have significant financial and operational consequences. Our content strategy includes three primary sources that enterprise technology and business professionals use to assist them in their pre-purchase research: independent content provided by our professionals, vendor-generated content provided by our customers and member-generated or peer-to-peer content. In addition to utilizing our independent editorial content, registered members and users appreciate the ability to deepen their pre-purchase research by accessing the extensive vendor-supplied content we make available across our virtual events, webinar channels and website network (collectively, our “Network”). Likewise, these members and users can derive significant additional value from the ability to seamlessly interact with and contribute to information exchanges in a given field on our Network. To advance our ability to provide purchase intent-driven marketing and sales data, we have been acquisitive over the last three years. During 2021, we acquired Xtelligent Healthcare Media, LLC, a leading healthcare B2B media company focusing on healthcare-related technology. Similarly, during 2020, we acquired (i) BrightTALK Limited, a technology media company that provides customers with a platform to create, host and promote webinar and video content, (ii) The Enterprise Strategy Group, Inc., a leading provider of decision support content based on user research and market analysis for global enterprise companies, and (iii) Data Science Central, LLC, a digital publishing and media company focused on data science and business analytics.
We had approximately 30.7 million and 29.4 million registered members and users, which we refer to as our “audiences”, as of March 31, 2023 and 2022, respectively. While the size of our audiences does not provide direct insight into our customer numbers or our revenue, we believe the value of the services we sell to our customers is a direct result of the breadth and reach of this content footprint. This footprint creates the opportunity for our clients to gain business leverage by targeting our audiences through customized marketing programs. Likewise, the behavior exhibited by these audiences enables us to provide our customers with data products designed to improve their marketing and sales efforts. The targeted nature of our audiences enables B2B technology companies to reach a specialized audience efficiently because our content is highly segmented and aligned with the B2B technology companies’ specific products.
Through our ability to identify, reach and influence key decision makers, we have developed a broad customer base and, in 2023 expect to deliver marketing and sales services programs to over 3,000 customers.
Executive Summary
Financial Results For the Three Months Ended March 31, 2023
Our revenue for the three months ended March 31, 2023 decreased by $11.1 million, or 16%, to $57.1 million, compared with $68.2 million, during the same period in 2022. We saw decreased customer spend across our product suite. The amount of revenue that we derived from longer-term contracts, which we define as contracts with a term of in excess of 270 days, in the first quarter of 2023 decreased 19%, compared to the first quarter of 2022.
Our international geo-targeted revenue, where our target audience is outside North America (“International”), decreased approximately 21% for the three months ended March 31, 2023, compared with the prior year period driven by the items noted above.
22
Gross profit percentage was 68% and 73% for the three months ended March 31, 2023 and 2022, respectively. Gross profit decreased by $10.5 million, mainly due to the decrease in revenue compared to the same period a year ago.
Business Trends
The following discussion highlights key trends affecting our business.
•Macro-economic Conditions. Because most of our customers are B2B technology companies, the success of our business is intrinsically linked to the health, and subject to the market conditions, of the IT industry. Despite the current uncertainty in the economy (i.e. inflation risks, rising interest rates, and Russia’s invasion of the Ukraine), there are several factors indicating positive IT spending over the next few years is likely. We believe there are several IT catalysts such as AI, security, data analytics, and cloud migrations, to name a few. Our growth continues to be driven in large part by the return on the investments we made in our data analytics suite of products, which continues to drive market share gains for us. While we will continue to invest in this growth area, management will also continue to carefully control discretionary spending such as travel and entertainment, and the filling of new and replacement positions, in an effort to maintain profit margins and cash flows.
•Industry Trends. Our business has been and is likely to continue to be impacted by macro-economic conditions. We have observed the enterprise technology market materially worsen during the second half of 2022 and the beginning of 2023, with third party data indicating that over 1,000 technology companies, including many of our largest customers, have announced layoffs. The layoffs have resulted in a challenging selling environment where we have seen elongated sales cycles, budget cuts and freezes at many of our customers, which has impacted our near-term outlook. We are seeing our international markets perform worse than our domestic markets. Given the weak macroeconomic conditions, in December 2022, we announced a headcount reduction of approximately 5% of our workforce, which is expected to result in approximately $7 million in annual savings.
•Customer Demographics. In the three months ended March 31, 2023, revenue from our legacy global customers (a static cohort comprised of our 10 historically largest on premises hardware technology companies), decreased by approximately 20%, compared to the same period in the prior year. The metric measures the year-over-year increase in GAAP revenue from this cohort of customers and is calculated by dividing the GAAP revenue from this cohort of customers for the current year by the GAAP revenue from this cohort of customers for the prior year. We use this information to monitor customer concentration trends within the Company, which we deem an important metric for evaluating revenue diversification. Revenue from our other customers, excluding the legacy global customers described above, decreased by approximately 17%, compared to the same three month periods in the prior year.
