Cognyte Software Ltd. (NASDAQ:CGNT) Q1 2024 Earnings Call Transcript

Cognyte Software Ltd. (NASDAQ:CGNT) Q1 2024 Earnings Call Transcript June 15, 2023

Cognyte Software Ltd. misses on earnings expectations. Reported EPS is $-0.25 EPS, expectations were $-0.22.

Operator: Good day and thank you for standing-by. Welcome to the Cognyte First Quarter Fiscal Year 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Dean Ridlon, Head of Investor Relations. You may begin.

Dean Ridlon: Thank you, operator. Hello everyone. I’m Dean Ridlon, Cognyte’s Head of Investor Relations. Thank you for joining us today. I’m here with Elad Sharon, Cognyte’s CEO; and David Abadi, Cognyte’s CFO. Before getting started, I would like to mention that accompanying our call today is a presentation. If you’d like to view these slides in real-time during the call, please visit the Investors section of our website at cognyte.com, click on the Investors tab, click on the webcast link, and select today’s conference call. I would also like to draw your attention to the fact that certain matters discussed on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other provisions of the federal securities laws.

These forward-looking statements are based on management’s current expectations and are not guarantees of future performance. Actual results could differ materially from those expressed in or implied by these forward-looking statements. The forward-looking statements are made as of the date of this call, and except as required by law, Cognyte assumes no obligation to update or revise them. Investors are cautioned not to place undue reliance on these forward-looking statements. For a more detailed discussion of how these and other risks and uncertainties could cause Cognyte’s actual results to differ materially from those indicated in these forward-looking statements, please see our annual report on Form 20-F for the fiscal year ended January 31, 2023, and other filings we make with the SEC.

The financial measures discussed today include non-GAAP measures. We believe investors focus on non-GAAP financial measures in comparing results between periods and among our peer companies that publish similar non-GAAP measures. Please see today’s presentation slides, our earnings release, and the Investors section of our website at cognyte.com for a reconciliation of non-GAAP financial measures to GAAP measures. Non-GAAP financial information should not be considered in isolation from, as a substitute for or superior to GAAP financial information, but is included because management believes it provides meaningful information about the financial performance of our business and is useful to investors for informational and comparative purposes.

The non-GAAP financial measures the company uses have limitations and may differ from those used by other companies. Now, I would like to turn the call over to Elad.

Elad Sharon: Thank you, Dean. Welcome, everyone, to our first quarter conference call. I’m pleased to report a good start for the year with solid Q1 results across several key metrics. Revenue grew sequentially came in ahead of our expectation at $73 million. I’m very pleased with our gross margins increasing by [800 basis points] [ph] compared to Q1 last year and gross profit increasing 7% year-over-year on a network adjusted non-GAAP basis. Free cash flow was very strong coming in at $70 million also ahead of our expectations. Today, I’ll start with a review of our first quarter of significant wins in market dynamics. Next, I’ll discuss our differentiated technology and how we believe we’re well-positioned to leverage the latest AI innovations to increase customer value.

Photo by Rodeo Project Management Software on Unsplash

And lastly, I’ll discuss our updated outlook for the year. I would now like to review some of our significant wins in the quarter that highlight our differentiated technology and deep customer relationships. Our investigating analytics solutions help national security, law enforcement, national intelligence, and other security organizations to accelerate investigations. The first deal is for approximately $8 million with an existing national intelligence customer for its mission to combat drug trafficking and other high impact crimes around the borders. We believe we’re selected because of our cutting edge technology that consistently outperformed solutions from other vendors during the variety of operational activities performed by this customer.

The second deal is with an existing national security customer for approximately $9 million. It represents an expansion of our customers’ capabilities and functionality for its mission to address an increase of terror and criminal activities in the country. We believe we’re selected due to our ability to accelerate security investigations and the long-term relationship we have with this customer. The third deal is for approximately $5 million from an existing national security customer. The deal is to expand capacity and widen the operational capabilities of their solution to more effectively combat our activities. We believe we’re selected based on our long track record of success in value creation. The common thread we see through these wins is our innovative and differentiated investigating analytic solutions and our ability to help customers successfully create operational volume.

Looking at the current market dynamics, we see a noticeable change versus what we saw last year. A year ago, many customers suffered from budget uncertainties, which impacted the visibility and ability to plan ahead. This year, more customers are expressing confidence in the budgets and plans. Our customers increase confidence, support our expectations for the year, and is translating into more discussions about future needs. For example, at recent industry conference, we saw a higher level of attendance and interest from customers. Overall, we clearly see more customers returning to normal behavior this year, compared to what was happening a year ago. Next, I would like to discuss our innovation and differentiation. Our customers face unique challenges when it comes to investigating analytics and decision making.

