Q1 2021 Cognyte Software Ltd Earnings Call
Welcome to the Cognex first quarter fiscal year at 2020.2022 earnings Conference call. My name is Hilda and I will be your operator for today at this time all participants are in a listen <unk>.
Only mode later, we will conduct a question and answer session.
During the question and answer session. If you have a question. Please press star and then 1 you're seeing your Touchtone phone.
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 <unk>.
Sharon Cognex, CEO and David a body Cognex CFO.
Before getting started I'd like 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 and select today's conference call.
I'd 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 except as required by law Cognize seems no obligation to update or revise them.
Investors are cautioned not to place undue reliance on these forward looking statements.
For more detailed discussion of how these and other risks and uncertainties could cause cognex actual results to differ materially from those indicated in these forward looking statements. Please see our annual report on form 20-F.
The year ended December 31, 21.
With the SEC on April 29, 2021, and other filings we make decisions.
The financial measures discussed today include non-GAAP measures, we believe investors focus on non-GAAP financial measures and comparing results between periods and among our peer companies to publish similar non-GAAP measures.
Please see today's presentation slides and our earnings release in the investors section of our website at Cognex Dot 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 information on comparative purposes.
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 a lot of luck.
And welcome everyone to our first quarter of FY 'twenty 2 conference call.
Pleased to report a strong quarter with both revenue and diluted EPS coming in ahead of our expectations.
During the last conference call, we discussed the completion of our transition to a software model and I'm pleased to report that in Q1, we continued to see the benefits of our strategy in our results.
Non-GAAP revenue increased 12, 3% year over here, while golf ball for each increased at an even faster pace of 18.8%, reflecting 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, we can open analytics platform to help them address many different security use cases.
To her dreams the strategy to life today, I will review our market opportunity discuss several large first of all they're all theirs 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 their toys for granted it spread across organizational silos, making investigations more difficult.
Many customers recognize that homegrown solutions cannot keep pace with evolving security challenges and have increasingly sold opened security platforms with cutting edge analytics.
Solutions that confuse that at scale from different sources and generate high quality insight Foster to me to get to a wide range of security threats before they unfold.
Our open platform provides many benefits to our customers, including faster innovation more frequent updates with our latest analytics and artificial intelligence technologies.
We believe the security analytics market is in the early stage and we are committed to staying ahead of the demand curve with our open analytics platform.
With nearly 1000 people in R&D, primarily based in Israel.
Close on developing highly sophisticated security and analytics software.
Our total addressable market is around $30 billion.
Growing 10% from here and we believe we are well positioned to address this opportunity we've ever opened analytics platform.
Let me take you through several large Q1 wins that reflect the successful execution of our strategy.
First is a 40 million dollar order that came from the National law enforced that organization that started with 1 use case is expanding to a second use case. This customer initially the product platform with real time analytics for fighting drug trafficking, and 1 agency and overtime deployed it across multiple agencies to facility.
Collaboration of course, it's 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 support multiple use cases and enables us to go wider and deeper and go on with our customers' needs.
The second example is a 9 million dollar order from a national security organization that is replacing homegrown solution.
This organization neither the most scalable open an advanced platform and fostering innovation to address its changing security needs.
Our platform allows them to easily add new data sources and accelerates criminal investigations using advanced analytics capabilities.
This is a good example of our platform addresses the limitations of homegrown solutions.
Is there. An example is a 6 million dollar order from an existing national intelligence customer that is expanding the deployment of our latest security analytics software.
This is a good example of our customers look to Cook night to help them address their growing security challenges with real time 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 crypto currency investigations.
Keep the currencies are being increasingly yields really got activities, such as money laundering, extortion, dropdowns auctions tera funding and cyber crime.
It keeps the currencies can be anonymous and borderlands and it's a challenge to find who is behind those leasing transactions.
Investigations with existing technologies, often reach a dividend when trying to determine who is responsible.
We are about to launch a new solution to web security organizations conduct investigations involving crypto currencies.
Our solution will be offered on a subscription basis and is designed to identify the leases transactions and suspects and generate actionable intelligence to successfully complete investigations.
Brocade analytics and the challenge it poses to security organizations are good examples of why are 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.
Target, our revenue growth rates and margins to further improve in FY 'twenty 3 in FY 'twenty 4.
I'm also pleased to share with you the Doctor a successful transition to software. We are now turning our attention to shifting to a subscription model. We expect these initiatives 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 a lot and Hello, everyone. Our discussion today will include non-GAAP financial measures.