Our key strategic initiatives include:
•Geographic. During the three months ended March 31, 2023, approximately 34% of our revenue was derived from internationally targeted campaigns. We continue to explore initiatives to grow our international presence.
•Product. Purchase intent data continues to drive our product road strategy. During 2023, we intend to improve upon our sales use case by revamping our sales alerts and ROI dashboard features among other strategic objectives (including expanding our saleforce.com connecter functionality).
Our revenue was down 16% for the three months ended March 31, 2023 compared to the same period in the prior year, which was primarily driven by the factors noted above.
Sources of revenues
Revenue changes for the three month periods ended March 31, 2023, as compared to the same periods in 2022, are shown in the table below. See the discussion above and Notes 3 and 13 to our condensed consolidated financial statements for additional information on our revenues.
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
|
(dollars in thousands) |
2023 |
|
|
2022 |
|
|
North America |
$ |
37,760 |
|
|
$ |
43,587 |
|
-13% |
International |
|
19,354 |
|
|
|
24,578 |
|
-21% |
Total |
$ |
57,114 |
|
|
$ |
68,165 |
|
-16% |
23
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
(dollars in thousands) |
2023 |
|
|
2022 |
|
Revenue under short-term contracts |
$ |
33,889 |
|
|
$ |
39,505 |
|
Revenue under longer-term contracts |
|
23,225 |
|
|
|
28,660 |
|
Total |
$ |
57,114 |
|
|
$ |
68,165 |
|
We sell customized marketing programs to B2B technology companies targeting a specific audience within a particular enterprise technology or business sector or sub-sector. We maintain multiple points of contact with our customers to provide support throughout their organizations and their customers’ IT sales cycles. As a result, our customers often run multiple advertising programs with us in order to target their desired audience of enterprise technology and business professionals more effectively. There are multiple factors that can impact our customers’ marketing and advertising objectives and spending with us, including but not limited to, IT product launches, increases or decreases to their advertising budgets, the timing of key industry marketing events, responses to competitor activities and efforts to address specific marketing objectives such as creating brand awareness or generating sales leads. Our products and services are generally delivered under short-term contracts that run for the length of a given program, typically less than nine months. In the quarter ended March 31, 2023 approximately 41% of our revenues were from longer-term contracts.
Product and Service Offerings
We use our offerings to provide B2B technology companies with numerous touch points to identify, reach and influence key enterprise technology decision makers. The following is a description of the products and services we offer:
•IT Deal Alert . A suite of data, software and services for B2B technology companies that leverages the detailed purchase intent data we collect on enterprise technology organizations and professionals researching IT purchases via our network of websites and our webinar community platform. Through our proprietary data-capture and scoring methodologies, we use this insight to help our customers identify and prioritize accounts and contacts whose content consumption and online research activities around specific enterprise technology topics indicate that they are “in-market” for a particular B2B technology product or service. The suite of products and services includes Priority Engine and Qualified Sales Opportunities. Priority Engine is a subscription service powered by our Activity Intelligence platform, which integrates with customer relationship management (“CRM”) and marketing automation platforms (“MAPs”) including Salesforce.com, Marketo, Hubspot, Eloqua, Pardot, and Integrate. The service delivers lead generation workflow solutions designed to enable marketers and sales forces to identify and prioritize accounts and individuals actively researching new technology purchases or upgrades, and then to engage those active prospects. Qualified Sales Opportunities is a product that profiles specific in-progress purchase projects via surveys and interviews with business technology professionals whose research activity and content consumption is indicative of a pending technology purchase. Qualified Sales Opportunities includes information on project scope, purchase criteria and vendors considered.
•Demand Solutions. Our offerings enable our customers to reach and influence prospective buyers through content marketing programs, such as white papers, webcasts, podcasts, videocasts, virtual trade shows, and content sponsorships, designed to generate demand for their solutions, and through display advertising and other brand programs that influence consideration by prospective buyers. We believe this allows B2B technology companies to maximize ROI on marketing and sales expenditures by capturing sales leads from the distribution and promotion of content to our audience of enterprise technology and business professionals.
•Brand Solutions. Our suite of brand solutions provide B2B technology companies with direct exposure to targeted audiences of enterprise technology and business professionals that are actively researching information related to their products and services. We leverage our Activity Intelligence platform to enable significant segmentation and behavioral targeting of audiences to improve the relevancy of digital ads to the researcher’s needs. Branding solutions include on-network banner advertising and digital sponsorships, off-network banner targeting, and microsites and other related formats.
