Cognyte Software Ltd (CGNT) 2021 Q1 法說會逐字稿

Welcome to the Cognyte First Quarter Fiscal Year-End 2022 Earnings Conference Call. My name is Hilda, and I will be your operator for today. (Operator Instructions) And now I would like to turn the call over to Mr. Matthew Frankel. Mr. Frankel, you may begin.

Thank you, operator. Hello, everyone, and 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'd like to mention that accompanying our call today is a Webex with slides. If you'd like to view these slides in real time during the call, please visit the IR section of our website at cognite.com, click on the Investors tab, click on the webcast link and select today's conference call.

I'd 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 as accepted -- 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 discussions about 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 June 31, '21 filed with the SEC on April 29, 2021, 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 in 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 provides meaningful information about the financial performance of our business and are used by investors for informational comparative purposes. The non-GAAP financial measures the company uses have limitations and may differ from those used by other companies. Now I'd like to turn the call over to Elad. Elad?

Thank you, Matt, and welcome, everyone, to our first quarter of FY '22 conference call. I'm pleased to report a strong quarter with both revenue and diluted EPS coming in ahead of our expectations. During our last conference call, we discussed the completion of our transition to our software model, and I'm pleased to report that in Q1, we continue to see the benefits of our strategy and our results.

Non-GAAP revenue increased 12.3% year-over-year, while gross profit increased at an even faster pace of 18.8%, reflecting an improved software mix. We are particularly pleased with our gross margin, which came in at 72.6%, up 400 basis points. Adjusted EBITDA increased a strong 66%. Our strategy is to empower security organizations with an open analytics platform to help them address many different security use cases. To help bring this strategy to life, today, I will review our market opportunity, discuss several large first quarter orders and discuss recent innovations in our analytics platform.

Our customers are facing many security challenges. Well-organized, well-funded entities are becoming harder to detect as they take advantage of the lesser technologies to hide in the shadows. At the same time, there is a growing volume and diversity of structured and unstructured data, and data is fragmented and spread across organization silos, making investigations more difficult. Many customers recognize that home-grown solutions cannot keep pace with these evolving security challenges and have increasingly sought open security platforms with cutting-edge analytics. Solutions that confuse data scale from different sources and generate high-quality insights faster to mitigate the right range of security threats before they unfold.

Our open platform provides many benefits to our customers, including faster innovation and more frequent updates with the latest analytics and artificial intelligence technology. We believe the security analytics market is in early stage, and we are committed to staying ahead of the demand curve with our open analytics platform. With nearly 1,000 people in R&D, primarily based in Israel, we are focused on developing highly sophisticated security analytics software. Our total addressable market is around $30 billion, growing 10% per year, and we believe we are well positioned to address this opportunity with our open analytics platform.

Let me take you through several large Q1 wins that reflect the successful execution of our strategy. The first is a $40 million order that came from a national law enforcement organization that started with one use case as is expanding to a second use case. This customer initially deployed our platform in retail analytics for fighting drug trafficking in one agency, and over time, deployed it across multiple agencies to facilitate collaboration across its different operational units. This customer is now expanding our platform to add additional use case for antiterrorism. This is a good example of our platform supports multiple use cases and enables us to go wider and deeper and grow with our customers' needs.

The second example is a $9 million order from a national security organization that is replacing the homegrown solution. This organization needed a more scalable, open and advanced platform and faster innovation to address its changing security needs. Our platform allows them to easily add new data sources and accelerate criminal investigations using advanced analytics capabilities. This is a good example of how our platform addresses the limitations of homegrown solutions.

The third example is a $6 million order from an existing national intelligence customer that is expanding the deployment of our latest security analytics software. This is a good example of how our customers look to Cognyte to help them address their growing security challenges with realtime analytics. As a reminder, about 90% of our revenue is repeat business from existing customers, reflecting our ability to help them address their evolving security challenges with our cutting-edge technology. We continue to innovate our platform by adding analytics to address new use cases.

A recent example of our innovation is addressing cryptocurrency investigations. Cryptocurrencies are being increasingly used for illegal activities, such as money laundering, extortion, drug transactions, terror funding and cyber crime. Cryptocurrencies can be anonymous and borderless, and it's a challenge to find who is behind those illicit transactions. Investigations with existing technologies offer and reach a dead-end when trying to determine who is responsible.