Constellation between our GAAP and non-GAAP financial measures is available as Matt mentioned in our earnings release and in the investors section of our website.
As I've mentioned, we had a strong started the year with revenue and EPS coming in ahead of our expectations.
During Q1, we want multiple 7 and they did 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.
Part 2 is 1.3% year over year and non-GAAP diluted EPS came in at 20.
Non-GAAP operating income increased more than 100% and adjusted EBITDA increased 66% year over year to $21.1 million.
Beyond our strong as that 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 in 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 investment transitioned from a system integrator model to a software model.
These investments are behind us and we're seeing the benefit of this investment in our software mix and gross margin.
As 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 overtime.
Turning to FY 'twenty 2 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 the range of plus or -2%, reflecting approximately 10% year over year growth.
We expect our non-GAAP diluted EPS to come in at 80.
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 'twenty 2.
In Q2, we expect approximately 9% revenue growth year over year, and approximately 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 40% normalized adjusted EBITDA growth.
Looking beyond the current year, we expect revenue growth to accelerate.
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.
Thank you we will now begin the question and answer session. If you have a question. Please press star and then 1 using your Touchtone phone.
You wish to be removed from the question queue. Please press the pound sign or husky.
You're already seeing a speakerphone you may need to pick up the handset first before pressing the numbers.
Once again, if you have a question. Please press star and then 1 on your Touchtone phone.
We have a question from Daniel Ives from Wedbush.
Yeah. Thanks, So first off in terms of the subscription shift.
If if there was news subscription shift.
Just talk about from a growth perspective.
That would work like I mean is it 200 bps more Greens Creek could you maybe just give some.
Some color on that.
Yes, Thank you Dan.
So in the last few years.
The transition to software was a major focus.
And it was very successful what actually we were able to improve the gross margin in the whitehouse, especially exploring in the last few years.
And also grow the recurring business to reach about 50% of our revenue.
And now that the transition to software is behind us.
Shifting attention to increasing our subscription business.
This is going to be a gradual process given the purchasing behavior of our government customers in our domain.
Which is mainly perpetual license today, so we do not expect a.
Changes in the short term, but in the mid to longer term.
Yes.
Got it.
And can you just maybe talk from a pipeline perspective.
Given the climate that we're seeing are you seeing larger deals within especially within European government and no other geographies, the middle East and others in terms of larger more strategic deals a meager again accelerated during the quarter.
Things done so.
So in the last few years as part of the transition, we actually rely less and less on the large deals we do see demand for our solution and we do see like.
A customer willing to put a large users like we shared like a digital deep deals and.
It's again, an evidence of the strong the.
Solution that we have.
Currently we are not rely on the certain specific you know large deals, but the demand is there and and do either variety between the.
Different governmental agencies on the way to their purchasing and we see all type of fringe of deals.
Thanks.
Thank you. Our next question comes from Mike <unk> from Needham.
Hey, guys. Thanks for taking the question I also had a question on the subscription model shifts that you guys are talking about I'm curious with these.
Subscription contracts do you expect that you can.
I guess improve or.
Increased 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.
Overtime, we believe that there will be revenue will be shifted to subscription. We do think it's going to be gradual and the land mention this kind of sports assets are taking time.
Especially given the purchasing behavior of their government customers and in our domain and as you know many and it mainly today perpetual license and we think that the physician.
It's something that will take some time in the short term.
We still live.
The RFP or that we need to execute and we still love them.
Some are recurring revenue and we believe that the impact in the short term will be relatively minor so format and growth perspective.
The our assumption regarding the transition their face and we think that is going to be a modest transition the pace.
We think that the short term impact on the on the top line will be.
Relatively are taking possession in our in the way that we provided the outlook. Obviously, if we see a faster adoption will be very pleased with it.
Understood and could you actually help us think about.
What is it cognate 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 cognates port to change the market is thinking about.
This buying pattern.
Yes.
I think there's a few activities we should we should take into consideration. The first 1 we've obviously have to change our go to market and of course to offer more and more of our solution in a subscription.
And this is something we are we are going to do it gradually.
We also understand that our ultra government customers, although they are used to certain ER visit.
Small though.
Willing to shift they understand that the world is shifting towards a subscription.
And while it will be more difficult to do it.
And expansions of existing solution or is that David mentioned in existing Oh, there is that within our IPO.
We believe that a full new offerings and new use cases that we're going to launch it will be easier for us to offer it in different way and also I believe that will have a you know more of the corporation.
