Q4 2020 Cognyte Software Ltd Earnings Call
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Welcome to <unk> earnings Conference call. My name is Sylvia and I'll be your operator for today's call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session.
During the question and answer session they'd be happy a question. Please press Star then one on your Touchtone phone.
Please note that this conference is being recorded.
I will now turn the call over to Matthew Frankel, Mr. Frankly, when it began.
Thank you operator, Hello, everyone and thank you for joining our first conference call as an independent public company.
My name is Matthew Frankel and I'm here with a lot your own cognex, CEO and David body Cognex 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 Cognex com click on the investors' tab click on the webcast link.
Today's conference call.
I would also like to draw your attention to the fact that certain matters discussed in this call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act and <unk> 95, and other provisions of 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 cognate assumes no obligation to update or revise them.
You 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 cognates actual 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, 2021, one filed and other filings we make with the SEC.
Measures discussed today include non-GAAP measures as we believe investors focus on those measures and comparing results between periods and among our peer companies.
Please see todays presentation slides earnings release, and the investors section of our website at Cognex Dot com for a reconciliation of non-GAAP financial measures to GAAP measures now.
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 supplemental information regarding our operating results when assessing our business and are 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 a lot.
Thank you, Matt and welcome everyone to our first conference call.
The public company.
We the mechanics of the separation from various behind US we are.
Now a few close accusing a leading software company.
Laser focused on addressing the needs of our customers and accelerating our growth.
That's what the game today's call with a view of our fourth quarter and fully resolve false.
Rose by a discussion of market trends and outlook.
In Q4, non-GAAP revenue came in at $125 million slightly higher than we expected, bringing non-GAAP revenue for the year to $447 million.
On a GAAP basis revenue was $194 million and $443 million respectively.
The first half last year was impacted by global travel and other restrictions due to the pandemic.
The business environment improves throughout the year, we experienced sequential revenue growth every quarter.
And then third FY 'twenty, two with the higher software mix.
With the first quarter almost completed we are off to a strong start to the year.
Looking back on FY 'twenty, one we made significant progress with our software model strategy ahead of expectation and I'm pleased to announce that we now view it as being complete.
We expect that the completion of the transition will benefit our future growth rates.
For the full year, 85% of our revenue careful software driving gross margin in excess of 70%.
We believe our security analytics platform strategy is resonating well with our customers and us.
Driving many of our competitive wins.
In Q4, we continued to win multimillion dollars deals, including two eight figure deals and I'll discuss a few of them later in the call.
Next I would like to review our market opportunity.
We estimate our total addressable market to be approximately $30 billion growing 10% barrier.
We believe there are three trends behind the demand for security analytics software.
First government and enterprise security organization first more complex challenges and threats are becoming more difficult to be fixed.
Second there is a growing volume and diversity of structured and unstructured data and then things for granted and spread across organizational silos.
And third leading security organizations seek hopper security analytics solutions.
Solutions that confuse data from different sources and generate high quality insights faster to mitigate threats before doubtful.
Cognex is well positioned to continue to win large deals from existing and new customers based on our strength of our platform and our reputation for delivering value.
Our technological strength, including open platform, a broad portfolio and the ability to generate real time or near real time insights for a wide range of security use cases.
Our brand leadership is based on our strong track record with more than 1000 customers in more than 100 countries around the world for over two decades.
Let me share with you a few examples of why we win.
The first example is attacking a dollar Q4 order from an existing customer.
And National Security Agency that was looking to shorten the time of security investigation.
Realized they needed to modernize the technology that powers the investigation.
They selected to ignite due to our open analytics platform and the ability to give them to keep pace with emerging threats.
They also have confidence in our ability to deliver value.
Based on our track record and previous deployments.
This is a good example of a customer with challenges that are constantly evolving recognizes the need to modernize technology that powers investigation, we can open analytics platform.
The other came from an existing customer consistent with our expectation.
90% of our revenue each year is reoccurring.
We also winning new customers.
Due to our global leadership position.
The second example.
He's a $7 $5 million order from a new customer.
Ministry of public security that was looking to upgrade their capabilities by replacing a homegrown solution.
Our solution has many benefits over Hong Kong solution.
Including real time insights.
And the ability to implement quick technology refreshments.
We believe that many security organizations today still use Hong Kong solution and we see this as a significant opportunity for carbonite.
A third example is a <unk>.
$6 $5 million win from another new customer.
This law enforcement the agency recognized the need to connect organizational silos to better achieve the strategic mandates.
