TechTarget(TTGT) - 2022 Q4 - Annual Report

PART I Business TechTarget provides purchase intent-driven marketing and sales data to B2B technology companies, facing macroeconomic headwinds and implementing strategic growth initiatives Business Overview TechTarget delivers purchase intent-driven marketing and sales data to B2B tech companies, leveraging a content network and strategic acquisitions for growth - The company is a global data, software, and analytics leader for B2B companies, offering solutions to identify, reach, and influence enterprise technology decision-makers[12] - As of December 31, 2022, the company had approximately 30.2 million registered members and users, an increase from 29.1 million in 2021[14] - In 2022, the company delivered marketing and sales services to over 3,400 customers[15] - Recent strategic acquisitions include Xtelligent Healthcare Media (2021), BrightTALK (2020), The Enterprise Strategy Group (2020), and Data Science Central (2020) to enhance its purchase intent data capabilities[13] Business and Industry Trends The company's business, impacted by 2022 tech industry downturns and layoffs, anticipates long-term growth from sales/marketing modernization and privacy trends - The enterprise technology market materially worsened in 2022, with over 1,000 tech companies announcing layoffs, leading to a challenging selling environment with elongated sales cycles and budget freezes[18] - In December 2022, the company announced a headcount reduction of approximately 5% of its workforce, expected to result in about $7 million in annual savings[18][69] - Long-term growth is expected to be supported by trends including the modernization of sales/marketing with automation and first-party purchase intent data, growing privacy regulations, and younger buyers' preference for self-service research[19] Our Solutions and Strategy TechTarget offers IT Deal Alert and BrightTALK platforms, with a strategy focused on data-enabled innovation, long-term contracts, and international expansion - Key solutions include IT Deal Alert™ (data/software suite), Demand Solutions (content marketing), Brand Solutions (targeted advertising), Custom Content Creation, and the BrightTALK platform (webinars/virtual events)[29][30] - The company's strategy is to enhance its position as a leader in purchase intent-driven marketing by innovating data-enabled services, expanding long-term contracts, growing into new sectors, expanding internationally, and pursuing strategic acquisitions[35][36][37] - Planned product improvements for 2023 include enhancements to the Salesforce interface, ROI dashboard, and sales alerts functions[36] Platform, Content, and Customers The company's platform, organized by specialized content categories, serves over 3,400 B2B tech customers, with no single customer dominating revenue - The content platform is organized into key market categories such as Security, Networking, Storage, Compute/IT Ops/DevOps, CIO/IT Strategy, Business Applications, Analytics & AI, Application Architecture, Channel, ESG, and Healthcare Technology[44][45][46] - The company served over 3,400 customers in 2022, with no single customer representing 10% or more of total revenues for 2022, 2021, or 2020[50] Competition, Regulation, and Human Capital TechTarget navigates competition from diverse tech and media firms, adheres to evolving data privacy regulations, and recently restructured its global workforce - Key competitors include media companies (Ziff Davis, Foundry), data/analytics providers (6sense, Bombora, ZoomInfo), and webinar providers (ON24, LogMeIn)[57] - The company is subject to numerous data privacy and consumer protection laws, including the CAN-SPAM Act, TCPA, GDPR, and CCPA, which regulate its marketing and data collection activities[61][62][63][64] - As of December 31, 2022, the company had approximately 1,000 full-time employees. A restructuring plan in December 2022 involved eliminating approximately 60 positions (5% of the workforce)[67][69] - Revenue is seasonal, influenced by customer budget cycles, new product introductions, and a historical decrease in marketing activity during summer months[70] Risk Factors The company faces risks from advertising dependence, short-term contracts, user retention, acquisition integration, evolving data privacy laws, cybersecurity threats, and significant indebtedness Risks Related to Business and Operations Business risks include reliance on cyclical advertising, short-term contracts, search engine visibility, international operations, and intense competition - The primary source of revenue is purchase intent-driven advertising, which fluctuates with