In that respect.
We have a close relationship with our customers. So we are going to do it while talking today, we are not going to force you know.
Southern methods that are will not fly we are going to discuss it with them.
Due to of course are convinced them that there is a lot of value shifting to subscription while the shift to subscription obviously, you'll get a.
The quicker a refresh that technology.
Will you benefit from our 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 2 took us about 3 years.
I believe that also these transitions take some time.
But I believe I also believe that our.
If successful we are committed to it and I believe the market.
We will appreciate and accept it.
Thank you for that and 1 more if I could just on the on the crypto currency 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.
Yeah. So let me give you some some color relative to currencies and why it's important for customers and also address your question about the maturity of the solution so gift of currencies.
Our store and digital wallets.
It's an alternative to a stand that the banking system of cash.
If we compare to traditional banking unlike the traditional banking system crypto currency can be traded between people anonymously.
Without the need for third party media, though and which is the welfare of the identity of the parties involved.
Unlike cash crypto currencies are a digitized 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 these are address a new challenge for our customers they need to do 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 both homegrown solutions with the region and that's so important to have an open platform that can be easily refreshed with new use cases and with your 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 that this need will be growing as they can.
It's very convenient for illicit activities.
To be conducted in this ecosystem will skip the currency.
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.
To address this challenge by strong analytics and help customers to identify.
Yeah.
The list of transactions and also who is behind it I think it's a it's a lot of value. So so.
I know there are stages, but believe that this will become.
Create a lot of benefit to our customers over time.
Thank you very helpful.
Thank you.
Our next question comes from Kirk <unk> from Evercore ISI.
Great. Thanks for taking my question Peter Levine in for Kirk So.
Just to piggyback off of the comments you made on the call in 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 is that are you planning ahead.
So yeah, you talked about just changes to your go to market.
Yeah.
So in terms of go to market, we live 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 who used to live tournament solution. So the go to market was actually tailor made solutions.
Solutions and offering.
Our system integrator like solutions with.
Professional services, a lot of customization et cetera.
And we shifted our model into software model and now we are a software company. So actually we were able to take the professional services and customization is down and our product ties our solutions in a way that it is very <unk>.
Z to deploy to upgrade them to update and the benefits for our customers was increasingly accordingly.
And also we were able to shift a lot of our professionals.
Eh develop innovation like the crypto currency I, just mentioned instead of onetime customization.
Looking ahead for subscription will have also to go there to some changes in the go to market. We will have to change the way we offer until our solutions in a way that are the benefits and the offering that will encourage our customers to shift from perpetual license into.
Subscription so the offering will be a little bit different than the way, we are going to teach our solutions and offering to the customer is going to be different and this is something that we're working on these days.
Towards the shift towards subscription.
Time.
Great. Thanks, and then maybe 1 for you David is.
Sticking to your full year guide it looks like you're maintaining.
We guide at roughly 9% at the midpoint.
You highlighted a number of large deal wins pipeline seem to be picking so love to understand what's what's behind the guide number kind of what's how would you build again what are you're not building in that could potentially be upside.
So.
Our guidance sticking explanation the level of forward visibility so.
We have very strong visibility we have.
Recurring revenue of around 50% of our revenue repeat businesses are more than 90% of our.
Of our revenue and <unk> and.
And we have stronger appeals so when we look at our guidance, obviously with the very strong start of the year with a strong Q1 with the level of confidence that we have for the year is egg is higher.
The deals that we announced are aligned with our strategy, we believe that the strategy, we execute our strategy.
Quarter over quarter with a very long term view and we are able to deliver and what.
What we are committed to and.
Giving that.
I think that I'm.
Very pleased with where we are and I'm confident that we'll be able to.
And deliver our outlook for the year.
Great. Thank you very much for taking my questions.
Yeah.
Thank you. Our next question comes from Brad Reback from Stifel.
Great. Thanks, very much a quick follow up on that last answer you had mentioned strong or appeal can you give us a sense of what it grew in the quarter.
Yeah.
So actually the overall is more than half a billion dollar.
And again and do you need to look at the appeal in 2 elements. They wanted to 11th for the next 12 months into 1 that.
For a longer period and the level of the 12 months we are consistently.
Consistently around 2 thirds of the total lay our appeal.
And then more than half a billion below for appeal.
But how about the growth rate year over year.
So again like we don't share like the exact number on a quarterly basis.
As I mentioned.
We have the capacity of fulfill our appeal.