•Custom Content Creation. We deliver market insights and guidance to B2B technology companies through our Enterprise Strategy Group annual research and advisory subscription programs, custom market research services, and consulting engagements. In addition, our Enterprise Strategy Group experts author custom content products including technical and economic validations, white papers, infographics, videos and webinars. This content can be leveraged by B2B technology marketers to support product launches, enable demand-generation campaigns, and establish overall thought leadership. We also create white papers, case studies, webcasts or videos to our customers’ specifications. These customized content assets are then promoted to our audience within both demand solutions and brand solutions programs. Additionally, we offer off-the-shelf editorial sponsorship products on topics aligned to customer markets, enabling them to engage and generate
24
demand via packaged content created by our editorial staff to educate technology researchers on new technology trends and feature options.
•BrightTALK platform. Allows our customers to create, host and promote webinars, virtual events and video content. Customers create their own hosted Channels on the platform where they schedule both live and on-demand webinars for promotion to BrightTALK’s community of in-market accounts and individuals. The BrightTALK Channel also enables customers to self-administer lead generation campaigns, set up workflow integrations between the Channel and their CRM and MAP systems, and access reporting detailing the size and growth of their community of subscribers over time. Customers may also create an off-network embedded Channel page on their own corporate website featuring content in their BrightTALK Channel, as well as an embedded BrightTALK registration form that captures and converts interested individuals to marketing leads.
Cost of Revenue, Operating Expenses, and Other
Expenses consist of cost of revenue, selling and marketing, product development, general and administrative, depreciation and amortization, and interest and other expense, net. Personnel-related costs are a significant component of each of these expense categories except for depreciation and amortization and interest and other expense, net.
Cost of Revenue. Cost of revenue consists primarily of salaries and related personnel costs; member acquisition expenses (primarily keyword purchases from leading internet search sites); lead generation expenses; freelance writer expenses; website hosting costs; vendor expenses associated with the delivery of webcast, podcast, videocast and similar content and other offerings; stock-based compensation expenses; facility expenses and other related overhead.
Selling and Marketing. Selling and marketing expenses consist primarily of: salaries and related personnel costs; sales commissions; travel-related expenses; stock-based compensation expenses; facility expenses and other related overhead. Sales commissions are recorded as expense when earned by the employee.
Product Development. Product development includes the creation and maintenance of our network of websites, advertiser offerings and technical infrastructure. Product development expense consists primarily of salaries and related personnel costs; stock-based compensation expenses; facility expenses, and other related overhead.
General and Administrative. General and administrative expenses consist primarily of salaries and related personnel costs; facility expenses and related overhead; accounting, legal and other professional fees; and stock-based compensation expenses.
Depreciation. Depreciation expense consists of the depreciation of our property and equipment and other capitalized assets. Depreciation is calculated using the straight-line method over their estimated useful lives, ranging from three to ten years.
Amortization. Amortization expense consists of the amortization of intangible assets recorded in connection with our acquisitions, including changes in the value of contingent consideration in relation to certain of the acquisitions. Separable intangible assets that are not deemed to have an indefinite life are amortized over their estimated useful lives, which range from eighteen months to nineteen years, using methods that are expected to reflect the estimated pattern of economic use.
Interest and Other Expense, Net. Interest expense, net consists primarily of interest costs (offset by interest income), inducement expense and the related amortization of deferred issuance costs on our Notes and amounts borrowed under our current and our prior loan agreements and amortization of premiums on our investments, less any interest income earned on cash, cash equivalents and short-term investments. We historically have invested our cash in money market accounts, municipal bonds, government agency bonds, U.S. Treasury securities, and corporate bonds. Other expense, net consists primarily of non-operating gains or losses, primarily related to realized and unrealized foreign currency gains and losses on trade assets and liabilities.
Non-GAAP Financial Measure
We use Adjusted Revenue, a non-GAAP financial measure to assist us in evaluating our operating performance to understand and compare operating results across accounting periods, for internal budgeting and forecasting purposes, for short- and long-term operating plans, and to evaluate our financial performance. We believe that non-GAAP Adjusted Revenue reflects our ongoing business in a manner that allows for meaningful period-to-period comparisons and analysis of trends in our business. We also believe that this
25
non-GAAP measure provides useful information to investors and others in understanding and evaluating our operating results and prospects in the same manner as management and in comparing financial results across accounting periods. Regulation S-K Item 10(e), “Use of non-GAAP financial measures in Commission filings,” defines and prescribes the conditions for use of non-GAAP financial information.