We are about to launch a new solution to help security organizations conduct investigations involving cryptocurrencies. Our solution will be offered on a subscription basis and is designed to identify illicit transactions and suspects and generate optimal intelligence to successfully complete investigations. Blockchain analytics, as a challenge it poses to security organizations, are good examples of why the rapid pace of innovation is required for our customers to stay ahead of the curve. This is also a good example of how customers can easily deploy new solutions from our open analytics platform.

In summary, we are pleased with our strong first quarter as a pure-play security analytics company. For the current year, we expect around 10% revenue growth, and we target our revenue growth rate and margins to further improve in FY '23 and FY '24. I'm also pleased to share with you that after a successful transition to software, we are now turning our attention to shifting to a subscription model. We expect this initiative to have a positive impact on our revenue composition with more recurring revenue over time.

Now let me turn the call over to David to discuss our Q1 results and outlook in more detail. David?

Thank you, Elad, and hello, everyone. Our discussion today will include non-GAAP financial measures. A reconciliation between our GAAP and non-GAAP financial measures is available, as Matt mentioned, in our earning release and in the Investors section of our website.

As Elad mentioned, we had a strong start to the year with revenue and EPS coming ahead of our expectations. During Q1, we won multiple 7- and 8-digit orders from existing and new customers, driven by ongoing demand for our analytics software and our strong differentiation. Non-GAAP revenue came in at about $150 million, up 12.3% year-over-year and non-GAAP diluted EPS came in at $0.20.

Non-GAAP operating income increased more than 100% and adjusted EBITDA increased 66% year-over-year to $21.1 million. Beyond our strong result was the demand for our solution and the successful execution of our software model strategy, which I would like to discuss in greater detail. In Q1, nearly 50% of our revenue was recurring and 89% of our revenue came from software, up 400 basis points year-over-year, reflecting the adoption of our analytics platform and the reduction of hardware selling and professional services.

Our non-GAAP gross margin increased 400 basis points to 73%, and our non-GAAP gross profit increased approximately 19% year-over-year as a result of this improved mix. Over the last few years, we have made investments transition from a system integrator model to a software model. These investments are behind us, and we are seeing the benefit of this investment in our software mix and gross margin. As Elad mentioned earlier, after the successful completion of our transition to software, we are now shifting our attention to a subscription model and are in the process of reviewing our go-to-market strategy with the goal to drive more subscription revenue over time.

Turning to FY '22. We are pleased with our strong start to the year and expect a strong Q2 and the full year. Our confidence in the outlook has improved due to strong Q1 results, faster delivery cycles as a result of our transition to software model, and the gradual increase in recurring revenue. Our outlook for the full year is $490 million of non-GAAP revenue with a range of plus or minus 2%, reflecting approximately 10% year-over-year growth. We expect our non-GAAP diluted EPS to come in at $0.80 at the midpoint of the revenue range. Our diluted EPS guidance reflects $85 million of adjusted EBITDA or 14% year-over-year growth in adjusted EBITDA normalized for the spin-off dis-synergies.

Let me provide you with a little more color on how we see the year progressing. For revenue, we expect sequential increase throughout FY '22. In Q2, we expect approximately 9% revenue growth year-over-year and approximately $0.14 of diluted EPS, reflecting the timing of certain expenses.

In summary, with cutting edge analytics and AI technology and a strong track record, we are well positioned to grow in a large addressable market, driven by favorable trends. We are pleased with our first quarter results. And for the current year, we expect 10% revenue growth and 14% normalized adjusted EBITDA growth. Looking beyond the current year, we expect revenue growth to accelerate and our margin to continue to expand as we execute on our growth strategy.

With that, I would like to hand over to the operator to open the line for questions. Operator?

(Operator Instructions)

We have a question from Daniel Ives from Wedbush.

So first off, in terms of the subscription shift. If there was no subscription shift, can you maybe just talk about from a growth perspective what that would look like? I mean, is it 200 bps more? I mean, could you maybe just give some color on that?

Yes. Thank you, Dan. So in the last 2 years, the transition to software was our major focus, and it was very successful, actually. We were able to improve the gross margin by 100 basis points in the last 2 years and also grow the recurring business to reach about 50% of our revenue. And now that the transition to software is behind us, we'll shift our attention to increasing our subscription business. This is going to be a gradual process, given the purchasing behavior of government customers in our domain, which is mainly perpetual license today. So we do not expect changes in the short term, but in the mid, longer term.

