TECHTARGET, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the 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 endedDecember 31, 2019 under Part I, Item 1A, "Risk Factors," in our Quarterly Report on Form 10-Q for in our Quarterly Report on Form 10-Q for the quarter endedJune 30, 2020 under Part II, Item 1A, "Risk Factors" under Part I, Item 1A, "Risk Factors," and in the other documents we file with theSecurities and Exchange Commission . Please refer to our "Forward-Looking Statements" section on page 35.
Overview
TechTarget, Inc. ("we" or "the Company") is aDelaware corporation incorporated onSeptember 14, 1999 . Through continued innovation around our specialized online content for buyers of enterprise technology solutions we have become a global leader in purchase intent-driven marketing and sales services that deliver business impact for enterprise business-to-business "B2B" technology companies. Our offerings enable B2B technology companies to better identify, reach and influence corporate enterprise technology decision makers actively researching specific enterprise technology purchases. We improve a vendor's ability to impact these audiences for business growth using advanced targeting, analytics and data services complemented with customized marketing programs that integrate demand generation, brand marketing and advertising techniques.
Enterprise technology has become increasingly specialized, and the websites within our network of over 140 websites address every major enterprise technology segment such as storage, security, networking, and business applications. Enterprise technology and business professionals rely on us for key decision support information tailored to their specific areas of responsibility.
We 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 appreciate the ability to deepen their pre-purchase research by accessing the extensive vendor supplied content available across our website network. Likewise, these members derive significant additional value from the ability our network provides to seamlessly interact with and contribute to information exchanges in a given field. We had approximately 20.6 million and 19.9 million registered members - our "audiences" - as ofSeptember 30, 2020 and 2019 respectively. During the second quarter of 2020, the Company ended a partnership with a company covering theBelgium ,Netherlands , and Luxembourg ("Benelux") region. This reduced our member number by 0.5 million. Additionally, we restated our 2019 membership to remove the Benelux member number as ofSeptember 30, 2019 (0.5 million). We believe that we have sufficient members within our remaining database to support our business needs within the Benelux region. While the size of our registered member base does not provide direct insight into our customer numbers or our revenues, the value of our services sold to our customers is a direct result of the breadth and reach of this content footprint. This footprint creates the opportunity for our customers 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 to improve their marketing and sales efforts. The targeted nature of our member base 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. With it, we have developed a broad customer base and, in 2020 expect to deliver marketing and sales services programs to approximately 1,500 to 1,600 customers. 22
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Executive Summary COVID-19 Business Update
We finished the third quarter of 2020 in a strong financial position. As of
Cash and investments:$62.5 million Current portion debt:$1.7 million Long-term portion debt:$21.0 million Our remaining debt obligation for 2020, including required interest payments, is approximately$0.5 million . We generated$33.3 million in cash from operations during the nine months endedSeptember 30, 2020 . InJuly 2020 , we obtained a$20 million line of credit withWestern Alliance Bank . While we do not have any current plans to utilize the line of credit, we feel that the line of credit provides us with additional flexibility in the current economic environment. We expect to be able to maintain adequate liquidity to satisfy our cash needs as we navigate through the current environment, although we could experience significant fluctuations in our cash flows from period to period. If necessary, we may take additional steps to preserve adequate liquidity, including through accessing capital markets and other sources of external financing. During the third quarter we saw trends similar to those we saw at the end of the first quarter and during the second quarter. We saw a general shift in customer behavior moving away from longer-term contracts in favor of shorter-term contracts, which allow our customers greater flexibility. Additionally, our ability to attract new customers to longer-term contracts was impacted as a result of the general cautiousness related to the COVID-19 environment. These factors resulted in Priority Engine revenue growth of only 5% over last year. We saw weakness from our Global 10 accounts, in particular their investments in their branding. Our revenue growth in the quarter was driven in large part due to increases in our international revenue. We believe the increase in international revenue was driven by three factors:
• We continue to benefit from the opt-in nature of our audience.
• We own and operate our own websites which provides us with first party data.
• Historically, face to face events were more prevalent outside the
United States ; the reallocation of certain of those marketing
budgets from face to face events to online, intent-based
offerings has created an opportunity for us.