A limitation of our non-GAAP financial measure of Adjusted Revenue is that it does not have a uniform definition. Our definition will likely differ from the definitions used by other companies, and therefore comparability may be limited.
We compensate for these limitations by reconciling the non-GAAP financial measure to GAAP revenue, the most comparable GAAP financial measure. Adjusted Revenue should be considered in addition to, not as a substitute for or in isolation from, GAAP revenue. We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure, and to view our non-GAAP financial measure in conjunction with the most comparable GAAP financial measure.
Adjusted Revenue
We define Adjusted Revenue as the sum of revenue and the impact of fair value adjustments to acquired unearned revenue related to services billed by an acquired company prior to its acquisition. Management uses this measure to evaluate growth of the business period over period, excluding the impact of adjustments due to purchase accounting. We believe that it is important to evaluate growth on this basis. We expect our Adjusted Revenue to converge over time with our GAAP revenue.
The following table presents a reconciliation of Revenue to Adjusted Revenue:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
(dollars in thousands) |
|
2023 |
|
|
2022 |
|
Revenue |
|
$ |
57,114 |
|
|
$ |
68,165 |
|
Impact of fair value adjustment on acquired unearned revenue |
|
|
— |
|
|
|
1,175 |
|
Adjusted Revenue |
|
$ |
57,114 |
|
|
$ |
69,340 |
|
Revenue percentage change |
|
|
-16 |
% |
|
|
|
Adjusted revenue percentage change |
|
|
-18 |
% |
|
|
|
Application of Critical Accounting Policies and Use of Estimates
The discussion of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amount of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue, long-lived assets, goodwill, allowance for doubtful accounts, stock-based compensation, contingent liabilities, self-insurance accruals and income taxes. We base our estimates of the carrying value of certain assets and liabilities on historical experience and on various other assumptions that we believe to be reasonable. In some cases, changes in the accounting estimates are reasonably likely to occur from period to period. Our actual results may differ from these estimates under different assumptions or conditions.
Our critical accounting policies are those that affect our more significant judgments used in the preparation of our condensed consolidated financial statements. A description of our critical accounting policies and estimates is contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. Other than those noted in Note 2 to our condensed consolidated financial statements, there were no material changes to our critical accounting policies and estimates during the first three months of 2023.
Income Taxes
We are subject to income taxes in both the U.S. and foreign jurisdictions, and we use estimates in determining our provision for income taxes. We recognize deferred tax assets and liabilities based on temporary differences between the financial reporting and income tax bases of assets and liabilities using statutory rates expected to be in effect when such differences are settled.
Our net deferred tax liabilities are comprised primarily of book to tax differences on stock-based compensation, intangible asset basis, net operating loss carryforwards, valuation allowance and timing of deductions for right-of-use assets and lease liabilities, accrued expenses, depreciation, and amortization.
26
Results of Operations
The following table sets forth our results of operations for the periods indicated, including percentage of total revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
(dollars in thousands) |
|
2023 |
|
|
2022 |
|
Revenue |
|
$ |
57,114 |
|
|
|
100 |
% |
|
$ |
68,165 |
|
|
|
100 |
% |
Cost of revenue |
|
|
17,350 |
|
|
|
30 |
% |
|
|
17,846 |
|
|
|
26 |
% |
Amortization of acquired technology |
|
|
673 |
|
|
|
1 |
% |
|
|
745 |
|
|
|
1 |
% |
Gross profit |
|
|
39,091 |
|
|
|
68 |
% |
|
|
49,574 |
|
|
|
73 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing |
|
|
24,756 |
|
|
|
43 |
% |
|
|
24,255 |
|
|
|
35 |
% |
Product development |
|
|
2,609 |
|
|
|
5 |
% |
|
|
3,118 |
|
|
|
5 |
% |
General and administrative |
|
|
7,918 |
|
|
|
14 |
% |
|
|
7,842 |
|
|
|
12 |
% |
Depreciation |
|
|
2,000 |
|
|
|
4 |
% |
|
|
1,665 |
|
|
|
2 |
% |
Amortization |
|
|
1,493 |
|
|
|
3 |
% |
|
|
2,012 |
|
|
|
3 |
% |
Total operating expenses |
|
|
38,776 |
|
|
|
68 |
% |
|
|
38,892 |
|
|
|
57 |
% |
Operating income |
|
|
315 |
|
|
|
1 |
% |
|
|
10,682 |
|
|
|
16 |
% |
Interest and other income (expense), net |
|
|
2,757 |
|
|
|
5 |
% |
|
|
(560 |
) |
|
|
-1 |
% |
Income before provision for income taxes |
|
|
3,072 |
|
|
|
5 |
% |
|
|
10,122 |
|
|
|
15 |
% |
Provision for income taxes |
|
|
1,427 |
|
|
|
2 |
% |
|
|
2,958 |
|
|
|
4 |
% |
Net income |
|
$ |
1,645 |
|
|
|
3 |
% |
|
$ |
7,164 |
|
|
|
11 |
% |
Comparison of Three Months Ended March 31, 2023 and March 31, 2022
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
(dollars in thousands) |
|
2023 |
|
|
2022 |
|
Decrease |
|
Percent Change |
|
Revenue |
|
$ |
57,114 |
|
|
$ |
68,165 |
|
$ |
(11,051 |
) |
|
-16 |
% |
Revenues for the three months ended March 31, 2023 decreased by $11.1 million, or 16%, over the three months ended March 31, 2022, primarily due to the following:
•New customers during the first quarter of 2023 (over 700) compared to the first quarter of 2022 resulted in increased revenues of approximately $9.9 million.
