Q2 2021 Cognyte Software Ltd Earnings Call
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Welcome to the Cognex to Q F Y E 22 earnings Conference call. My name is John and I'll be your operator for today's call. At this time all participants are in a listen only mode.
We will conduct a question and answer session. During the question and answer session. If you do have a question press Star then one on your Touchtone phone and I will now turn the call over to Matthew Frankel.
Thank you operator, Hello, everyone and thank you for joining us today I'm here with a larger one cognex CEO and David a body cognex CFO, but before getting started I'd like to mention that accompanying our call today is a webex slides if you'd like to do these slides in real time during the call. Please visit the investors section of our website at Cognex Dot com click on the investor's tab.
Click on the webcast link and select today's conference call.
I would also like to draw your attention to the fact that certain matters discussed in 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.
I was 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.
Forward looking statements are made as of the date of this call and as except as required by law type medicines, no obligation to update or revise them.
<unk> 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 for the fiscal year ended June 31, 2021 filed with the SEC on April 29, 2021 and other.
And if we make with the SEC.
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 that publish similar non-GAAP measures.
Please see today's presentation slides and earnings release.
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 it provides meaningful information about the financial performance of our business and are useful to investors for informational and comparative purposes. The.
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 a lot of luck.
Thank you, Matt and welcome everyone to our second quarter Conference call.
I'm pleased to report another strong quarter with both revenue and diluted EPS coming in ahead of our expectations.
In Q2, we continued to see the benefits of our software model strategy in our results.
Revenue increased 10% year over year, while gross profit increased at an even faster pace of more than 13%.
We're particularly pleased with our gross margin, which increased 250 basis points year over year.
Adjusted EBITDA came in strong at $23.0 million and non-GAAP EPS came in at 17 cents.
It's a similar strong story for the first half of the year with revenue growing 11%, you're aware and gross profit growing 16%.
We're pleased with the progress of our filter strategy, which is ahead of schedule and are raising our profit guidance for the year, reflecting the better software mix, which David will expand upon later.
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'll briefly review our market opportunity and discuss several of our largest second quarter orders.
Our customers are facing security challenges of course, many use cases.
Well organized well find out that the rest of us are becoming harder to detect as they take advantage of the latest technologies to hide in the shadows.
At the same time, there is growing volume and diversity of structured and unstructured data and data augmented it spread across organizational silos, making investigations more difficult.
Many customers recognize that the homegrown solutions can no longer keep pace with this evolving security challenges and have increasingly start to open analytics platform that can support multiple use cases.
Solutions that confused that SK from different sources and generate high quality insights faster to me they get the wide range of security threats before downfall.
I'll open analytics platform provides many benefits to our customers, including foster innovation and more frequent updates with our latest analytics and artificial intelligence technology.
We believe the security analytics market is in its early stages.
Nearly 1000 people in R&D, primarily based in Israel, we are focused on developing highly sophisticated security analytics software.
Let me take you through several large Q2 wins that reflect the successful execution of our strategy.
The first example is a 30 million dollar order from an existing National Security agency customer that is expanding the capacity of the platform.
This is a good example of our platform can scale and help customers address their growing needs to accelerate complex investigation with sophisticated analytics.
The second example is a 10 million dollar order from an existing national law enforced that organization customer that is expanding to a second use case.
This customer initially deployed our platform with real time analytics for investigating drug trafficking and is now expanding our platform to investigate human trafficking.
This is a good example of our customers can use the platform to address multiple use cases and enables us to go with our customers' needs.
The first example is a 7 million dollar order from an existing homeland security customer that is using our platform to investigate cross border smuggling of drugs with weapons.
The customer decided to replace a homegrown system, which is used for many years, but found it to be inflexible and expensive to maintain.
Behind these wins is our ability to evolve our platform to address multiple use cases.
Today, let me double click into one investigating analytics use case that we are seeing growing interest in cyber crime.
Cyber crime is becoming more frequent and methods that are being used are becoming more and more sophisticated making identifying the bad actors much more difficult.
Our customer mission is to identify the bad actors and prevent cyber crime activities that can lead to significant economic losses and security breaches.
Many security organizations today are using Commvault solutions that are unable to keep pace with current threats are difficult to maintain and are expensive to operate.
Open analytics platform provides our customers with strong analytics tools to accelerate investigation identified bad actors and prevent cyber crime.