We had a successful new release of Priority Engine, in
Even after the easing of governmental restrictions and the severity of the COVID-19 pandemic lessens, we could experience further fluctuations in our results of operations and cash flows resulting from the ongoing global impacts of the pandemic and our customers' realignment of their marketing and sales budgets.
Our priorities remain ensuring the health and safety of our employees, customers, vendors, members, stockholders, and other stakeholders, while delivering our content and services to our customers around the world and continuing to drive long-term growth.
Impacts on Future Financial Results
At the beginning of 2020, we expected the strong demand we saw in 2019 to
continue. However, beginning in March, we saw certain customers extend their
normal sales cycles and shift their budgets away from long-term commitments to
shorter-term marketing campaigns as they began to navigate through the pandemic.
This trend continued throughout the second quarter and third quarters of 2020
and through the date of this report. We expect these adverse impacts to result
in lower revenue for the duration of the pandemic. The impact COVID-19 will have
on our 2020 results remains uncertain, and we continue to evaluate the impacts
the pandemic will have on our business operations and strategy going forward. We
believe we will return to normal growth rates when the macro environment
improves.
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For the Nine Months Ended
Our revenues for the nine months endedSeptember 30, 2020 increased by$4.4 million , or 4%, to$102.5 million , compared with$98.1 million , during the same period in 2019. Priority Engine™ revenues increased 5% to more than$38.2 million , in the first nine months of 2020 compared with$36.3 million in the first nine months of 2019. This increase was offset, in part, by our legacy Global customers, who decreased their spend, particularly as it related to our brand offerings. The amount of revenue that we derived from longer-term contracts in the third quarter of 2020 increased 8%, compared to the third quarter of 2019. As noted above, we saw some of our customers shift from long-term commitments to shorter-term commitments. We continue to benefit from our customers' increasing demand for purchase intent data to fuel their sales and marketing outreach. Another important factor in our revenue trajectory relates to the evolving way our customers use our purchase intent data relative to our offerings. Our offerings help customers identify "in-market" prospects for their products and services - our offerings help them reach, influence, and activate these prospects. A growing number of customers purchase "always on" programs from us that combine offerings to identify and influence active buyers throughout the year. The growth in our longer-term revenue component is evidence of our continued traction for these types of integrated programs. Additionally, customers use our offerings to support quarterly sales and marketing campaigns. These purchases are more fluid - customers of this type may focus more on offerings in a particular campaign, and shift objectives as opposed to an "always on" program. Our international geo-targeted revenues, where our target audience is outsideNorth America ("International"), increased more than 25% for the nine months endedSeptember 30, 2020 , compared with the prior year period driven by the items noted above. Gross profit percentage was 74% and 77% for the nine months endedSeptember 30, 2020 and 2019, respectively. Gross profit increased by$1.3 million , mainly due to the increase in revenue compared to the same period a year ago. 24 --------------------------------------------------------------------------------
Business Trends
The following discussion highlights key trends affecting our business not including items relating to the global pandemic, which is discussed in further detail above.
• Brexit. The
approved an exit of the
referred to as "Brexit," resulted in significant general economic
uncertainty as well as volatility in global stock markets and currency
exchange rate fluctuations. In
notice to the
its intention to withdraw from the
the
an eleven month transition period began which to time for a free trade
agreement to be negotiated. If no agreement can be reached at the end of
this transition period, it could mean that the United Kingdom will face
tariffs on goods traveling to the EU. Brexit could subject us to new
regulatory costs and compliance obligations (including regarding the
treatment and transfer of personal data). The full effect of
Brexit remains uncertain and depends on any agreements the
may make to retain access to the EU market. Moreover, the overall impact
of Brexit may create further global economic uncertainty, which may cause
a subset of our customers to more closely monitor their costs in the
affected region. Our revenue generated from customers who have billing
addresses within the United Kingdom was approximately 10% of our total
revenues for both periods ended September 30, 2020 and 2019.
• Privacy. On
invalidated the EU-US Privacy Shield Framework and upheld the adequacy of
the use of EU Standard Contractual Clauses. We, along with thousands of
other companies, relied on this EU-US Privacy Shield Framework, among
other mechanisms, for the transfer of personal data to data processors
established outside of the EU. The
Commission and the European Data Protection Board remain in close contact
regarding the impact of the CJEU decision and supervisory authorities are
expected to issue further guidance to business. We are evaluating what
additional mechanisms or actions may be required to establish adequate
safeguards for the further transfer of personal data.