•Our existing customers decreased their spend by approximately $22.1 million.
•Revenues increased by $1.2 million due to the renewal of acquired customer contracts previously recorded as unearned revenue.
Cost of Revenue and Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
(dollars in thousands) |
|
2023 |
|
|
2022 |
|
|
Decrease |
|
|
Percent Change |
|
Cost of revenue |
|
$ |
17,350 |
|
|
$ |
17,846 |
|
|
$ |
(496 |
) |
|
|
-3 |
% |
Amortization of acquired technology |
|
|
673 |
|
|
|
745 |
|
|
|
(72 |
) |
|
|
-10 |
% |
Total cost of revenue |
|
$ |
18,023 |
|
|
$ |
18,591 |
|
|
$ |
(568 |
) |
|
|
-3 |
% |
Gross profit |
|
$ |
39,091 |
|
|
$ |
49,574 |
|
|
$ |
(10,483 |
) |
|
|
-21 |
% |
Gross profit percentage |
|
|
68 |
% |
|
|
73 |
% |
|
|
|
|
|
|
27
Costs of Revenues. Costs of Revenues for the three months ended March 31, 2023 decreased by $0.6 million as compared to the three months ended March 31, 2022 primarily due to the following:
•$0.4 million decrease in variable costs attributable to contracted costs related to fulfilling campaigns;
•$0.5 million decrease in labor and related costs;
•$0.2 million increase in stock compensation; and
•$0.2 million increase in depreciation expense.
Gross Profit. Our gross profit is equal to the difference between our revenue and our cost of revenue for the period. Gross profit percentage was 68% and 73% for the three months ended March 31, 2023 and 2022, respectively. Gross profit decreased by $10.5 million in the three months ended March 31, 2023 compared to the same period in 2022, primarily due to decreased revenue compared to the same period a year ago. Because the majority of our costs are labor-related, we expect our gross profit to fluctuate from period to period depending on the total revenue for the period.
Operating Expenses and Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
(dollars in thousands) |
|
2023 |
|
|
2022 |
|
|
Increase (Decrease) |
|
|
Percent Change |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing |
|
$ |
24,756 |
|
|
$ |
24,255 |
|
|
$ |
501 |
|
|
|
2 |
% |
Product development |
|
|
2,609 |
|
|
|
3,118 |
|
|
|
(509 |
) |
|
|
-16 |
% |
General and administrative |
|
|
7,918 |
|
|
|
7,842 |
|
|
|
76 |
|
|
|
1 |
% |
Depreciation |
|
|
2,000 |
|
|
|
1,665 |
|
|
|
335 |
|
|
|
20 |
% |
Amortization |
|
|
1,493 |
|
|
|
2,012 |
|
|
|
(519 |
) |
|
|
-26 |
% |
Total operating expenses |
|
$ |
38,776 |
|
|
$ |
38,892 |
|
|
$ |
(116 |
) |
|
|
0 |
% |
Interest and other income (expense), net |
|
$ |
2,757 |
|
|
$ |
(560 |
) |
|
$ |
(3,317 |
) |
|
|
-592 |
% |
Provision for income taxes |
|
$ |
1,427 |
|
|
$ |
2,958 |
|
|
$ |
(1,531 |
) |
|
|
-52 |
% |
Selling and Marketing. Selling and marketing expenses increased for the three months ended March 31, 2023, as compared to the same period in 2022, primarily due to a $2.5 million increase in stock-based compensation expense offset by a $1.7 million decrease in pay related expenses.
Product Development. Product development expenses decreased for the three months ended March 31, 2023, as compared to the same period in 2022, primarily due to a $0.5 million decrease in pay related expenses.