Behind this large win is our ability to fuse data from multiple data silos and apply advanced analytics to help them address multiple security use cases with an open platform.
We believe these large wins.
Let our differentiation and our ability to grow with existing customers and win new customers.
Now that the activities related to the spinoff are behind US we have shifted our focus to accelerating growth and extending our market leadership.
We are a leader in a very exciting market.
We're positioned to continue to deliver rapid innovation with our open analytics platform.
For the commentary, we expect around 10% revenue growth and without it our revenue growth rates and margins to further improve in FY 'twenty three and therefore <unk> 24.
Now, let me turn the call over to David to discuss our Q4 results and outlook in more detail.
David.
Thank you <unk> and Hello, everyone.
<unk> today will include non-GAAP financial measures.
Integration between our GAAP and non-GAAP financial measures is available as Mac mentioned in our earnings release and in the IR section of our website.
As I've mentioned, we have a strong finish to the year with revenues that came in slightly ahead of our expectations.
For Q4, non-GAAP revenue came in at about $125 million and adjusted EBITDA came in at $24 million.
Non-GAAP gross margin was 71% up one of the basis points year over year.
During Q4, we won't look at about seven and eight digit orders from existing or new customer driven by ongoing demand for our analytics software and our strong differentiation.
For the year, we generated $447 million of non-GAAP revenue.
Having sequential revenue growth each quarter.
Non-GAAP gross margin came in 71% up 530 basis points year over year.
Adjusted EBITDA came in at $89 million for the year.
Compared to various reporting of $19 million.
This $1 million of difference was driven by various cost of location metallurgy. When Koch Knight was still a part of <unk>.
As Cook Naturals part of variant in FY 'twenty, one we don't view EPS is meaningful for last year.
Over the last few years, we've made investments to transition from a system integrator model to a software model.
These investments are behind us as we completed the transition.
We are now focused on accelerating our revenue growth with gradual margin expansion.
We are pleased to report that last year, 85% of our revenue was generated from software.
450 basis points from two years ago.
Our long term objective is to gradually increase the software mix up to a level approaching 90% of revenue.
Over the last few years, we've seen a dramatic improvement in gross margin, reaching 71% on a non-GAAP basis in FY 'twenty one.
Nearly 1000 basis points since FY 19.
Going forward, we expect our gross margin to gradually improve consistent with the expected improvement.
Our software mix.
Turning to FY 'twenty.
I am pleased to share that we have started the year with a strong first quarter.
There are a couple of days left before Q1 hand, and our current forecast for revenue is between 113 and $115 million, representing 10% to 12% year over year growth.
We also expect strong Q1 profitability with EPS.
<unk> 16.
For the full year, we expect $419 million of revenue.
Actual minus 2%, reflecting approximately 10% year over year growth at the midpoint.
We expect annual EPS to come in at <unk> 80.
At the midpoint of the revenue range.
Our confidence in the outlook has improved Youtube.
Strong Q1.
Faster delivery cycle as a result of our transition to software model.
And the steady and gradual increase in recurring revenue.
Let me share with you a little more color on how we see the year progressing.
For revenue, we expect sequential increase throughout FY 'twenty, two with year over year growth of over 10% in Q1 slightly below 10% in Q2, and Q3 and approximately 10% in Q4, bringing total revenue to $490 million.
We expect gross margin to be up year over year to approximately 71, 5%.
With gross margin fluctuations quarter to quarter based on our revenue mix.
For operating expenses, we expect Q1 to be slightly below Q4 fiscal year 'twenty one.
But sequentially increase throughout the year.
As previously discussed we expect Opex to increase 15% for the full year, primarily due to the $50 million of support.
<unk> related dis synergies.
For taxes, we expect our cash tax rate to be slightly above 10%.
For share Count, we saw 67 25 million weighted average fully diluted shares in FY 'twenty two special calculation.
Taking the full effect of the spinoff from variance.
Based on these assumptions, we expect around 50 cents of EPS in both Q1 and Q2, increasing sequentially in Q3 and Q4 for a total of 80 for the full year.
Our EPS guidance of 80.
Reflects $85 million of adjusted EBITDA or 40% year over year growth in adjusted EBITDA normalized for the spin off dis synergies.
In summary, following the separation from Varian.
Excited about the journey ahead as a pure play security analytics company.
With cutting edge analytics and AI technology.
<unk> strong track record, we are well positioned to grow in a large addressable market driven by favorable trends.
For the current year, we expect 10% revenue growth and 40% normalized adjusted EBITDA growth.
Looking beyond the current year, we expect revenue growth to accelerate and our margins 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.