• Product. Purchase intent data continues to drive our product strategy.
During 2020, we intend to make our purchase intent data more readily
available for salespersons at our customers, focusing on connectivity, ROI
metrics and attribution. Additionally, we will be focusing on extending
the market reach of our purchase intent data.
• Customer Demographics. In the three months ended
revenues from our legacy global customers decreased approximately 15%
compared to the same period 2019. Revenues from our largest 100 customers,
excluding the legacy global customers described above increased by
approximately 17% compared to the same period in 2019. Revenues
attributable to remaining customers, which tend to be venture
capital-backed start-ups that primarily operate in North America ,
increased by approximately 11% over the prior year period.
• Geographic. During the three months ended, September 30, 2020
approximately 40% of our revenues were derived from International
campaigns.
Revenues
Revenue changes for the three and nine month period ended, September 30, 2020 as
compared to the same periods in 2019, are shown in the table below. See the
discussion above and Note 3 and Note 13 to our consolidated financial statements
for additional information on our revenues.
For the Three Months Ended For the Nine Months Ended
September 30, Percent Change September 30, Percent Change
2020 2019 2020 2019
North America $ 21,663 $ 22,813 -5% $ 62,518 $ 66,444 -6%
International 14,581 10,996 33% 39,938 31,623 26%
Total $ 36,244 $ 33,809 7% $ 102,456 $ 98,067 4%
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-------------------------------------------------------------------------------- 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' enterprise technology 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, enterprise technology 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. We continue to enter into longer-term contracts with certain customers, and in the quarter ended,September 30, 2020 approximately 35% of our revenues were from longer-term contracts of approximately twelve months.
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. IT Deal Alert is a suite of products and services for B2B technology companies that leverages the detailed purchase intent data that we collect about end-user enterprise technology organizations. Through proprietary scoring methodologies, we use this insight to help our customers identify and prioritize accounts whose content consumption around specific enterprise technology topics indicates that they are "in-market" for a particular product or service. We also use the data directly to identify and further profile accounts' upcoming purchase plans.
• Priority Engine™. Priority Engine is a subscription service powered by our
Activity Intelligence platform, which integrates with customer
relationship management and marketing automation platforms from
salesforce.com, Marketo, Eloqua , Pardot, and Integrate. The service
delivers information that enables marketers and sales personnel toidentify and understand accounts and individuals actively researching new
technology purchases and then to engage those active prospects within the
organizations that are relevant to the purchase. We sell this service in
approximately 200 technology-specific segments which our customers use for
demand generation, account-based marketing and other marketing and sales
activities. Priority Engine is also available with specific geographic
focus, bringing the total available segments to over 300.
• Sales Quality Leads. Sales Quality Leads is a suite of products which
accelerate inside sales efforts by enabling our customers to prioritize
their resources. Qualified Sales Opportunities™ is a product that profiles
specific in-progress purchase projects, including information on scope and
purchase considerations, in approximately 85 technology-specific
segments. Building on the success of our Qualified Sales Opportunities
product, Sales-Ready Leads and High-Quality Leads, which were launched in
2020, round out our qualified sales solutions with levels of
pre-qualification tailored to the specific needs of our clients and their
varied use cases.
• Deal Data™. Deal Data is a customized solution aimed at sales intelligence
and data scientist functions within our customer organizations. It renders
our Activity Intelligence data into one-time offerings directly consumable
by the customer's internal applications.
26
-------------------------------------------------------------------------------- Demand Solutions. Our offerings enable our customers to reach and influence prospective buyers through content marketing programs designed to generate demand for their solutions, and through display advertising and other brand programs that influence consideration by prospective buyers. This allows B2B technology companies to maximize return on investment by capturing sales leads from the distribution and promotion of content to our audience of enterprise technology and business professionals. Our demand solutions offerings may include the following program components:
• White Papers. White papers are technical documents created by B2B
technology companies to describe business or technical problems which are
addressed by the vendors' products or services. In a program that includes
demand solutions, we post white papers on our relevant websites and our
members receive targeted promotions about these content assets. Prior to
viewing white papers, our registered members and visitors supply their
corporate contact information and agree to receive further information
from the vendor. The corporate contact and other qualification information
for these leads are supplied to the vendor in near real time through our
proprietary lead management software.