economic conditions, budgetary constraints, and the cyclical nature of advertising spending[77] - Business success is closely linked to the health of the enterprise technology industry, which is characterized by volatility, short product cycles, and rapid technological change[80] - A majority of customer contracts are short-term (typically six months or less) and can be terminated with minimal notice, creating revenue instability[82] - A significant portion of website traffic comes from internet search engines, making the business vulnerable to changes in search algorithms that could reduce visibility and traffic[86] Risks Related to Acquisitions Acquisition risks involve integration challenges, business disruption, and failure to realize expected synergies, potentially increasing expenses and reducing growth - Acquisitions involve numerous risks, including difficulty assimilating operations and personnel, disruption of ongoing business, and potential failure to achieve expected synergies or cross-marketing benefits[98] - The ability to realize anticipated benefits from acquisitions depends on effective integration, which is a complex, costly, and time-consuming process that may disrupt business if implemented ineffectively[99] Risks Related to Data Privacy, Security and Intellectual Property Risks include IP infringement, third-party content liability, evolving data privacy laws, cybersecurity breaches, and dependence on unimpeded internet access - The company faces risks from evolving laws and standards related to marketing, data collection, and user privacy, such as GDPR, CCPA, and ePrivacy regulations, which could impose significant compliance costs and decrease revenue[106][110][113] - Cybersecurity breaches pose a significant threat, potentially resulting in the loss of confidential information, service disruptions, and significant legal and financial liability[126][130] - The business is vulnerable to system failures, natural disasters, and other disruptions at its third-party data centers and cloud infrastructure providers, which could reduce traffic and negatively impact revenue[133] Risks Related to Financial Matters Financial risks include goodwill impairment, stock price volatility, significant convertible note indebtedness, and substantial influence by a few major stockholders - As of December 31, 2022, the company had $192.2 million of goodwill and $95.5 million of net intangible assets, which are subject to impairment risk that could negatively impact earnings[139] - The company has significant indebtedness, with $51 million of 0.125% convertible senior notes due 2025 and $414 million of 0.0% convertible senior notes due 2026 outstanding as of December 31, 2022[144] - As of December 31, 2022, directors, executive officers, and significant stockholders beneficially own approximately 50% of the outstanding common stock, giving them significant influence over stockholder matters[152] Unresolved Staff Comments The company confirms no unresolved staff comments from the SEC - None[153] Properties The company leases its 68,000 sq ft global headquarters in Newton, MA, until 2029, alongside other international offices - The company's global headquarters is in a leased 68,000 square foot office space in Newton, Massachusetts, with the lease term running through December 31, 2029[154] Legal Proceedings The company is not involved in any material legal proceedings, nor is it aware of any threatened litigation - The company is not currently a party to any material legal proceedings[155] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq (TTGT), does not pay dividends, and repurchased $33.8 million in shares during Q4 2022 - The company's common stock is listed on the Nasdaq Global Market under the symbol "TTGT"[157] - The company has not paid cash dividends in the last three fiscal years and does not anticipate paying them in the foreseeable future, intending to retain earnings for business development[159] Issuer Purchases of Equity Securities (Q4 2022) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | Oct 2022 | 80,760 | $63.15 | | Nov 2022 | 298,138 | $53.04 | | Dec 2022 | 297,848 | $43.39 | | Total Q4 | 676,746 | $50.00 | - In November 2022, the Board approved a new repurchase program authorizing up to $200.0 million in purchases of common stock or convertible senior notes. As of December 31, 2022, $185.1 million remained available under this program[165][247] Management's Discussion and Analysis of Financial Condition and Results of Operations FY2022 revenues grew 13% to $297.5 million, with improved gross margin and operating income, and net income significantly increased due to