Thank you we will now begin the question and answer session. If you have a question. Please press Star then one on your Touchtone phone.
Wish to be removed from the queue. Please press the pound or the hash key.
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Once again, if you have a question. Please press Star then one on your Touchtone phone.
And our first question comes from Dan Ives from Wedbush.
Yes, thanks, and great quarter, Congrats a stand alone company.
So can you give us a little more detail as much you can provide on that replacement of the homegrown solution.
In terms of the dynamics there. Thanks.
Thanks.
Okay.
Yeah sure. Thank you Dan for the question.
So many organizations have developed their homegrown solutions over there is either with the help of their IGT organizations or system integrators.
However, with the pace of innovation required close systems and customized system are simply unable to keep up anymore.
These solutions are usually rigid it's hard to maintain it how to refresh its cost effective and the value for the customer he is declining over time.
This is becoming even a bigger issue for our customers because the threats are more sophisticated bid up those are also using more advanced technologies and better at targeting and the potential damage is growing.
So our security analytics platform is open which means that it can be easily integrated.
Customer ecosystem and its data sources.
It can be frequently refreshed with advanced and innovative technology and keep pace.
So.
The example of shared with you earlier this was exactly the situation. They give us three examples second round was related to a new customer.
Wanted to replace it homegrown solution with advanced technology.
We had a successful demonstration in the customer was happy with the results with our ability to quickly connect to data sources and being able to generate insights quickly.
And given the fact that many security organizations are still using a homegrown solutions that cannot address the evolving security and technology challenges.
Replacing that with our platform presents us with a significant opportunity.
I hope that this helps to frame things up.
That's great.
Great and then just last question can you just talk about like when you think about 'twenty, two and given pretty optimistic forecast.
Just walk through.
Getting that level of conviction is it just visibility pipeline youre seeing more and more of these deals.
Can you just talk about that just to give some color on the on the longer term outlook.
David do you want to take this one.
Yes. Thank.
Thank you Dan I would think.
So yes, we have a strong.
<unk> for the year.
First we expect a stronger Q1.
<unk> shared with you we are aiming to be between like $115 million to $115 million.
Second we see good demand and growth trends in the industry.
And the third.
<unk>.
We have an open discussion with our customers and.
Our customer is looking for expansion.
This kind of discussion.
Our level of confidence and we have.
Hi confidence confidence on the on the coming year.
And I'm.
I want to remind you that.
90 to about 90% of our business coming from our existing customer base.
And on top of that we continued to win new customers.
No.
Overall with these dynamics, we feel very good about this year.
Great. Thanks.
Our next question comes from Mike <unk> from Needham <unk> Company.
Hey, guys. Thanks for taking the questions. This morning, I just had a couple of quick questions I wanted to touch on the first I know that you guys had mentioned the improving.
The improving backdrop as we move further away from COVID-19, and I just wanted to get a better sense with with where we are today are you seeing things freeing up is that is that largely behind us at this time and then maybe in conjunction with that how does that affect.
Your ability to get in front of customers maybe.
Accelerate some of these some of the steel pipeline that youre seeing from the demand in the market.
Yes, so related to COVID-19.
COVID-19 is changing the way our customers are walking.
As a positive and let me explain why.
We are walking the security market and historically, our customers insisted to do everything on site.
The COVID-19.
This created a high dependency on drivers and making the sales and deployment cycles are longer.
And the COVID-19, the forced everybody to behave differently in children.
But a lot can be done remotely.
And the reason that this is good for US is that it created a shorter sales cycle and deploy deployment cycle and I think these are trends that will continue so yes, we see it as an overall positive impact.
As of the position at the moment is related to COVID-19 are you know that Q1 last year was the old stuff.
Hello, everybody globally, and but we saw a relief along the year.
If it had the sequential growth quarter over quarter.
And we do expect this improvement to continue throughout FY 'twenty two as well.
Thank you for that and then I guess just another question.
I guess as it ties back to this most recent quarter that you're reporting right. So I think you had mentioned that revenue actually came in slightly better than you had expected.
And I wanted to get a better understanding what what drove that upside was it.
Your ability to win to.
To win customers quicker than you had previously anticipated or maybe some.
Renewal or existing existing customers coming in earlier than I'm, just curious what drove that upside as well.
So.
It's David.
We had a.
Q4 areas driving slightly higher than what we expected a couple of million dollars.
Mainly as we mentioned that the demand is there and we were able to execute the.
To deploy faster and that allow us to to drive more revenue and we were pleased with that.