• Webcasts, Podcasts, Videocasts and Virtual Trade Shows . Webcasts,
podcasts, videocasts, virtual trade shows and similar content bringinformational sessions directly to attendees' desktops and mobile devices.
As is the case with white papers, our members supply their corporate
contact and qualification information to the webcast, podcast, videocast
or virtual trade show sponsor when they view or download the content.
Sponsorship includes access to the registrant information and visibility
before, during and after the event.
• Content Sponsorships. B2B technology companies, or groups of vendors, pay
us to sponsor independent editorially created content vehicles on specific
technology topics where the registrant information is then provided to all
participating sponsors. In some cases, these vehicles are supported bymultiple sponsors in a single segment, with the registrant information
provided to all participating sponsors. Because these offerings are
editorially driven, our customers get the benefit of association with
independently created content as well as access to sales leads that are
researching the topic.
Brand Solutions. Our suite of brand solutions offerings provides B2B technology
companies exposure to targeted audiences of enterprise technology and business
professionals actively researching information related to their products and
services. We leverage our Activity Intelligence to enable significant
segmentation and targeting of specific audiences that can be accessed through
these programs. Components of brand programs may include:
• On-Network Branding. These offerings enable our customers to influence
prospective buyers through display advertising purchased on the websites
we operate. Programs may include specific sites or audience segments
across our sites.
• Off-Network Branding. Our Off-Network offerings allow our customers to
influence prospective buyers through display advertising when they are
visiting other websites on the internet. We identify audience segments
that can be targeted based on their activity and demonstrated interests
against our content and websites, and offer an array of audience extension
and retargeting solutions that leverage Activity Intelligence.
• Microsites and Related Formats. We have a range of solutions that create
stand-alone websites for B2B Technology Companies, or "embedded" websites
that exist within the context of our existing websites, to enable a more
immersive experience for enterprise technology and business professionals
with the content and brand messaging of the vendor.
Custom Content Creation. We will at times create white papers, case studies,
webcasts or videos to our customers' specifications through our Custom Content
team. These customized content assets are then promoted to our audience within
both demand solutions and brand solutions programs.
Our suite of demand solutions offerings allows B2B technology companies to
maximize return on investment by capturing sales leads from the distribution and
promotion of content to our audience of enterprise technology and business
professionals. Our demand solutions campaigns typically offer the Activity
Intelligence Dashboard, a tool that gives our customers' marketers and sales
representatives a near real-time view of their prospects including insights on
the research activities
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Cost of Revenues, Operating Expenses, and Other
Expenses consist of cost of revenues, 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 Revenues. Cost of revenues consists primarily of: salaries and related personnel costs; member acquisition expenses (primarily keyword purchases from leading internet search sites); 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, based on recorded revenues. 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 and Amortization. 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 twelve years. Amortization of intangible assets expense consists of the amortization of intangible assets recorded in connection with our acquisitions. Separable intangible assets that are not deemed to have an indefinite life are amortized over their estimated useful lives, which range from 3 to 17 years, using methods that are expected to reflect the estimated pattern of economic use. Interest and Other Income (Expense), Net. Interest and other expense, net consists primarily of interest costs and the related amortization of deferred issuance costs on amounts borrowed under our Loan and Security Agreement (the "Loan Agreement") withWestern Alliance Bank and amortization of premiums on our investments, less any interest income earned on cash, and short-term and long-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 of non-operating gains or losses, primarily related to realized and unrealized foreign currency gains and losses on trade assets and liabilities.
Application of Critical Accounting Policies and Use of Estimates
The discussion of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States ("U.S."). The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amount of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenues, long-lived assets, goodwill, allowance for doubtful accounts, stock-based compensation, contingent liabilities, self-insurance accruals and income taxes. We based 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 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 endedDecember 31, 2019 . Other than those noted in Note 2 to our consolidated financial statements, there were no material changes to our critical accounting policies and estimates during the first nine months of 2020. 28 --------------------------------------------------------------------------------
Income Taxes
We are subject to income taxes in both theU.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. Our deferred tax assets are comprised primarily of book to tax differences on stock-based compensation and timing of deductions for rent expense, accrued expenses, depreciation, and amortization. As ofSeptember 30, 2020 , we had foreign net operating loss ("NOL") carryforwards of$0.2 million , which may be used to offset future taxable income in foreign jurisdictions indefinitely.