Our platform is built with deep domain expertise easily integrate into our customers' ecosystem and is frequently refreshed to keep pace with evolving technology and security challenges.
Cyber crime is a good example of our open on a leash platform can address multiple use cases.
In summary, we are pleased with our strong second quarter as a pure play security analytics company.
For the current year, we expect approximately 12% gross profit growth on 10% revenue growth and I'm pleased to be in a position to raise our annual outlook for EBITDA and non all guidance for non-GAAP EPS due to the successful execution of our software strategy.
Looking beyond this year, we believe market demand is strong for security analytics software and we are well positioned.
<unk> for continued growth.
As discussed on past calls we are pleased with the execution of sort of strategy and going forward, We love a more use cases on our platform to a subscription model.
We expect customer to adopt subscription model gradually overtime.
Now, let me turn the call over to David to discuss our results and outlook in more detail David.
Thank you <unk> and Hello, everyone. Our discussion today will include non-GAAP financial measures.
Relation between our GAAP and non-GAAP financial measures is available as Mac mentioned in our earnings release and in the Investor section of our website.
It did not mention we had a strong second quarter with revenue gross profit and EPS coming ahead of our expectations.
During Q2, we won multiple seven figure order from existing and new customers.
Driven by ongoing demand for our analytics software and our strong differentiation.
Revenue for Q2 came in at about $116 million up approximately 10% year over year.
Non-GAAP gross profit came in at $91.0 million.
More than 13% year over year.
And that GAAP diluted EPS came in at 17 cents.
Adjusted EBITDA was $23.0 million in the second quarter.
Behind our strong results once the demand for our solution and the successful execution of our software model strategy, which I would like to discuss in greater detail.
Okay.
In the first half of the year over 50% of our revenue was recurring and 89% of our revenue came from software.
200 basis points year over year.
Flexing the adaption of our analytics platform and the reduction of hardware reselling and professional services.
Our H one non-GAAP gross margin increased over 300 basis points to 73% and our non-GAAP gross profit increased approximately 16% year over year as a result of this improved mix.
Over the last few years, we have made investments to transition from a system integrator model to a software model.
These investments are now behind us and we are seeing the benefit of this investment in our software mix and gross profit growth.
Now, let's turn to our FY 'twenty two outlook.
Starting with revenue our outlook for FY 'twenty, two is $490 million.
Non-GAAP revenue with the range of plus or -2%, reflecting approximately 10% year over year growth.
We expect our annual recurring revenue, including subscription and support revenue.
Present, approximately 50% of our total revenue.
As Phil had mentioned, we're offering more from a platform use cases through a subscription model and we expect gradual adoption of subscription over time.
Regarding profitability. We are pleased that our software strategy is ahead of plan and we are raising our annual outlook for gross margin and adjusted EBITDA and our annual guidance for diluted EPS.
For non-GAAP gross margin, we now expect slightly above 72% for the year.
More than a 100 basis points improvement over the current year.
Then that gross profit growing approximately 12% year over year.
We expect our non-GAAP diluted EPS to come in at 80% at the midpoint of the revenue range.
Up from our prior guidance of 86.
Our diluted EPS guidance reflect $87 million or so.
Adjusted EBITDA.
Up from our prior outlook of $85 million.
Our outlook for $87 million EBITDA reflect 18% year over year growth normalized for the spin off dis synergies.
Let me also discuss how we see the year progressing.
We are pleased with our strong first half.
And ended Q2 with more than $500 million of our appeal.
<unk> strong demand for our platform.
When looking at our backlog and the timing of our customer deployment, we expect Q3 revenue in a range of $112 million to 117 medium.
And to finish the year with our typically strong fourth quarter.
Regarding EPS if they just mentioned we are raising our outlook for the year to 80% and based on our revenue mix and opex level for H two.
We expect EPS.
About 10% in Q3, and EPS up about 35% in.
In Q4 at the midpoint of our revenue outlook.
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 correctly.
I have a question press Star then one on your Touchtone phone.
If you wish for from the queue. Please press the pound sign or there has to be once again. If you do have a question press Star then one on your Touchtone phone.
Our first question from Mike Michael from Needham <unk> Company.
Hey, guys you have Mike <unk> here. Thanks. Thanks for the time I did have a question for you regarding the revenue obviously, putting up some strong growth in the first half of the year maintaining its fiscal 'twenty two guidance, but can you walk us through the <unk> revenue guide.