non-recurring prior-year expenses Overview and Business Trends FY2022 revenues grew 13% to $297.5 million amid macroeconomic challenges, with non-legacy customer growth and increased longer-term contracts Revenue and Adjusted Revenue (Non-GAAP) | Metric | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Revenue (GAAP) | $297.5M | $263.4M | 13% | | Adjusted Revenue (Non-GAAP) | $299.2M | $274.9M | 9% | - The enterprise technology market materially worsened in 2022, leading to elongated sales cycles and budget freezes. In response, the company reduced its workforce by approximately 5% in December 2022[178] - Revenues from legacy global customers (a cohort of 10 historically largest hardware companies) decreased by 2% in 2022, while revenues from all other customers increased by 11%[178] - Longer-term contracts accounted for 41% of revenue in 2022, an increase from 40% in 2021[175] Results of Operations (2022 vs 2021) FY2022 revenues grew 13% to $297.5 million, gross profit increased 14% to $219.0 million, and net income surged to $41.6 million due to the absence of a prior-year inducement expense - Revenue increased by $34.1 million (13%) in fiscal 2022, with $25.6 million from new customers and $8.5 million from existing customers[206] Key Financial Metrics (2022 vs 2021) | Metric | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $297.5M | $263.4M | 13% | | Gross Profit | $219.0M | $192.2M | 14% | | Gross Margin | 74% | 73% | +1 ppt | | Operating Income | $56.7M | $34.4M | 65% | | Net Income | $41.6M | $0.9M | 4284% | - Total operating expenses increased by $4.4 million (3%), which includes a new $4.4 million restructuring cost for a reduction in force, partially offset by a $4.2 million decrease in amortization expense[208] - Interest and other expense (income), net, changed by $24.1 million, from a $23.3 million expense in 2021 to a $0.9 million income in 2022, primarily due to the absence of the $21.2 million Inducement Expense incurred in 2021[213] Results of Operations (2021 vs 2020) FY2021 revenues surged 78% to $263.4 million, driven by acquisitions and customer growth, but net income sharply declined to $0.9 million due to a $21.2 million inducement expense - Revenue increased by $115.1 million (78%) in fiscal 2021, driven by $50.0 million from the BrightTALK acquisition, a $37 million increase from existing customers, and a $28 million increase from new customers[215][216] Key Financial Metrics (2021 vs 2020) | Metric | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $263.4M | $148.4M | 78% | | Gross Profit | $192.2M | $111.0M | 73% | | Gross Margin | 73% | 75% | -2 ppt | | Operating Income | $34.4M | $22.8M | 51% | | Net Income | $0.9M | $17.1M | -95% | - Gross profit margin decreased from 75% to 73%, primarily due to purchase accounting adjustments on acquired deferred revenue from recent acquisitions[218] - Interest and other expense, net, increased by $23.0 million, primarily due to a $21.2 million inducement expense incurred in connection with the retirement of a portion of the 2025 Notes[222] Liquidity and Capital Resources The company ended 2022 with $364.7 million in cash and investments, strong operating cash flow, and $465 million in convertible notes, while DSO increased to 76 days Cash Flow Summary (in thousands) | Activity | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $90,702 | $81,699 | $52,453 | | Net cash used in investing activities | $(14,450) | $(56,984) | $(175,747) | | Net cash provided by (used in) financing activities | $(92,958) | $254,459 | $153,366 | - Cash and investments totaled $364.7 million at year-end 2022, a decrease of $17.0 million from 2021, primarily due to cash used for stock buybacks[227][228] - Days Sales Outstanding (DSO) increased to 76 days at Dec 31, 2022, compared to 60 days at Dec 31, 2021, attributed to the timing of customer payments[230] - In 2022, the company used $79 million for share repurchases under its stock buyback programs[241] - The company has a $75 million revolving credit facility which was undrawn as of December 31, 2022[259] Critical Accounting Policies Critical accounting policies involve significant judgments in revenue recognition, goodwill impairment testing, business combinations, and stock-based compensation valuation - Revenue Recognition: The company uses stand-alone selling price (SSP) to allocate transaction prices among performance obligations in bundled contracts, requiring judgment based on historical pricing and market conditions[191] - Goodwill and Long-Lived Assets: Goodwill is tested for impairment annually at the entity level. As of December 31, 2022, no impairment was indicated[195] - Stock-Based