Results of Operations
The following table sets forth our results of operations for the periods indicated, including percentage of total revenues:
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Revenues $ 36,244 100 % $ 33,809 100 % $ 102,456 100 % $ 98,067 100 %
Cost of revenues 9,212 25 % 8,047 24 % $ 26,148 26 % 23,011 23 %
Gross profit 27,032 75 % 25,762 76 % 76,308 74 % 75,056 77 %
Operating expenses:
Selling and marketing 13,792 38 % 12,454 37 % 39,311 38 % 38,877 40 %
Product development 1,961 5 % 2,085 6 % 5,839 6 % 6,073 6 %
General and administrative 3,355 9 % 3,107 9 % 9,976 10 % 9,252 9 %
Depreciation and amortization 1,452 4 % 1,205 4 % 4,250 4 % 3,481 4 %
Total operating expenses 20,560 57 % 18,851 56 % 59,376 58 % 57,683 59 %
Operating income 6,472 18 % 6,911 20 % 16,932 17 % 17,373 18 %
Interest and other expense,
net 91 0 % (409 ) -1 % (388 ) 0 % (798 ) -1 %
Income before provision for
income taxes 6,563 18 % 6,502 19 % 16,544 16 % 16,575 17 %
(Benefit) provision for
income taxes (219 ) -1 % 1,151 3 % 2,782 3 % 3,783 4 %
Net income $ 6,782 19 % $ 5,351 16 % $ 13,762 13 % $ 12,792 13 %
Comparison of Three Months Ended
Revenues
Three Months Ended September 30,
Percent
2020 2019 Increase Change
Revenues $ 36,244 $ 33,809 $ 2,435 7 %
The increase in revenues was due to customers increasing their spend for data
driven marketing products. Priority Engine revenue grew 4% versus the prior year
period to $13.2 million . Increases in lead generation, driven by the customers
movement to shorter-term contracts, were offset by decreases in brand.
Cost of Revenues and Gross Profit
Three Months Ended September 30,
Percent
2020 2019 Increase Change
Cost of revenues $ 9,212 $ 8,047 $ 1,165 14 %
Gross profit $ 27,032 $ 25,762 $ 1,270 5 %
Gross profit percentage 75 % 76 %
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-------------------------------------------------------------------------------- Gross Profit. Our gross profit is equal to the difference between our revenues and our cost of revenues for the period. Gross profit percentage was 75% for the three months endedSeptember 30, 2020 and 76% for the three months endedSeptember 30, 2019 . Gross profit increased by$1.3 million in the three months endedSeptember 30, 2020 compared to the same period in 2019, primarily attributable to increased revenues compared to the same period a year ago, offset, in part, by an increase in outside consultant expenditures. Because the majority of our costs are labor-related, we expect our gross profit to fluctuate from period to period depending on the total revenues for the period. Operating Expenses and Other Three Months Ended September 30, Increase Percent 2020 2019 (Decrease) Change Operating expenses: Selling and marketing$ 13,792 $ 12,454 $ 1,338 11 % Product development 1,961 2,085 (124 ) -6 % General and administrative 3,355 3,107 248 8 % Depreciation and amortization 1,452 1,205 247 20 % Total operating expenses$ 20,560 $ 18,851 $ 1,709 9 %
Interest and other expense, net
122 %
(Benefit) provision for income taxes
Selling and Marketing. Selling and marketing expenses increased for the three months endedSeptember 30, 2020 , as compared to the same period in 2019, primarily due to increases in stock-based compensation expense (accounting for 70% of the overall increase) and labor-related costs offset, in part, by a reduction of travel and entertainment expenses related to the COVID-19 circumstances pandemic.
Product Development. Product development expense increased for the three months
ended
General and Administrative. General and administrative expense decreased for the three months endedSeptember 30, 2020 , compared to the same period in 2019, due to an increase in stock compensation expenses offset in part by decreases in labor costs. Depreciation and Amortization. Depreciation and amortization expense increased due to newly acquired intangible assets with high value, which were placed in service during 2020 and amortized during the three months endedSeptember 30, 2020 . Those intangible assets were not in service during the same period in 2019.