Got it. And can you just maybe talk from a pipeline perspective, just given the climate that we're seeing, are you seeing larger deals within the -- especially within European government and other geographies, Middle East and others, in terms of just larger, more strategic deals that maybe again accelerate given the climate?

Thanks, Daniel. So in the last few years, as part of the transition, we actually rely less and less on large deals. We do see demands for our solutions, and we do see like customer willing to put large leases like we share like the deals. And it's, again, an evidence of the stronger solution we have. Currently, we are not relying on a certain specific large deals. But the demand is there, and there is a variety between different governmental agencies in the way that they are purchasing, and we see all type of range of deals.

Our next question comes from Mike Cikos from Needham.

I also had a question on the subscription model shift that you guys are talking about. I'm curious with these subscription contracts, do you expect that you can, I guess, improve or increase sales velocity based on the different contract structure? And then the follow-up would be, if that's the case, should we expect growth to accelerate based on that?

So over time, we believe that revenue will be shifted to subscription. We do think it's going to be gradual. And as Elad mentioned, this kind of processes are taking time, especially given the purchasing behavior of the government customers in our domain. And as you know, mainly -- it's mainly today perpetual license, and we think that the transition is something that will take some time.

In the short term, we still have existed the RPO that we need to execute, and we still have some recurring revenue, and we believe that the impact on the short term will be relatively minor. So from a growth perspective and taking the -- our assumption regarding the transition phase, we think that it's going to be a modest transition phase. We think that the short-term impact on the top line will be relatively taking consideration in our -- in the way that we provided the outlook. Obviously, if we will see a faster adoption, we'll be very pleased with it.

Understood. And could you actually help us think about what is that Cognyte is doing to help change? Because, obviously, if your government customers have typically been purchasing these perpetual licenses, are you changing anything in your selling motion? Or what additional investments are required on Cognyte's part to change the market's thinking about this buying pattern?

Yes. So I think there's a few activities we should take into consideration. The first one, we obviously have to change our go-to-market, and of course, offer more and more of our solution in subscription. And this is something we are going to do gradually. We also understand that also government customers, although they are used to certain business model, they are willing to shift. They understand that the world is shifting towards subscription. And while it will be more difficult to do it in expansions of existing solutions or as David mentioned, in existing orders that are within our RPO, we believe that for new offerings and new use case sales that we are going to launch, it will be easier for us to offer it in different way.

And also, I believe that we'll have more of the cooperation in that respect. We have a close relationship with our customers. So we are going to do it while talking to them. We are not going to force a certain method that will not apply. We are going to discuss it with them to, of course, convince them that there is a lot of value of shifting to subscription. While you shift to subscription, obviously, you get quicker refresh to your technology, you benefit from innovation constantly. And this is something that I believe they will appreciate. But again, it will be a gradual process. Also the transition to software model took us about 3 years. I believe that also this transition takes some time. But I believe -- I also believe that it's going to be successful. We are committed to it. And I believe the market will appreciate and accept it.

And one more, if I could, just on the cryptocurrency that you guys were talking about earlier. I'm curious, is that a new solution that you guys don't currently have on the market? Is that something that you plan on selling soon? Or is that already out in the market at this time?

Yes. So let me give you some color about cryptocurrencies and why it's important for our customers and also address your question about the maturity of this solution. So cryptocurrencies are stored in digital wallets. It's an alternative to a standard banking system or cash. If we compare it to traditional banking, unlike the traditional banking system, cryptocurrency can be traded between people anonymously, without a need for third-party mediator, which is welfare of the identity of the parties involved. And unlike cash, cryptocurrencies are digital. So there is no physical component, which makes them easier to hide from law enforcement and also easier to transfer domestically or internationally, and obviously, this address a new challenge for our customers. They need to take it into account and to evolve. And that's the reason it's so important to have an open platform that is able to keep pace with the technology changes. We discussed it a lot previously about homegrown solutions that are rigid. And that's so important to have an open platform that can be easily refreshed with new use cases and with new analytics.