In the in the in the in the way that we actually outlook for the full year. So it's aligned with our expectation to deliver aware.
And longer term expectations.
Okay, that's great.
And maybe getting into the accounting reads a little bit on this 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 it will be some impact it cannot I cannot say that it will be the vast defeat 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 ever situation because of the time based license that will need to recognize that part of it upfront, but overall, we do believe that there will be an impact on the on the between the revenue composition.
<unk> and we will see more and more recurring revenue.
That's great. Thank you very much.
Thank you. The next question comes from Brian Rosenberg from Imperial capital.
Great. Thank you very much good quarter couple of quick questions.
This is a housekeeping, but right now where are you as a percentage of revenue on subscription is at zero percent that subscription.
And then where do you expect to be in year, 1 year or 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 that you you see things moving forward.
So today, our recurring revenue stands on its own about 50% of our revenues is recurring 1 third of it is subscription and 2 thirds of it support we do not expect any.
Major shift in the first year the reason for that is that.
It will take time for us.
<unk> customers to shift to subscription and also given the strong IPO.
Which is actually in the same mix that we used to have so it's a the appeal was strong as David mentioned before it's more than half a billion dollars.
And it's not a it's a multi picture license rather than a subscription so for the short term we do not expect.
Any any changes in the ratio.
Going forward, we do not it's too early to say what are the.
Exactly the target is something that you'll have to figure out in the next few months.
We are going through the planning of the shift in transitioning towards a subscription.
Again, including what I mentioned before which means that they go to market are we discussing with customers and understanding that.
Willing to shift too.
Subscription and convince them and providing them with the you know encourage them providing them with the with more benefits are to encourage them to shift. So it will take some time for us to set the targets, but generally speaking.
Yeah.
We believe that this is something that.
We will be able to execute like we did in the software transition.
For the targets will do we will have to do it.
The later stage, David do you want to okay.
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 third is approximately currently subscription so each surround a little bit more than 10% of our total revenue that is today.
Subscription and.
We do think that overtime, we will see the shift in the transition obviously it will impact also support in the or the composition of the of the revenue in our in the long term.
But I do think that it's a.
It will allow us to get better scale and drive more growth over time.
Great.
Thank you very much for that color.
Shifting over to.
A different kind of question in terms of the.
The recent attack 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 are additional attacks do you have a new contingency plan.
Post the recent.
Recent attacks too.
Normalized business and was there any impact.
Impact to you guys in terms of sales.
In the quarter because the recent attacks.
Yeah.
Not sure what you're referring to.
Oh 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 do possibly shut down some of your operations for a day because of some of the missile attacks from Gaza is that correct.
No.
Okay.
So okay. So the tuck in Gaza and got it and 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.
Total again geography, we didn't suffer any.
The disruptions anyhow most of our employees due to the Covid the working from home we have to set up we have the facilities.
<unk> shifted our everything to virtual.
<unk>.
By the way and till today many.
Employees around the globe, including Israel are working from home working for home use you the COVID-19.
So there was no disruption to the to the operations, it's only a matter of people volcker, either working from the office or working from home.
The business is running as usual and no disruptions related to this.
Incidents in Israel.
Okay impact sales at all.
Your sales that was there a delay and any sales or an acceleration in the sales because the b.
Their attacks.
Maybe that's the answer is obvious and no but I just wanted to hear that from you.
There was no impact at all on our business, including deployment deliveries nothing was the impact from this.
Incidents related to.
Israel.
Thank you for joining as usual thank you.
Thank you.
Thank you we have a question from Shaul Eyal from Cowen.
Yeah.
Joe showed we can't hear you.
Apologies I was appointed I was I was muted.
I'm sorry.
Yeah.
I apologize in advance if the question was already answered I was literally to.
To the Costar.
In terms of the subscription transition, what's the timeframe that we have in mind for it.
And I believe it will be similar to the transition to software model. So it will be about 3 to 4 years to execute that.
And the reason for that is that it involves.
Changes in the go to market strategy in the face of the adoption of customers government, mainly governmental customers to shift to a subscription and also we have a strong IPO that we have to deliver which is currently with a mix of more perpetual license our software.
Today. So so it will take a few weeks time to complete this transition.
So for the short term, we do not expect any material impact on our business for the medium and longer term, we do believe that we'll see more recurring revenue.
And more subscription.
It is a very good for us as we plan to see more visibility on it.
And going forward.
And being able to accelerate growth over time.
Got it thank you so much.
Thank you.
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 and 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.
[music].