Interest and other expense, net. Interest and other expense, net decreased mainly due to changes in foreign currency adjustments as compared to the prior period.
(Benefit) provision for income taxes. Our effective income tax rate was a benefit of 3% and an expense of 18% for the three months endedSeptember 30, 2020 and 2019, respectively. The decrease in the effective rate was primarily due to the impact of excess deductions from stock-based compensation in the third quarter of 2020, a discrete item.
Comparison of Nine Months Ended
Revenues
Nine Months Ended September 30,
Percent
2020 2019 Increase Change
Revenues $ 102,456 $ 98,067 $ 4,389 4 %
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-------------------------------------------------------------------------------- The increase in revenues was due to customers increasing their spending for data driven marketing products. Priority Engine™ revenues were up 5% in versus last year to$38.2 million the nine months endedSeptember 30, 2020 . Increases in lead generation, driven by the customers movement to shorter-term contracts, were offset by decreases in brand.
Cost of Revenues and Gross Profit
Nine Months Ended September 30,
Percent
2020 2019 Increase Change
Cost of revenues $ 26,148 $ 23,011 $ 3,137 14 %
Gross profit $ 76,308 $ 75,056 $ 1,252 2 %
Gross profit percentage 74 % 77 %
Gross Profit. Our gross profit is equal to the difference between our revenues
and our cost of revenues for the period. Gross profit percentage was 74% for the
first nine months of 2020 and 77% for the nine months ended September 30, 2019 .
Gross profit increased by $1.2 million in the nine months ended September 30,
2020 compared to the same period in 2019, primarily attributable increased
revenue, offset, in part, by an increase in contracted services. Because the
majority of our costs are labor-related, we expect our gross profit to fluctuate
from period to period depending on the total revenues for the period.
Operating Expenses and Other
Nine Months Ended September 30,
Increase Percent
2020 2019 (Decrease) Change
Operating expenses:
Selling and marketing $ 39,311 $ 38,877 $ 434 1 %
Product development 5,839 6,073 (234 ) -4 %
General and administrative 9,976 9,252 724 8 %
Depreciation and amortization 4,250 3,481 769 22 %
Total operating expenses $ 59,376 $ 57,683 $ 1,693 3 %
Interest and other expense, net $ (388 ) $ (798 ) $ 410 -51 %
Provision for income taxes $ 2,782 $ 3,783 $ (1,001 ) -26 %
Selling and Marketing. Selling and marketing expenses increased for the nine
months ended September 30, 2020 , as compared to the same period in 2019,
primarily due to increases in stock-based compensation expense and labor-related
costs offset by a reduction of travel and entertainment expenses related to
COVID-19 circumstances.
Product Development. Product development expense decreased for the nine months
ended September 30, 2020 , as compared to the same period in 2019, primarily due
to additional amounts that were capitalized over the nine months ended
September 30, 2019 offset in part by increases in contracted services.
General and Administrative. General and administrative expense increased for the
nine months ended September 30, 2020 , compared to the same period in 2019, due
to an increase in stock compensation expenses offset in part by decreases in
labor costs.
Depreciation and Amortization. Depreciation and amortization expense increased
for the nine months ended September 30, 2020 when compared to the same period in
2019, due to increased amortization expense related to the Company's acquisition
of Data Science Central in February 2020 .
Interest and other expense, net. Interest and other expense, net decreased mainly due to changes in foreign currency adjustments as compared to the prior period.