General and Administrative. General and administrative expenses increased for the three months ended March 31, 2023, as compared to the same period in 2022, primarily due to a $0.2 million decrease in pay related expenses offset by increased other costs totaling $0.3 million.
Depreciation. Depreciation expense increased for the three months ended March 31, 2023, as compared to the same period in 2022, primarily due to increased capitalized software expenses.
Amortization. Amortization expense decreased for the three months ended March 31, 2023, as compared to the same period in 2022, due to a decrease in fair value of contingent consideration.
Interest and other expense. Interest and other expense decreased for the three months ended March 31, 2023, as compared to the same period in 2022, primarily due to a $3.2 million increase in interest income.
Provision for income taxes. Our effective income tax rate was 46% and 29% for the three months ended March 31, 2023 and 2022, respectively. The tax expense for the three months ended March 31, 2023 decreased by approximately $1.5 million primarily due to a decrease in pretax income that resulted in a $2.2 million decrease in tax expense based on our projected effective tax rate and offset by $0.6 million increase in stock compensation shortfalls.
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Seasonality
The timing of our revenues is affected by seasonal factors. Our revenues are seasonal primarily as a result of the annual budget approval process of many of our customers, the normal timing at which our customers introduce new products, and the historical decrease in advertising in summer months. The timing of revenues in relation to our expenses, much of which do not vary directly with revenues, has an impact on our cost of revenues, selling and marketing, product development, and general and administrative expenses as a percentage of revenues in each calendar quarter during the year.
The majority of our expenses are personnel-related and include salaries, stock-based compensation, benefits and incentive-based compensation plan expenses. As a result, we have not experienced significant seasonal fluctuations in the timing of our expenses period to period.
Liquidity and Capital Resources
Resources
Our cash, cash equivalents and investments at March 31, 2023 totaled $352.7 million, a $12.1 million decrease from December 31, 2022, primarily driven by purchases of investments and repurchases under stock buyback programs offset by the cash generated from our operations. We believe that our existing cash, cash equivalents and investments, our cash flow from operating activities and available borrowings under our Loan and Security Agreement with Western Alliance Bank, as administrative agent and collateral agent for the lenders, and the banks and other financial institutions or entities from time to time party thereto as lenders (the “2021 Loan Agreement”) will be sufficient to meet our anticipated cash needs for at least the next twelve months. Our future working capital requirements will depend on many factors, including the operations of our existing business, our potential strategic expansion internationally, future acquisitions we might undertake and any expansion into complementary businesses. To the extent that our cash, cash equivalents and investments and cash flow from operating activities are insufficient to fund our future activities, we may raise additional funds through additional bank credit arrangements or public or private equity or debt financings. We may also raise additional funds in the event we determine in the future to effect one or more additional acquisitions of businesses.
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
March 31, 2023 |
|
|
December 31, 2022 |
|
Cash, cash equivalents and investments |
|
$ |
352,679 |
|
|
$ |
364,733 |
|
Accounts receivable, net |
|
$ |
51,375 |
|
|
$ |
60,359 |
|
Cash, Cash Equivalents and Investments
Our cash, cash equivalents and investments at March 31, 2023 were held for working capital purposes and were invested primarily in government backed money market funds and pooled bond funds. We do not enter into investments for trading or speculative purposes.
Accounts Receivable, Net
Our accounts receivable balance fluctuates from period to period, which affects our cash flows from operating activities. The fluctuations vary depending on the timing with which we meet our performance obligations and on the timing of our cash collections, as well as on changes to our allowance for doubtful accounts. We use days sales outstanding (“DSO”) as a measurement of the quality and status of our receivables since lower DSO is generally correlated with higher collection rates. We define DSO as net accounts receivable at quarter end divided by total revenue for the applicable period, multiplied by the number of days in the applicable period. DSO was 80 days and 76 days at March 31, 2023 and December 31, 2022, respectively.
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Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
(dollars in thousands) |
|
2023 |
|
|
2022 |
|
Net cash provided by operating activities |
|
$ |
18,218 |
|
|
$ |
27,557 |
|
Net cash used in investing activities |
|
$ |
(28,847 |
) |
|
$ |
(3,611 |
) |
Net cash used in financing activities |
|
$ |
(27,426 |
) |
|
$ |
(9,911 |
) |
Operating Activities
Cash provided by operating activities primarily consists of net income adjusted for certain non-cash items including depreciation and amortization, provisions for bad debt, stock-based compensation, deferred income taxes, and the effect of changes in working capital and other activities. Cash provided by operating activities for the three months ended March 31, 2023 was $18.2 million compared to cash provided by operating activities of $27.6 million for the three months ended March 31, 2022.