Just looking at the $13.0 million to $117 million.
It would imply I guess a year on year decline at the at the lower half of that guidance, if I'm looking on a sequential basis and about flat year on year from looking at the.
At last year's result.
Can you walk us through some of the puts and takes in and understand the typical seasonality you would see for the <unk> pick up but the <unk> is really what I'm driving at.
Thanks, Mike.
Davidson.
So we ended Q2 with more than the private the million dollars copay IPO.
And then looking at where we.
Revenue backlog and timing.
We expect Q3 to be between <unk>, 12, and $117 million.
And eastern Europe.
With the typical strong Q4.
Brian.
Yes.
Originally model.
We're currently scheduled to Lora.
Okay.
And for the year.
As we mentioned before we are raising our outlook.
Yes.
$10 million.
And revenue growth.
But we do like the color on Q like these.
Guidance.
Right.
Alright, that's helpful and it might just be my phone, but.
You were breaking up just a little bit just a little bit, but I did have a.
Another question for you I know that you guys cited again back to back quarters, now where you're seeing these.
Multiple seven and eight figure deals that youre winning in each quarter.
And I'm curious can you just help us and in the $500 million plus <unk> exiting <unk> can you help us think about the pipeline of deal activity that you are currently seeing.
And the customer demand is would you say the visibility is actually improving for your business based on this successful execution of our software model transition.
Maybe the demand environment is actually strengthening if we look back even three or six months ago anything on the I guess demand dynamics would be helpful. There.
So.
Just some color.
And also the.
Okay.
So we started the year with the.
Our strong Q1 and Q2.
And each one completed.
47.
Percent of our revenue for the year already done.
He is good.
We see the demand remains to be formed in the Microfluidics solution.
And continue to build and we ended Q2 with more than private EMEA.
Our appeal and again.
So a very significant figure, which gives us a significant level of visibility.
And by doing that we have.
The current level of visibility.
Yeah, maybe my colleague because thats began about market demand our customers are facing more.
More and more complex security challenges.
We'll continue to see demand for analytics platform.
And we are focusing mainly on replacing homegrown solutions.
Some of the examples I gave earlier in Q1 and also.
Call.
As David mentioned, we started strong and we do have good visibility for rates to us.
And it's driven by a recurring business.
Which is about 50%.
Business from existing customers, which is about 9% and the slow industrial products a billion dollars, but they'd be just mentioned so overall I feel good about it.
Thank you guys and one more if I could just real quick on the subscription I know that you guys are very early in the process and that is going to be a gradual process for you guys but.
But the question is I guess as your Salesforce is talking to either existing customers or prospective customers can you help us understand how those customer conversations been trending and how receptive has your customer base spin.
To potentially transitioning to a more subscription oriented offering.
Sure. Thanks, Mike.
Currently around 50% of our revenue is recurring and about a quarter of reaches already subscription.
And we have an open dialogue with our customers we are discussing with the transition to subscription.
In some government agencies, we see more openness to transition while others are not yet ready.
And given what we see in terms of customer behavior, and the existing backlog and pipeline.
<unk> revenue to stay around 50% next year.
Going forward beyond next year, we expect subscription revenue to grow faster than overall revenue.
We have to remember that our government customers are a little conservative and we saw that also weigh in when we transition to software.
For them some time to adjust they are lagging behind the global market.
But we believe that at certain point of time, they will accelerate.
The adoption.
Just about the amount of time and we already we already we are offering subscription.
Some of them already adopted subscription.
But as you mentioned, Mike it will be gradual and slow process.
Understood. Thank you very much 11, David.
Thank you.
Our next question from Dan Ives from Wedbush.
Yes. Thanks.
So could you talk to the last question, but just expand it down more in terms of deal sizes in terms of pipeline are you seeing a clear change in tumors as larger deal sizes.
So you guys are working on especially deals become more strategic and broader things.
Yeah, Hey, Dan this is allowed.
Actually we don't see any change in the market. It's similar to what we saw were before.
There are deals of seven and eight digit is we give for example, some smaller deals.
Generally speaking.
We are focusing on replacing homegrown solutions, our customers can choose whether to start.
<unk> and <unk>.
If all overtime or buy from us.