Provision for income taxes. Our effective income tax rate was 17% and 23% for the nine months endedSeptember 30, 2020 and 2019, respectively. The decrease in the effective rate was primarily due to the impact of excess deductions from stock-based compensation in the third quarter of 2020, a discrete item. 31 --------------------------------------------------------------------------------
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, many of which do not vary directly with revenues, has an impact on the cost of online 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 includes 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 and investments atSeptember 30, 2020 totaled$62.5 million , a$5.0 million increase fromDecember 31, 2019 , primarily driven by our cash generated from operations offset in part by the repurchase of shares of our common stock under ourNovember 2018 Repurchase Program, the acquisition of substantially all the operating assets of Data Science Central inFebruary 2020 , investments in property and equipment, and principal payments on our term loan. We believe that our existing cash and investments and our cash flow from operating activities will be sufficient to meet our anticipated cash needs for at least the next twelve months. Additionally, we have$20 million available under a line of credit agreement entered into inJuly 2020 . Our future working capital requirements will depend on many factors, including the operations of our existing business, our potential strategic expansion internationally, future acquisitions we might undertake, and any expansion into complementary businesses. To the extent that our cash and investments, cash flow from operating activities, and amounts available under our line of credit are insufficient to fund our future activities, we may need to raise additional funds through bank credit arrangements or public or private equity or debt financings. We also may need to raise additional funds in the event we determine in the future to effect one or more additional acquisitions of businesses. September 30, December 31, 2020 2019 Cash and investments$ 62,472 $ 57,499 Accounts receivable, net$ 24,380 $ 27,102 Cash and Investments
Our cash and investments, at
Accounts Receivable, Net
Our accounts receivable balance fluctuates from period to period, which affects
our cash flow 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. We define DSO as net accounts receivable at quarter end
divided by total revenues for the applicable period, multiplied by the number of
days in the applicable period. DSO was 62 days and 69 days at September 30, 2020
and December 31, 2019 , respectively.
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Cash Flows
Nine Months Ended September 30,
2020 2019
Net cash provided by operating activities $ 33,348 $ 29,993
Net cash used in investing activities $ (10,054 ) $ (4,271 )
Net cash used in financing activities $ (18,459 ) $ (8,163 )
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 nine months ended September 30, 2020 was $33.3 million
compared to cash provided by operating activities of $30.0 million for the nine
months ended September 30, 2019 .
The increase in cash provided by operating activities was primarily the result
of changes in working capital (driven mainly by increases in amounts payable for
income and payroll taxes as compared to 2019) offset by decreases in amounts
collected from accounts receivable.
Investing Activities
Cash used in investing activities in the nine months endedSeptember 30, 2020 was$10.1 million and was primarily a result of the acquisition of substantially all of the operating assets of Data Science Central inFebruary 2020 ($5.0 million ) and purchase of property and equipment, primarily for internal-use software, and to a lesser extent, computer equipment. In the first nine months of 2019 we used$4.2 million in investing activities primarily a result of purchase of property and equipment($4.7 million ), primarily for internal-use software, and to a lesser extent, computer equipment offset by$0.5 million from the maturity of investments. We capitalized internal-use software and website development costs of$4.6 million and$3.9 million for the nine months endedSeptember 30, 2020 and 2019, respectively.
Financing Activities
In the first nine months ofSeptember 30, 2020 , we used$18.5 million for financing activities, consisting primarily of$14.8 million , for the purchase of treasury shares,$0.9 million for the repayment of principal under the Loan Agreement and related costs and$3.1 million for tax withholdings related to net share settlements. In the first nine months of 2019 we used$8.2 million for financing activities, consisting primarily of$4.7 million for the purchase of treasury shares and related costs,$0.9 million for the repayment of principal on the Loan Agreement, and$2.6 million for tax withholdings related to net share settlements.
Common Stock Repurchase Program
InNovember 2018 the Company announced that the Board had authorized a$25.0 million stock repurchase program (the "November 2018 Repurchase Program") under which the Company is authorized to repurchase the Company's common stock from time to time on the open market or in privately negotiated transactions at prices and in a manner that may be determined by management. The Company repurchased 736,760 shares at an aggregate purchase price of approximately$14.8 million during the first quarter of 2020 under theNovember 2018 Stock Repurchase Program. No amounts were repurchased under this plan during the second quarter of 2020. During the nine months endedSeptember 30, 2019 we repurchased 317,724 shares of common stock for an aggregate purchase price of approximately$4.7 million pursuant to the ("November 2018 Repurchase Program"). TheNovember 2018 Repurchase Program was terminated onMay 1, 2020 . OnMay 1, 2020 , the Company's Board of Directors approved a new two-year$25.0 million stock repurchase program (the "May 2020 Repurchase Program"). Repurchases of the Company's stock under theMay 2020 Repurchase Program may be made in the open market, in privately negotiated transactions, or pursuant to one or more trading plans. The timing and amount of repurchases, if any, will be determined by the Company's management at its discretion and be based on a variety of factors such as the market price of the Company's common stock, corporate and contractual requirements, prevailing market and economic conditions and legal 33 --------------------------------------------------------------------------------
requirements. The
Repurchased shares were recorded under the cost method and are reflected as treasury stock in the accompanying Consolidated Balance Sheets. All repurchased shares were funded with cash on hand.