We believe that the demand will grow over time. For now, it's an early opportunity for us. We are conducting pilots with some of our customers. And I believe that over time, this need will be growing, as you know, it's very convenient for illicit activities to be conducted in this ecosystem of cryptocurrency. Again, it's easier to hide. It's easier to transfer money domestically or internationally. And you cannot -- usually, you don't know who is behind the transaction. And if you are able to address this challenge by strong analytics and help customers to identify the illicit transactions and also who is behind it, I think it's a lot of value. So we are in early stages, but believe that this will become -- create a lot of benefit to our customers over time.

Our next question comes from Kirk Materne from Evercore ISI.

Great. Peter Levine in for Kirk. So just to piggyback off of the comments you made on the call and the prior question, so can you talk specifically about the changes you're making to your go-to-market to accelerate software adoption? Are these -- are you adding new reps? Are you adding new partners? Just curious to know what these changes are?

Are you referring to the transition to software or the transition to subscription that we are planning ahead?

So yes, you talked about just the changes to your go-to-market?

Yes. So in terms of go-to-market, we'll have -- in terms of transitioning to software, what we did before and later on, I'll address what we are going to do going forward for subscription. So a customer used to have tailor-made solutions. So the go-to-market was actually tailor-made solutions and offering a system integrator like solutions, with professional services, a lot of customization, et cetera. And we shifted our model into a software model and now we are a software company. So actually, we were able to take the professional services and customizations down and productize our solutions in a way that it's very easy to deploy, to upgrade and to update and the benefit for our customers was increasing accordingly. And also, we were able to shift a lot of our professionals to develop innovations like the cryptocurrency, I just mentioned, instead of onetime customization.

Looking ahead for subscription, we'll have also to go there to some changes in the go to market. We'll have to change the way we offer and sell our solutions in a way that the benefits and the offering will encourage our customers to shift from perpetual license into subscription. So the offering will be a little bit different. And the way we are going to pitch our solutions and offering to the customer is going to be different. And this is something that we are working on these days towards the shift to subscription over time.

Great. And then maybe one for you, David, is, you are sticking to your full year guide. It looks like you're maintaining the guide at roughly 9% at the midpoint. You've highlighted a number of large deal wins, pipeline seem to be baking. So love to understand what's behind the guide number? Kind of, what tailwinds are you building in? What are you not building in that could potentially be upside?

So the -- our guidance taking into consideration the level of our visibility. So we have a strong visibility. We have recurring revenue around 50% of our revenue. Our repeat business is more than 90% of our revenue, and we have strong RPOs. So when we look at our annual guidance, obviously, with the very strong start of the year with strong Q1, with the level of confidence that we have for the year is higher. The deals that we announced are aligned with our strategy. We believe that this strategy -- we execute our strategy quarter-over-quarter with a very long-term view, and we are able to deliver what we are committed to. And given that, I think that I'm very pleased with where we are, and I'm confident that we'll be able to deliver our outlook for the year.

Our next question comes from Brad Reback from Stifel.

A quick follow-up on that last answer. You had mentioned strong RPO. Can you give us a sense of what it grew in the quarter?

So actually, the RPO, overall, is more than $0.5 billion. Again, you need to look at the RPO in 2 elements. The one that we land for the next 12 months and the one that for a longer period. On the level of the 12 months, we are consistently around 2/3 of the total RPO and more than $0.5 billion of RPO.

But how about the growth rate year-over-year?

So again, like, we don't share like the exact number on a quarterly basis. And -- but as I mentioned, we have the capacity to fulfill our RPO in the way that we actually outlook for the full year. So it's aligned with our expectation to deliver our short- and long-term expectations.

Okay. That's great. And maybe getting into the accounting weeds a little bit on the shift to subscription, given that most of your customers deploy on-prem and 606, would it be right to assume that you'd still get the vast majority of that contract value on a subscription basis recognized upfront?

That's correct. There will be some impact. I cannot say that it will be the vast of it because the way that we are changing the offering and the way that we deliver our software services will be impacted also from the shift. On certain cases, we will have a situation because of the time-based license that we will need to recognize part of it upfront. But overall, we do -- we believe that there will be an impact on the -- between the revenue composition, and we will see more and more recurring revenue.

The next question comes from Brian Ruttenbur from Imperial Capital.

Great. Good quarter. A couple of quick questions and this is housekeeping, but right now, where are you as a percentage of revenue on subscription? Is it 0%, that subscription? And then where do you expect to be in year 1, year 2? What is the plan that you're going to switch over and be 50% at subscription in year 3? Give us some kind of parameters as you see things moving forward?