The decrease in cash provided by operating activities was primarily the result of decrease in revenue, changes in working capital and stock-based compensation charged to earnings.
Investing Activities
Cash used in investing activities in the three months ended 2023 and 2022 was $28.8 million and $3.6 million respectively and was driven by the purchases of investments and the purchase of property and equipment, primarily for internal-use software, and to a lesser extent, computer equipment. We capitalized internal-use software and website development costs of $3.4 million and $3.2 million for the three months ended March 31, 2023 and 2022, respectively.
Financing Activities
In the first three months of 2023, we used $27.4 million for financing activities, consisting primarily of $2.3 million for the payment of contingent consideration related to our 2021 acquisitions, $0.2 million for tax withholdings related to net share settlements and $25.0 million for the repurchase of TechTarget shares. In the first three months of 2022, we used $9.9 million for financing activities, consisting primarily of $5.2 million for the payment of contingent consideration related to our 2020 and 2021 acquisitions, $4.4 million for tax withholdings related to net share settlements and $0.3 million for the repurchase of TechTarget shares.
Common Stock Repurchase Programs
In May 2020, we announced that our board of directors had authorized a $25.0 million stock repurchase program (the “May 2020 Repurchase Program”) whereby we were authorized to repurchase shares of our common stock from time to time on the open market or in privately negotiated transactions at prices and in the manner determined by management. The Company repurchased 4,614 shares at an aggregate purchase price of $0.3 million and an average share price of $69.91 under this plan for the three months ended March 31, 2022. The May 2020 Repurchase Program expired on May 1, 2022, with $10.8 million in authorized remaining capacity.
In May 2022, we announced that our board of directors had authorized a stock repurchase program (the “May 2022 Repurchase Program”) whereby we were authorized to repurchase shares of our common stock having an aggregate purchase prices of up to $50.0 million from time to time on the open market or in privately negotiated transactions at prices and in the manner determined by management. During the three months ended March 31, 2022, there were no amounts purchased under the May 2022 Repurchase Program. As of March 31, 2023, no amounts remained available under the May 2022 Repurchase Program.
In November 2022, we announced that our board of directors had authorized a new repurchase program (the “November 2022 Repurchase Program”) whereby we were authorized to repurchase shares of our common stock and convertible senior notes having an aggregate purchase price of up to $200.0 million from time to time on the open market or in privately negotiated transactions at prices and in the manner determined by management over the next two years. During the three month period ended March 31, 2023, we repurchased 581,295 shares for an aggregate purchase price of $25.0 million at an average share price of $42.99 under the November 2022 Repurchase Program. As of March 31, 2023, $160.1 million remained available under the November 2022 Repurchase Program.
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Repurchased shares were recorded under the cost method and are reflected as treasury stock in the accompanying condensed consolidated Balance Sheets. All repurchased shares were funded with cash on hand.
Convertible Senior Notes and Term Loan and Credit Facility Borrowings
Convertible Senior Notes
In December 2021, we issued $414 million in aggregate principal amount of 0.00% convertible senior notes (“2026 Notes”) due December 15, 2026, unless earlier repurchased by us or converted by the holder pursuant to their terms. Special interest, if any, is payable semiannually in arrears on June 15 and December 15 of each year.
The 2026 Notes are governed by an indenture between us, as issuer, and U.S. Bank Trust Company, National Association, as trustee. The 2026 Notes are unsecured and rank senior in right of payment to our future indebtedness that is expressly subordinated in right of payment to the 2026 Notes and equal in right of payment to our unsecured indebtedness that is not so subordinated.
Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of common stock, at our election.
The 2026 Notes have an initial conversion rate of 7.6043 shares of common stock per $1,000 principal amount of 2026 Notes. This represents an initial effective conversion price of approximately $131.50 per share of common stock and 3,148,180 shares issuable upon conversion. Throughout the term of the 2026 Notes, the conversion rate may be adjusted upon the occurrence of certain events. As of March 31, 2023, no such adjustment has occurred. Holders of the 2026 Notes will not receive any cash payment representing accrued and unpaid interest, if any, upon conversion of a 2026 Note.
Proceeds from the 2026 Notes were utilized to retire $149.9 million of the 2025 Notes and for general corporate purposes.
In December 2020, we issued $201.3 million in aggregate principal amount of 0.125% convertible senior notes (the “2025 Notes”) due December 15, 2025, unless earlier repurchased by us or converted by the holder pursuant to their terms. Interest is payable semiannually in arrears on June 15 and December 15 of each year, which commenced on June 15, 2021.