Alright, and maybe last question, if I could but if I'm just thinking about the forward outlook that you guys have provided them with the expectation that revenues beyond fiscal 'twenty, two should be able to accelerate.
I guess could you comment on what's what's expected to drive that acceleration is it are you guys changing anything in your go to market motion or is it just the recognition among some of these.
Organizations with the internally built homegrown solution recognizing that they need to evolve with they have.
And go with an open platform to keep up with these evolving threats.
Yes sure.
The market is growing at 10% a year and we plan to grow faster over time.
The main growth drivers are related to first of all the growing demand for security analytics software the.
The challenges are more complex and analytics became even more crucial for our customers.
And on top of that we see faster adoption of <unk> security analytics platform.
And that would transition to software model.
The easier and faster deployments and updates and maintain high value over time.
And we discussed that previously.
Previously we discussed the benefits of a homegrown solution that is.
A very good opportunity for us.
The third one is related to our innovation.
We're doing ongoing innovation and bring innovation to the market.
Driving more value to existing customers. So we can go.
Deeper and wider and as David mentioned about 90% of our business comes from existing customer base.
So so we continue to develop and innovate in order to provide them with a growing value.
And the same goes for new customers and we have about 1000 professionals are doing that.
And with the gain tens of new customers every year with the history of land and expand when we start with the recast with new customers.
They come to us and buy more and more solutions to address more and more use cases.
And to summarize.
The growth drivers a combination of the growing demand.
Our advanced offering.
The differentiation in our go to market for going deep and wider for existing customers and blend and extend for new customers.
Thank you very much I'll cede the floor.
Our next question comes from Kirk <unk> from Evercore ISI.
Great. Thank you this is Peter Levine in for Kirk.
Ricky back off of your prior comment on pipeline strike can you dissect how much of that might be net new versus upsell.
And that percentage mix shifts like how has that trended throughout fiscal 'twenty, one and your expectation into fiscal 'twenty, two and then maybe perhaps.
What would have to go wrong for you not to hit your fiscal FY 'twenty two targets. It seems like you know I think the.
Insurance or in your favor, but just curious to know what would have to go wrong.
Okay. Thanks Peter.
There was like a few questions. There. So let me try to take one by one and share with you.
Our view so.
During the FY 'twenty one as you can see from the results. We continue with improvement in our software mix, meaning that we were able to sell more and more from our software.
Over time like we improve our mix for me around 82% in FY 'twenty one.
So from FY 'twenty into almost six.
85% in FY 'twenty.
'twenty, one and these trends allow us to drive also.
Better profitability as for a golf and confidence for our growth so actually and that was like sticking it in the previous question, but.
I repeat the demand on the in the market is there and we see more and more customers looking for the open.
Software solution and that allow us to to address the demand by our solutions can that can be deployed.
Yeah.
In a faster way versus the past.
And overall, we believe that this will allow us to achieve our FY 'twenty two targets.
Uh huh.
Do you is this that this is your question are you do you need more color.
Got it.
That's fine and then maybe just one more for you David.
Do you see a materially different post COVID-19 expense profile for cognate and as it relates to sales and marketing traveling expense real estate just curious to know what your what your take.
Thank you again for the questions and congrats on the quarter.
Thank you.
So again from an Opex, we lay out how we believe that next year, we look.
From an opex perspective.
Due to the dis synergies, we expect to have in FY 'twenty to an incremental $50 million that represents the cost of being gay and independence as part of the spin which are mainly related to <unk>.
Finance <unk> legal.
Legal and compliance function.
Taking that into the situation, we do see leverage.
<unk> operating leverage by having normalized EBITDA.
The suggested for the synergies that will allow us to grow by 14% approximately 13% year over year.
As for an overall opex, we do see benefit and the positive impact of COVID-19, which allow us to work.
And more effectively and directly with our customers and our drive better margins on the level of the gross margin and the overall margin.
And on our organization.
Is any follow up questions or is there okay with that.
Yes. Thank you. Thank you for taking my questions.
Yeah.
Our next question comes from Mike sequels from Needham <unk> Company.
I did just wanted to circle up because I know you guys had commented that 90% of your revenue each year comes from existing customers and I just wanted to see if we can get better clarity.
Again for the customer use cases earlier.
Where you outlined some.
Some orders from existing customers, but could you give us a better idea.
What.
Drive B.
So are you driving deeper penetration within these existing customers and can you help us understand that penetration rate is it.
Or is it more a function of.
Greater data ingestion into your platform as well as addressing new use cases debate you previously had.
Okay.
So.
Both.
Do you think customers as I mentioned.