So today, our recurring revenue stands on about 50% of our revenue is recurring, 1/3 of it is subscription and 2/3 of it is support. We do not expect any major shift in first year. The reason for that is that it will take time for us and for our customers to shift to subscription. And also, given the strong RPO, which is actually in the same mix that we used to have. So it's -- the RPO is strong, as David mentioned before, it's more than $0.5 billion. And it's not -- it's a more perpetual license rather than subscription. So for the short term, we do not expect any changes in the ratio. Going forward, we do not -- it's too early to say what are the -- exactly the target. This is something we'll have to figure out in the next few months.

We are going through the planning of the shift and transitioning to subscription. Again, including what I mentioned before, which means the go-to-market, we're discussing with customers and understanding -- leading to shift to subscription and convince them and providing them with -- encourage them and providing them with more benefits to encourage them to shift. So it will take some time for us to set the targets. But generally speaking, we believe that this is something that we will be able to execute like we did in the software transition. For the targets, we'll have to do it at a later stage. David, do you want to add?

So let me add a little bit more color again about like where we are from subscription. So from the overall recurring revenue of the 50% of our revenue, 1/3 is approximately currently subscription. So it's around a little bit more than 10% of our total revenue that is today subscription. And -- we do think that over time, we will see the shift in the transition. Obviously, it will impact also support and all the composition of the revenue in the long term. But I do think that it will allow us to get better scale and drive more growth over time.

Great. Shifting over to a different kind of question. In terms of the recent attacks and the impact in the quarter and maybe the impact going forward, can you talk about -- we had a conversation recently, but you talked about having to shut down for a day because of the attacks. What is your game plan kind of going forward if there is additional attacks? Do you have a new contingency plan post these recent attacks to normalize business? And was there any impact to you guys in terms of sales in the quarter because of the recent attacks?

I'm not sure what attack are you referring to?

I was just referring to your operations in Israel. I think that you had to -- as I recall, having a conversation with you a couple of weeks ago that you had to possibly shut down some of your operations for a day because of some of the missile attacks from Gaza. Is that correct?

No, actually. Okay. Okay. So -- okay. So the attack in Gaza. Got it. First of all, we have a business continuity management plan available, and it was executed well in the times of the COVID-19 and also in times of other constraints that we had. In our territory again, geography, we didn't suffer any disruptions. Anyhow, most of our employees due to the COVID are working from home. We have the setup. We have the facilities. We shifted everything to virtual work. By the way, until today, many employees around the globe, including in Israel are working from home, still working from home due to the COVID. So there was no disruption to the operations. It's only a matter of people either working from the office or working from home. The business is running as usual. No disruptions related to this incident in Israel.

Okay. Did it impact sales at all, your sales? Was there a delay in any sales or an acceleration in these sales because of the Gaza attacks? Maybe the answer is obvious and no, but I just wanted to hear that from you.

Yes. There was no impact at all on our business, including deployment, sales, deliveries. Nothing was impacted from this incident related to Gaza and Israel. Business is running as usual.

We have a question from Shaul Eyal from Cowen. .

Shaul, we can't hear you.

Apologies, I was muted. I was muted. I'm sorry. Yes. No, I apologize in advance if the question was already answered. I was a little late to the call start. In terms of the subscription transition, what's the time frame you have in mind for it?

I believe it will be similar to the transition to software model. So it will be about 3 to 4 years to execute that. The reason for that is that it involves changes in the go-to-market strategy, in the pace of the adoption of customers, mainly governmental customers to shift to subscription. And also, we have a strong RPO that we have to deliver, which is currently with a mix of more perpetual license as of today. So it will take a few years' time to complete this transition.

So for the short term, we do not expect any material impact on our business. For the mid and longer term, we do believe that we'll see more recurring revenue and more subscription, which is very good for us as we plan to see more visibility on our business and going forward being able to accelerate growth over time.

Thank you. At this moment, we have no further questions. I would like to turn the call back to Mr. Frankel for final remarks.

Thanks, operator. And thank you, everyone, for joining us today. I look forward to speaking to you again soon. Have a good day.

Thank you. Ladies and gentlemen, this concludes today's conference. We thank you for participating. You may now disconnect.