The 2025 Notes are governed by an indenture between us, as issuer, and U.S. Bank Trust Company, National Association, as trustee. The 2025 Notes are unsecured and rank senior in right of payment to our future indebtedness that is expressly subordinated in right of payment to the Notes and equal in right of payment to our unsecured indebtedness that is not so subordinated.
Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of common stock, at our election.
The 2025 Notes have an initial conversion rate of 14.1977 shares of common stock per $1,000 principal amount of the Notes. This represents an initial effective conversion price of approximately $70.43 per share of common stock and 2,857,447 shares issuable upon conversion of the full aggregate principal amount of the 2025 Notes. Throughout the term of the 2025 Notes, the conversion rate may be adjusted upon the occurrence of certain events. As of March 31, 2023, no such adjustment has occurred. Holders of the 2025 Notes will not receive any cash payment representing accrued and unpaid interest, if any, upon conversion of a Note, except in limited circumstances. Accrued but unpaid interest will be deemed to be paid by cash, shares of our common stock or a combination of cash and shares of our common stock paid or delivered, as the case may be, to the holder upon conversion of the Notes.
After the induced conversion of $149.9 million aggregate principal amount of the 2025 Notes in December 2021, approximately $51 million of aggregate principal of 2025 Notes remain outstanding. As of March 31, 2023, 729,533 shares were issuable upon conversion of the full aggregate principal amounts of such remaining 2025 Notes.
2021 Loan Agreement
On October 29, 2021, we entered into the 2021 Loan Agreement with Western Alliance Bank. The 2021 Loan Agreement provides for a $75 million revolving credit facility with a $5 million letter-of-credit sublimit and a maturity date of October 29, 2023. The 2021 Loan Agreement is secured by substantially all of our assets. Borrowings under the 2021 Loan Agreement bear interest at a rate equal to one (1) month U.S. LIBOR, plus a spread based upon our leverage (as defined by 2021 Loan Agreement), which may vary between 2.00% and 2.75%. As of March 31, 2023, the interest rate was 7.42%. The 2021 Loan Agreement is subject to various leverage and non-financial covenants. No amounts were outstanding under the 2021 Loan Agreement as of March 31, 2023.
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Capital Expenditures
We have made capital expenditures primarily for computer equipment and related software needed to host our websites, internal-use software development costs, as well as for leasehold improvements and other general purposes to support our growth. Our capital expenditures totaled $3.5 million and $3.6 million for the three-month periods ended March 31, 2023 and 2022, respectively. A majority of our capital expenditures in the first three months of 2023 were for internal-use software and website development costs and, to a lesser extent, computer equipment and related software. We capitalized internal-use software and website development costs of $3.4 million and $3.2 million for the three months ended March 31, 2023 and 2022, respectively. We are not currently party to any purchase contracts related to future capital expenditures.
Contractual Obligations
There were no material changes to our contractual obligations and commitments described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2022.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included or referenced in this Quarterly Report that address activities, events or developments which we expect will or may occur in the future are forward-looking statements, including statements regarding our intent, beliefs or current expectations and those of our management team. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “going to,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, priorities, plans, or intentions. Such statements may include those regarding our future financial results and other projections or measures of our future operating performance, including the drivers of such growth, profitability, and performance (including, in each case, any potential impact of product and service development efforts, GDPR or other similar laws, potential changes to customer relationships, and other operational decisions); expectations concerning market opportunities and our ability to capitalize on them; the amount and timing of the benefits expected from acquisitions, new strategies, products or services and other potential sources of additional revenue; and the behavior of our members, partners, and customers. These statements speak only as of the date of this Quarterly Report on Form 10-Q and are based on our current plans and expectations. Such forward-looking statements are not guarantees of future performance and involve risks and uncertainties that could cause actual future events or results to be different than those described in or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, those relating to: market acceptance of our products and services, including continued increased sales of our IT Deal Alert offerings and continued increased international growth; relationships with customers, strategic partners and employees; the duration and extent of the future health pandemics and any related economic downturns on our business, operations, and the markets in which we and our customers operate; difficulties in integrating acquired businesses; changes in economic or regulatory conditions or other trends affecting the internet, internet advertising and information technology industries; data privacy laws, rules, and regulations; the impact of foreign currency exchange rates, certain macro-economic factors facing the global economy including disruptions in the capital or banking markets, economic sanctions and economic slowdowns or recessions, rising inflation and interest rates, and other matters included in our SEC filings, including in our Annual Report on Form 10-K for the year ended December 31, 2022. Actual results may differ materially from those contemplated by the forward-looking statements. We undertake no obligation to update our forward-looking statements to reflect future events or circumstances.
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