They have to fuse and analyze data at scale from a large variety of different sources, including sensitive data. The objective is to uncover insights quickly to accelerate investigations. Cognyte is focused on investigating analytics in order to uncover hidden connections inside large diverse data sources. We have been doing this for many years by continuously improving the [investment analytics] [ph] and incorporating artificial intelligence models in our solutions. The recent developments in AI provide us with new opportunities. We are currently focused on leveraging the latest innovation to enable our customers to derive even greater value from the data. We believe there are new market segments that face investigating analytics challenges that present us with good expansion opportunities over time.

We believe that our long-term market leadership in investigating analytics combined with our technological strength and our strong relationships with our large customer base across the globe position us well to leverage AI innovation and drive long-term growth. Looking at our outlook for this fiscal year, given the improved visibility, we are raising our revenue guidance for the year to $303 million, plus or minus 2%, representing 7% year-over-year growth at the midpoint on an SIS Adjusted non-GAAP basis. With revenue expected to grow by 7%, we now expect gross profit to grow faster at more than 10% year-over-year. As for cash flow, we are now expecting positive cash flow from operations for the full-year. Looking beyond this year, given recent innovations in AI, we have identified potential opportunities to expand our business with both existing and new customers.

We believe that the combination of positive industry trends, our innovative technology and large global customer base position us well for long-term growth. To summarize, our customers continue to face significant investigative challenges across many used cases. Our mission is to help them accelerate investigations and mitigate a wide range of threats before they unfold. And our customers view us as domain experts and trusted partner. We are pleased with our first quarter results and positive momentum and are raising guidance for the current year. Long-term, we target continued growth and margin expansion. Now, let me turn the call over to David to provide more details about our results and outlook. David?

David Abadi: Thank you, Elad, and hello everyone. Our discussion today will include non-GAAP financial measures. The reconciliation between our GAAP and non-GAAP financial measures is available as Dean mentioned in our earnings release and in the Investors section of our website. Our website also includes a financial dashboard with a tab that details our historical results, excluding the divested situation intelligence solutions. We are pleased with our Q1 financial results as we add solid performance across revenue, gross margin, cash flow, and bookings. The ongoing demand for our cutting edge investigative analytics solutions continued to be strong during the quarter and we continue to win deals from a variety of customers.

Q1 revenue came in at $73,000,000, up $2,000,000 from Q4, Total revenue came in at $25 million, representing 6% sequential growth and 11% year-over-year growth. Gross profit was up 9% sequentially and 7% year-over-year and our software gross profit grew faster than software revenue and was up 90% sequentially and 80% year-over-year. Q1 gross margin was 68.4%, up 250 basis points from Q4 and up 800 basis points from Q1 last year, primarily due to an increase in software revenue. Our gross margin reflects our competitive differentiation and ability to create value for our customers. All of the revenue, gross profit, and gross margin growth rates, I just discussed are on SIS Adjusted non-GAAP basis. Our Q1 non-GAAP operating expenses were $55.7 million, slightly higher than the Q4 level.

Over the last few quarters, we improved our execution, better focused the organization, and improved our cost structure resulting in sequential revenue growth, higher gross margin and a significant reduced operating [cost] [ph]. Our Q1 non-GAAP operating loss was $5.5 million and non-GAAP adjusted EBITDA loss was $2.3 million. Turning to cash. We generated a significant positive cash flow from operation of $19 million during Q1. The positive cash flow was driven by our improved financial results and strong cash collection. In terms of the balance sheet, we entered the quarter with cash of about $73 million and no debt. Our long and short-term RPO continued to be strong. Total RPO at the end of Q1 was $581 million, and short-term IPO was $283 million, approximately the same level as of Q4.

This healthy backlog and continued demand allow us to increase again our outlook for the current year. Turning to fiscal 2024. For the full-year, we are raising our revenue outlook to $303 million, plus or minus 2%, reflecting approximately 7% year-over-year growth on an SIS Adjusted non-GAAP basis at the midpoint of the range. Our revenue outlook is driven by our current view of the backlog deployment schedule for this year and assumes in similar macro environment conditions. Let me share with you more color on how we see the remainder of the year evolving. For revenue, based on current short and backlog deployment schedule, we expect Q2 revenue similar to Q1 and the second half to be higher than the first half. As a result of the strength and quality of our backlog, and recent booking, we’re increasing our full-year non-GAAP gross margin expectation to 66.5%, an improvement of 150 basis points versus our previous outlook and year-over-year improvement of 375 basis points on an SIS Adjusted non-GAAP basis.

