TechTarget Has Muted Outlook but Strong Forecasts for 2014

TechTarget (TTGT) reported essentially in-line 3Q13 results as revenue growth in product offerings and international were able partially offset ongoing weakness in the North American IT Market. Total revenue fell 10% year over year, and while 4Q revenue guidance of a 7% year over year decline at the mid-point calls for minimal improvement, management cited a return to double-digit growth in Online revenue for 2014 vs. our 5% expectations thanks to expanding business within IT Deal Alerts and growing international penetration.

We believe TechTarget has positioned itself well in the face of the ongoing macro challenges by developing new recurring revenue streams and continuing to take international market share, diversifying revenue growth. We note that there is significant leverage in the business model, with our new 10% revenue growth estimate for 2014 translating into 59% year over year EBITDA growth, with upside to our forecast should there be any recovery in the macro environment.

3Q13 total revenue of $22.1 million was down 10% year over year. Online revenue decreased 8% year over year to $18.8 million, slightly below our forecast, with Events revenue falling 20% year over year to $3.3 million, slightly above our forecast. IT Deal Alert accounted for an estimated 5% of online revenue, with double the customer penetration and a similar margin profile. Customer growth is expected to be up 70% in 4Q, and we note that model could see significant revenue leverage as leads are sold to multiple customers vs. the 1:1 ratio employed by the traditional online platform. International remained a bright spot, with revenue growth up 25% year over year, although down from 35% in 2Q. International now accounts for 31% of online revenue, and could reach 40% of revenue within the next 3 years.

We are reducing our 2013 estimates, with revenue projected at $88.3 million ($89.5 prior), down 12% year over year, reflecting little expected improvement in the domestic market. Our EBITDA estimate falls $500,000 to $9.6 million, down 52% year over year, although EPS remains unchanged at $0.10 resulting from the successful tender of 7.1 million shares at $5.00 reducing the share count to around 32 million. Free cash flow could be $6 million or $0.15.

TechTarget trades at 8x 2014E EBITDA. Our $6 price target equates to 10x. While facing a tough advertising environment, TechTarget’s shift into recurring revenue streams and a greater service offering should help insulate the business from ongoing macro weakness. When advertising budgets rebound, TechTarget’s growth could accelerate more than anticipated while margins likely expand.