The Holy Grail platform, we don't use cases with one use case says it's lance.
But generally speaking there is no change in the ecosystem, we see similar trends in the market as we saw before.
I hope this helps.
Okay, and then just finally on the subscription model transition, obviously try and accelerate that more and more I mean is that something where you are.
Youre continuing to sort of drive that even to next level through the go to market strategy.
As we're thinking about that transition over the next six to 12 months.
Hey, yes so.
Maybe a little more color about the subscription so as I mentioned before we are in <unk>.
Open dialogue with our customers our government customers are more conservative and from what we hear we do expect a modest market adoption.
In addition, we should remember that we have a strong LBO of more than half a billion.
And proposals that are out which are in perpetual model.
And it takes more time for government customers to <unk>.
Vishal.
But eventually we believe they'll catch up.
At this point, it's hard to tell how long it will take and we believe that are trying to force customers, mainly government customers to shift to early when they are not ready to accept it to that May result in a negative impact.
And we saw that again in the transition to software it took some time for government.
Organizations to adopt but eventually they are adopted and we see very good results are the software transition is ahead of plans and the gross margin is very strong.
And I believe it will be a gradual overtime process, but but the end game will be will.
It will be what we wanted to be.
I hope I answered them that's great. Thanks.
Thank you.
And our next question is from Brian <unk> from Stifel.
Oh, great. Thanks very much.
I think you guys mentioned you've had some early success or some early customers moved to subscription can you give us a sense of what the revenue uptick is when a customer does that.
Yeah.
Yes, some of the use cases, we offer in subscription.
Do see about one third of our recurring revenue in subscription.
When we go to customers existing customers that work with us for more than 20 years.
Still in the perpetual model.
We are discussing with them to shift from new customers, it's easier to adopt our subscription. So that's the reason we expect a gradual process.
If I answer any any other comments.
I'm sort of interested if a customer spending a dollar.
Historically with you on license and maintenance and they move to subscription what's that dollar by com.
So I would like some color on that.
Actually most of them, but historically, we started like a few years.
In addition to sort of model.
Didn't have any subscription offering in the last few years, we introduced some subscription offering uncertain.
Offering and allow the customer to move to subscription where they would like willingness from the customers to move to this direction now.
Level.
This is a lag between the $1 spent on perpetual versus like.
Brexit.
Subscription was around like a.
But.
It depends on the use case, and what we're offering and what we can actually.
The customer need to remember that we are in the beginning of the process actually we know.
<unk> more open.
Open discussion with the customer and internally working on.
Our offering to make it.
That's correct.
Great. Thanks very much.
Thank you.
Our next question is from Merck.
From Evercore ISI.
Hi, yes, thanks, very much a lot can you just expand a little bit on the opportunity around crypto and and how is that a needle moving opportunity for you all in terms of what it could add.
From a from a product perspective too.
Your existing base I was just kind of curious if you could add a little bit more color around that opportunity. Thanks.
Sure So Scott crypto currency in previous call, we discussed that.
It's becoming very important for our customers to have this use case because illegal transactions are done in the in the crypto currency ecosystem.
It's another use case actually our growth plan is relying on evolving the platform to support more and more use cases in crypto currencies wants them.
In terms of where we are today.
We launched it.
Last quarter there.
We see these as an opportunity for both expanding with existing customers as well as the acquiring new customers and obviously lots of customers.
We will have an interest in this use case.
At this point of time, you're running multiple poc's with customers and the results so far are encouraging.
Okay. That's helpful and then David just two quick ones for you.
One was just sort of a follow up on the earlier question around the seasonality and through June <unk>.
And sorry, if I missed this but is that just more of a rev. Rec issue or is or bookings also more fourth quarter weighted meaning last year. It looked like it wasn't quite as pronounced but going back two years ago. It looked like you guys had more seasonality from <unk> to <unk>. So I'm just trying to get a sense on those are deals that have been you've been selected but haven't invoiced.
Booked yet or is it more just the pipeline builds or are buyers are more pronounced in the fourth quarter.
Okay. Thanks.
Yeah.
So.
As we spoke before like we give an IPO with about half a billion dollar and the Smith there, it's a matter of timing of revenue.
Q4 is typically strong and.
Again, when we look at the Q3 and Q4 ahead of us.
And we are still have still.
Still guiding for 10% the year over year growth.