Term Loan and Credit Facility Borrowings
OnDecember 24, 2018 , we entered into a Loan and Security Agreement (the "Loan Agreement") withWestern Alliance Bank (the "Bank") as the lender. The Loan Agreement provides for a$25 million term loan facility with a maturity date ofDecember 10, 2023 (the "Term Loan"). The borrowings under the Loan Agreement are secured by a lien on substantially all of our assets, including a pledge of the stock of certain wholly-owned subsidiaries (limited, in the case of the stock of certain foreign subsidiaries, to no more than 65% of the capital stock of such subsidiaries). The Term Loan must be repaid quarterly, with applicable interest paid monthly, in the following manner: 1.25% of the initial aggregate borrowings are due and payable each quarter for the first two loan years, 1.88% of the initial aggregate borrowings are due and payable each quarter for the third loan year, and 2.50% of the initial aggregate borrowings are due and payable each quarter for the fourth and fifth loan years. At maturity, all outstanding amounts, including unpaid principal and accrued and unpaid interest, under the Loan Agreement will be due and payable. The borrowings are subject to a leverage ratio, measured quarterly. The Loan Agreement also requires us to make representations and warranties and to comply with certain other covenants and agreements that are customary in loan agreements of this type. AtSeptember 30, 2020 , we were in compliance with all covenants under the Loan Agreement. The Loan Agreement bears interest at a floating per annum rate equal to one and three-eighths percent (1.375%) above the greater of (a) the one (1) monthU.S. LIBOR rate reported in The Wall Street Journal and (b) two percent (2.00%).
The Loan Agreement may be prepaid at our option without penalty, provided we comply with the notice provision of the document. The Loan Agreement also contains customary events of default, subject to grace periods in certain cases, which may cause repayment of the Term Loan to be accelerated.
OnJuly 2, 2020 , the Company and the Bank entered in a Loan and Security Modification Agreement (the "Modification Agreement") amending the Loan Agreement between the Company and the Bank. Among other things, the Modification Agreement added or amended certain definitions in the Loan Agreement, added a new asset coverage ratio financial covenant of no less than 1.0 to 1.0 tested as of the end of each quarter, and provided the Company with a new revolving line of credit facility of$20,000,000 ("Line of Credit"). The Line of Credit allows the Company to request non-formula advances in an aggregate principal amount not to exceed the Line of Credit and to use the proceeds of such advances until the facility matures onJuly 2, 2022 . Advances under the Line of Credit bear interest at a floating rate equal to one-quarter percent (0.25%) above the Prime Rate (as published in the Money Rates section of the Western Edition ofThe Wall Street Journal , or such other rate of interest publicly announced from time to time byWestern Alliance Bank as its Prime Rate); provided that at no time shall the interest rate on such advances be less than three and one half percent (3.50%). Additionally, the Modification Agreement includes language providing for the Company and the Bank to mutually agree upon a LIBOR replacement if LIBOR ceases to exist or is no longer available. 34 --------------------------------------------------------------------------------
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$4.9 million and$4.8 million for the nine month periods endedSeptember 30, 2020 and, 2019 respectively. A majority of our capital expenditures in the first nine months of 2020 were for internal-use software and website development costs and, to a lesser extent, computer equipment and related software. A majority of our capital expenditures in the first nine months of 2019 were for leasehold improvements and 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$4.6 million and$3.9 million for the nine months endedSeptember 30, 2020 and 2019, respectively. We are not currently party to any purchase contracts related to future capital expenditures.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
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 endedDecember 31, 2019 . 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. 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, 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 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 COVID-19 pandemic; 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; and other matters included in ourSEC filings, including in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , our Quarterly Report on Form 10-Q for the quarters ended our Quarterly Report on Form 10-Q for the quarter endedJune 30, 2020 , Item 1A. "Risk Factors" of this Quarterly Report on Form 10-Q. 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. 35
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