Compensation: The fair value of stock option awards is determined using the Black-Scholes model, with key assumptions for expected volatility (44% in 2022) and expected term (6 years)[199] - Internal-Use Software and Website Development Costs: The company capitalized $12.9 million in costs for internal-use software and website development in 2022, up from $11.5 million in 2021[201] Quantitative and Qualitative Disclosures About Market Risk Primary market risks are foreign currency and interest rates, with a 10% adverse currency movement having an immaterial impact on operating income - Foreign Currency Risk: Approximately 25% of 2022 revenues were from customers with billing addresses outside the U.S. A 10% unfavorable movement in foreign exchange rates would have decreased operating income by less than $450 thousand[263] - Interest Rate Risk: The company's convertible notes bear a fixed interest rate. The undrawn line of credit has a variable rate. Due to the short-term nature of its $364.7 million in cash and investments, exposure to changes in fair value from interest rate changes is considered immaterial[265] Financial Statements and Supplementary Data This section presents audited consolidated financial statements for 2020-2022, including balance sheets, income statements, and cash flows, with an unqualified auditor's opinion Consolidated Financial Statements The consolidated financial statements show $764.7 million in total assets, $297.5 million in revenues, and $41.6 million in net income for 2022 Consolidated Balance Sheet Highlights (As of Dec 31, 2022) | Account | Amount (in thousands) | | :--- | :--- | | Cash and cash equivalents | $344,523 | | Total Assets | $764,717 | | Convertible senior notes | $455,694 | | Total Liabilities | $547,243 | | Total Stockholders' Equity | $217,474 | Consolidated Statement of Income Highlights (Year Ended Dec 31, 2022) | Account | Amount (in thousands) | | :--- | :--- | | Total Revenues | $297,488 | | Gross Profit | $219,000 | | Operating Income | $56,693 | | Net Income | $41,609 | | Diluted EPS | $1.30 | Notes to Consolidated Financial Statements Notes detail accounting policies, revenue disaggregation, acquisition impacts, debt terms for $414 million and $51 million convertible notes, and stock-based compensation - In 2022, North American revenue was $189.9 million and International revenue was $107.6 million. Revenue from longer-term contracts was $123.4 million[328][330] - The company has two outstanding convertible senior notes: $51.4 million principal of 0.125% notes due 2025 and $414 million principal of 0.00% notes due 2026[350] - As of December 31, 2022, there was $82.4 million of total unrecognized compensation expense related to stock options and restricted stock units, expected to be recognized over a weighted average period of 1.9 years[377] - The company's effective tax rate for 2022 was 27.7%, compared to 91.0% in 2021, primarily due to the non-recurrence of a large non-deductible inducement expense from 2021[214][388] Controls, Procedures and Other Information The company reports no changes or disagreements with accountants, and management concluded disclosure controls and internal controls were effective as of December 31, 2022 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[401] - Management concluded that as of December 31, 2022, the company's internal control over financial reporting was effective[406] - There were no changes in internal control over financial reporting during the fourth quarter of 2022 that have materially affected, or are reasonably likely to materially affect, internal controls[402] PART III Directors, Executive Compensation, and Corporate Governance Information for Items 10-14, covering directors, executive compensation, and corporate governance, is incorporated by reference from the 2023 Proxy Statement - Information regarding Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, and Principal Accountant Fees and Services is incorporated by reference from the company's 2023 Proxy Statement[410][412][413][414][415] - The company has a Code of Business Conduct and Ethics applicable to all employees, officers, and directors, which is available on its investor relations website[411] PART IV Exhibits and Financial Statement Schedules This section lists Form 10-K exhibits, including consolidated financial statements, with schedules omitted as not required - The consolidated financial statements are included in Item 8. Financial statement schedules have been omitted as they are not required or the information is provided elsewhere[417] Form 10-K Summary The company has not provided a summary for Form 10-K - None[424]