Sure.
Recurring revenue continues to be a significant element on our business.
More than 50% of our business.
And the stock IPO.
Correct level visibility towards the end of the year.
Okay.
Last one for you just on the professional services side of the equation that relevant it's less emphasized at this point in time, but is this a good run rate do you think going forward for us to think about from a modeling perspective, meaning is around $14 million sort of the new base.
For you all or can that grow or how should we think about that.
As it relates to kind of your longer term aspirations to accelerate.
Yes.
And then our strategy is to reduce their professional services and that we're selling over time.
Started the journey like few years ago and were able income to go from the level of <unk>. This quarter are like more than the 89%.
From a modeling perspective in the longer.
The long term I would assume that the.
90% of our revenue will be for Mam software and the remaining 10% will be for professional services and how do we silly. This is in the long term.
In the coming.
Yes, I think that we will gradually will go there.
And I think that.
80, 687% of our revenue on software, it's a good day range.
Correct.
<unk>.
Perfect. That's very helpful. Thanks very much.
Our next question from Brian Rotenberg from Imperial capital.
Yes, Thank you very much one housekeeping and one.
Big picture question the housekeeping.
And I may have misheard. This you stated I believe total subscription revenue was currently a quarter or 25%.
I had written down and I may be incorrect, but last quarter, you were talking to $16, 17% with subscription.
Am I incorrect with my numbers are correct with my numbers.
The current the current subscription a portion of the total.
Recurring revenue is one quarter.
No.
Okay around 12% to 13%.
Got it out there we go that.
That's where I I didn't I did the total revenue with the map problem. Okay. So that's number one number two is.
You are talking about replacing homegrown solutions is one of the biggest drivers.
What is the biggest decision factor for these government agencies is it saving money is it resources is the ease of use what is the kind of the number one number two reasons for that didnt repeat out their solution and used in Europe.
Yes, so actually homegrown solutions.
Many downside for customers I'll focus on the top ones. The first one is that it.
Cannot keep pace with technology changes when you do a tailor made solution developed with the one time for yourself, it's very easy to develop its more than IV, it and keep pace with the technology. When you will have to invest only for one single solution. When you go to an open analytics platform.
Global vendor it does it for many other customers. So you go together with the with the pace of technology. This is one the.
The second is related to the high growth in order to maintain it and the third issue that it's very difficult to add more and more use cases and all these changing we discussed that there you know the use cases or the <unk>.
Different criminal activities. For example, it is crypto currency and you have to develop and evolve and they're taking all of it together. This is becoming very inefficient the value of the system is declining over time and it is in effective economically.
So altogether.
They don't get the value they need and they pay a lot of money. So this is the formula for them to transition and replace it with an open analytics platform.
That was helpful. Thank you.
Thank you.
Our next question is from Louie Dipalma from William Blair.
Good morning, Ilan and David.
Good morning, good morning, Thank you.
Is is there opportunity for you to partner with.
Mobile forensics extraction software providers like Grace shift or M. A S D.
<unk> forensics recently IPO, Ed in Canada, and they have a solution called axiom cyber that is very similar to yours for cyber incident response software and they have partnered with with great shift for mobile forensics extra.
Faction and they have built in integrations to help law enforcement and they have significant customer overlap with with you for and.
Intelligence communities and in law enforcement. So I was wondering in terms of your go to market strategy.
That's an area that <unk>.
You could pursue partnership opportunities to accelerate your growth.
Yes. So thanks for the question so actually if you look at our platform.
Fuses.
Data sources structure that software the scale and run stronger analytics on addressing many different acute use cases, that's what our platform do.
The digital forensics and this kind of a solution actually capturing data for the customer so so.
Behind the scenes customer can feed.
This data also into a platform together with other data sources such as <unk>.
Social networks, and Doug Webb, and criminal records and with vehicle Records and other data sources, but this is for the customer too.
According to regulation.
Data he has access to and what's to feed into the platform. So this is for us.
Another data source.
EMEA feed into into the platform in order to improve the analytics and investigation and the insights.
Great I hope this answers.
Yes.
Excellent. Thanks.
Once again, if you do have a question for them.
One on your Touchtone phone.
And I have no further questions at this time.
Alright, Thank you operator.
And thank you everyone for joining us today of course feel free to reach out with any questions and 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 and you may now disconnect.
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