The strategy is to go deeper and wider and then.
Customer can start small.
Addressing some spin.
Specific use cases and go over time and you can expand within the organization to different buyers.
Can address investigation themes and then later on in the address the operational teams and grow within the organization and.
Taking into consideration also the technology changes that data is growing so so there is a need for expansions in scale and expansions in the analytics capabilities.
Et cetera. So this is how we grow within our existing customers and this works quite well and as you can see in the numbers.
For new customers, it's a land and expand and usually what we do is is.
Small, it's not always like that sometimes we win large deals with new customers and to give two examples earlier today.
But the strategy is that an extent, which means that we try to penetrate the organization and trying to address specific use case the customer might have.
And b the confidence with the customer and the trust and the relationship over time and then it becomes a repeat business like the other existing customers when we give them more and more use cases that you can address with our platform.
Solutions.
That's the way we grow within our customer base.
Great. Thank you for that.
Our next question comes from Brad Reback from Stifel.
Great. Thanks, very much with respect to the 490 <unk> how should we think about the revenue breakout between the various line items should it be similar to the most recent fiscal year skewed a little more heavily towards software. Thanks.
So the trend to it.
The trend with the software is continue obviously, we were able to achieve.
Already significant progress and then we ended FY 'twenty, one with 85%.
Software the expectation that it will improve slightly and in the long term and we will get into that.
The level of the 90%, but the FY 2022.
For modeling perspective over the assume around 86% of our revenue coming from software.
Great and then maybe one high level question as you think about the business going forward what changes the most now that Youre a standalone public company.
Yes.
We are now a pure play security analytic software company and the fuel main benefits I can share with you. The first one is brand reputation.
And we created a customer campaigns, explaining to customers as well as partners, our vision and strategy and we get a very good response on that.
And the second one is that we have been able to align the compensation plans of the management and employees for driving the objectives of the company for this specific market. So we have better focus on our business objective.
And this will also help us.
Employer brand to attract the best talent in the market and continue leading with cutting edge technology.
So overall, we get the vertical feedback from the market. We are very excited about a new chapter and the benefits of the spin presents.
<unk> suites, so very good feedback so far.
Excellent thanks very much.
Thank you.
Our next question comes from Shaul Eyal from Cowen <unk> Company.
Okay.
Thank you.
Good morning, Good afternoon, guys congrats on the first quarter.
As a publicly traded entity congrats on performance duty or a lot of I wanted to ask you about the status of your AI and predictive analytics.
Product solution.
What can you share with us on that front and my follow up will be.
Now that your publicly traded entity.
The thinking about pursuing some M&A strategy. Thank you.
Yeah. Thank you Joe.
So I'll start with the first one with the AI.
In recent years, our security challenges become increasingly complex.
We all are reading the newspapers that well organized filenet illegal entities are becoming harder to detect as they take advantage of the latest tech.
Technologies to hide in the Shadows.
Our platform is designed with several components.
<unk> is.
The first one is our customers have many different data sources and our platform is equipped with a bundle data fusion technologies that aggregates and then reach a structured data such as the travel history. For example in unstructured data such as images video and social media from different sources.
So that's the foundation for actually being able to deal with the.
Diversified data at scale.
The next component is related to data analytics, including real time modeling and statistical tools.
Analysts are accelerating investigations.
And the next layer is.
About the AI and machine learning models, and we use it heavily in our platform to find hidden patterns in massive amounts of data.
And last is intuitive workflows and advanced visualization tool for example, our customers have the ability.
<unk> dropped their interface, and then being able to configure and the workflow.
I need for coding and go for our involvement so.
To summarize our platform produces insights using the analytics and AI and N and M D.
And machine learning.
To predict events, and when and where they might take place and generating those insights in real time or nearing time of course is crucial for security organizations.
Yeah.
Regarding the second question about the M&A.
So the securities.
Security analytics software market is highly fragmented.
And of course, there are many security companies and by the way, including in Israel. We know there are many startups in other companies.
Offering different security capabilities.
Some of them can be.
Synergistic to our business.
We are evaluating tuck in acquisition opportunities on an ongoing basis, and we'll make decisions case by case.
Having said that certainly for now is to acquire Opportunistically.
But we also don't have big gaps that we have to feel as we have about 1000 professionals.
Developing innovative technologies in house, so so but again, if we can find something that is interesting for us we will take the decision accordingly.
Thank you so much good luck.
Thank you Sean.
We have no further questions at this time.
Great well, thank you everyone for joining us.
Today and now we look forward to speaking to you soon have a good day.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.