Gross margin will fluctuate between quarters, based on the revenue mix. For our non-GAAP operating expenses, we continue to expect total expenses of about $220 million for the full-year and to be relatively flat throughout the year. Our improved cost structure combined with revenue growth and higher gross margins will allow us to improve operating margins over time. We remain on track to achieve our goal to drive positive non-GAAP adjusted EBITDA during Q4 of this fiscal year. As a result, we are now expecting a smaller annual EPS loss. The midpoint of the revenue range, we are now expecting a $0.53 annual non-GAAP EPS loss, an improvement of $0.07 versus our previous outlook. Our non-GAAP EPS will fluctuate quarter-to-quarter, partially due to our non-GAAP tax expenses.

We expect our Q2 non-GAAP EPS loss to be larger than Q1, primarily as a result of our non-GAAP tax methodology. Turning to cash flow, given the strong cash flow from operation we generate in Q1 and improved financial outlook, we are now expecting positive cash flow from operations for the full-year. We continue to expect about $10 million of payment for CapEx, partially offset by additional receipts from the SIS divestiture related to the holdback and price adjustment, which we expect to receive during the second half of the year. To summarize, we are a market leader in investigative analytics and have a strong and lengthy track records with customer around the world. We continue to add capabilities and improve the performance of our solution by leveraging the latest technologies, including emerging innovation in artificial intelligence.

We believe this technological innovation increased the operational value our customers generate for our solution and help drive demand. We are pleased with our first quarter results. We now expect about $303 million of revenue, plus or minus 2% and improving gross margin and profitability for FY 2024. We’re expecting positive cash flow from operations for the year. Looking beyond FY 2024, we believe that the combination of our cutting edge technology, large and loyal customer base, and the opportunity to address the needs of new customers position us well for long-term growth. With that, I would like to end the call over to the operator to open the line for questions. Operator?

See also Top 20 Countries with the Highest Oil Consumption and 10 Best GARP Stocks That Pay Dividends.

Q&A Session

Operator: [Operator Instructions] And our first question will come from Mike Cikos of Needham.. Your line is open.

Mike Cikos: Hey, guys. Mike Cikos here. Appreciate the pronunciation on the last name there, but thanks for getting me on here. Wanted to start out with the quarter itself and then going over some of the upside and outperformance if you guys were able to deliver? First, obviously revenue was above what we had anticipated. I know you guys were talking about flat sequentially versus this up, right? So, can you help us think about how the revenue came together in the quarter that was able to help you guys deliver that outperformance? That’s the first question I’d like to delve into. And then I have a couple of follow-ups.

Elad Sharon: Yes. So, hi Mike. Yes, indeed, we see a healthy demand [positive momentum] [ph] in the market over the last two quarters already and we’re continuing to win significant deals. The reasons for the – being ahead of expectations for Q1 is mainly related to backlog conversion scheduling. That’s the reason we’re able to deliver more within the quarter.

Mike Cikos : And just to pull it out because like your backlog bookings, right, if I think about the disclosures you guys provided today with RPO and current RPO climbing, from 4Q to 1Q by a couple of million dollars, right? So, when you’re calling out that backlog conversion, should I interpret that as like backlog came in earlier than you guys had anticipated and you were still able to backfill that based on the fact that those RPO and current RPO balances climb sequentially? Like can you tease that out?

Elad Sharon: Yes. So, maybe before talking about the RPO, I want to share with you a little bit about the market dynamics today because I think it’s important. We discussed the active demand, discussed the positive momentum, we have strong backlog long and short-term, but we also see more and more customers that are more confident in the budgets and plans. And the – actually the Q1 results are derived by accelerated customer readiness and for us being able convert more backlog into revenue within the quarter. And that’s what, what we see. Actually, we see more and more customers in better position. And this is the reason we were able to deliver more in Q1 and also raise the outlook for the year for [303] [ph].

Mike Cikos: Got it and appreciate it. And I know that you guys had also, again, coming back to the RPO for a second. The RPO and current RPO, you guys said that’s flat sequentially. If I go back to my notes, it’s actually up by a couple of million dollars. So, call it flat on a percentage basis, but the – you did grow it from 4Q to 1Q. One of the things that I’d like to hear, what has the typical cadence been? Like, if I go from 4Q to 1Q last year, the year before that, traditionally, is RPO and current RPO climbing sequentially from Q4 to Q1 or no?

David Abadi: So, RPO is reflected by multiple elements, including multiple year support contract and other elements that can impact on the total. There’s no specific pattern like, we could see like that the RPO in general can grow from quarter-on-quarter, but overall our RPO is very strong and our ability to convert more backlog in Q1 and giving the Q1 overall result gave us the ability to improve our outlook for the year. I believe that the RPO that we have, the short-term and the long-term support our future growth and it’s very solid.