Q3 2021 Cognyte Software Ltd Earnings Call
All participants please standby your conference will begin in two minutes once again please standby.
[music].
Welcome to the Cognex third quarter 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. Later, we will conduct a question and answer session.
During the question and answer that and if you do have a question Star then one on your Touchtone phone. Please note the conference is being recorded.
I'll now turn the call over to Dean Ridlon.
Thank you operator, Hello, everyone I'm, Dean Ridlon cognates, new head of Investor relations. Thank.
Thank you for joining us today I'm here with a lot of her own cognate CEO and David a body cognate CFO.
We're getting started I would 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 investors section of our website at Cognex Dot com click on the investors' tab click on webcast link and select today's conference call.
I would also like to draw your attention to the fact that certain matters discussed on this call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995, and other provisions of the federal Securities laws.
These forward looking statements are based on management's current expectations and are not guarantees of future performance.
Actual results could differ materially from those expressed in or implied by these forward looking statements.
The forward looking statements are made as of the date of this call and except as required by law cognate assumes no obligation to update or revise them.
Investors are cautioned not to place undue reliance on these forward looking statements.
For a more detailed discussion of how these and other risks and uncertainties could cause cognate actual results to differ materially from those indicated in these forward looking statements. Please see our annual report on form 20-F for the fiscal year ended January 31, 2021 filed with the SEC on April 20.
<unk> 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 and comparing results between periods and among our peer companies that publish similar non-GAAP measures.
Please see todays presentation slides, our earnings release and the investors section of our website at cognate 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 is useful to investors for informational and comparative purposes.
The non-GAAP financial measures. The company uses have limitations and may differ from those used by other companies.
Now I would like to turn the call over to allot.
Thank you Dan.
<unk> has rejoined the COVID-19.
Welcome everyone to our third quarter conference call.
I'm pleased to report third quarter revenue and diluted EPS coming in above the high end of our guidance.
Non-GAAP revenue was $119 million and non-GAAP EPS was 71 cents.
Adjusted EBITDA also came in strong at $22 million.
During the call there we have seen many large deals including multiple seven figure deals driven by our security analytics platform.
As we approach completing our first two as an independent company I am pleased with the execution of our software strategy.
We experienced sequential revenue growth in Q2, and Q3 and expect to finish two with strong sequential growth in Q4.
With six weeks left in the year, we are refining the runway outlook.
We now expect $480 million of revenue or around seven 5% year over year growth with 10% gross profit growth and there's a sense of EPS at the midpoint of our revenue expectations.
David will elaborate on our guidance later in the call.
Our growth strategy is to empower our security organization, we can help analytics platform to help them.
Yes, mainly defense security use cases, I would like to start my discussion today, which means you'll start with the large deals were excuse me in Q3 that reflects the future of this strategy.
The first is on approximately $15 million deal from the National Security agency that added new functionality.
This is a good example of our platform can help customers address their growing needs to accelerate complex investigations with our latest innovations and security analytics.
The second and third example to date each of approximately $10 million in connection with capacity expansion of our platform.
These two deals are good examples of how we help customers kind of solutions to analyze the increasing amount of data capture and address evolving security threats.
We believe these larger gains reflect our laser focus on innovation and artificial intelligence and data analytics and our customers' ability to leverage our platform to address many different use cases.
For example, and use cases for our platform is accelerating organized crime investigations.
Security Agency people identified members of criminal organizations.
The organizations ecosystem, including the leadership funding source as any intentions and ultimately prevent crimes before they happen.
In today's digital World premium leave behinds, many digital footprint that can be very useful and accelerating investigations.
Yes, marvellous digital information that is available to security agencies is growing rapidly, but it's also very diverse and difficult to analyze in order to find actionable insights.
Our platform is built with significant domain expertise and the maintenance security agencies to leverage digital footprints to connect the dots and rich quick conclusions.
We're thinking and analyzing data from a wide variety of sources.
I believe organized crime investigation is a good example of how we support many use cases of all analytics platform to help our customers address the evolving security challenges.
As we look forward.
The security analytics market is in its early stages.
Well positioned for long term growth.
Many customers recognize that homegrown solutions can no longer keep pace with growth in data volume and diversity.
They seek opened analytics platform from a trusted partner that can support multiple use cases.
Solutia confused there that scale from different sources and generate high quality insights foster the lead against the wide variety of security threats before the 40 unsold.
We have a long history of innovation that has enabled us to establish carbonite is a leading vendor of security analytics software.
With nearly 1000 people in R&D.
Really basically in Israel, we are committed to continuing to lead the market, we're developing highly sophisticated tools.
First on <unk>.
Our market leadership is not just about our technology customers also have confidence in our ability to deliver value based on our track record of innovation and previous deployments.
We intend to maintain our market leadership by continuing to collaborate with our customers to stay on the cutting edge of artificial intelligence and security analytics.
The volumes the needs of the world multiple 50 catered security agencies.
In summary, we are.
Please and with our third quarter results and on track for a solid first here as an independent public company.
And with the strong execution of our focused strategy, we expect to deliver 10% gross profit growth for the year.
Looking forward, we are in the large and growing markets with positive industry trends and are well positioned for long term growth.
Now, let me turn the call over to David to discuss our Q3 results and outlook in more detail.
David.
Thank you and Hello, everyone.
<unk> today will include non-GAAP financial measure.
Conciliation between our GAAP and non-GAAP financial measures.
Is available as Tim mentioned, our earnings release and in the investors section of Hanmi website.
With a solid first quarter with revenue adjusted EBITDA and EPS coming to end of our expectations.
Behind our results.
Demand for our <unk>.
Solution from both existing and new customers.
During the quarter, we won many large order driven by our cutting edge artificial intelligence and security analytics platform.
In Q3, non-GAAP revenue came in at $118 7 million adjusted.
Adjusted EBITDA came in at $22 1 million and diluted EPS came in at 21.
Year to date non-GAAP revenue was $353 million adjusted EBITDA was 61 $8 million and if you look at the 8-K.
<unk> 58.
With three quarters behind us I would like to provide an update on our focused strategy.
It is positively impacting our financial results.
Our software mix continued to improve this year.
Sell less hardware and professional services.
I'm pleased to report that our software strategy drove a double digit increase in gross profit during the first three quarters, and we expect 10% growth for the full year on a non-GAAP basis.
We've been steadily increasing the percentage of our revenue generated from self there over the last few years.
The gross profit is an important metric this year as we continued to drive higher software mix.
The execution of our software strategy and its benefits for both our customers and.
Good night.
So customer.
Deploying our software platform the benefit from faster innovation easier installation and frequent technology.
For ignite shifting customer mix is improving our financial model.
Both opportunities and competitive differentiation.
Let me now discuss our overall guidance.
Our outlook for FY 'twenty to $418 million non-GAAP revenue.
LIFO minus 2%.
Reflecting approximately 7%.
Year over year growth.
This revised outlook reflects the recent event affecting the timing of deployments include.
Including this travel restriction and second countries, leading to a worsening of the pandemic.
Recent charges your first party components required to deliver second solar solutions.
Another factor.
We continue to expect to grow faster than revenue and in addition to double digit gross profit growth, we expect adjusted EBITDA to grow 50% year over year normalized for the spin off dis synergies.
Finally related to establishing public company infrastructure with Standalone IP.
Legal and other public company and compliance functions.
We also expect our non-GAAP diluted EPS to come in at 80.
At the midpoint of the revenue range.
Since the spin off we have build our public company functions to operate independently, including expanding our finance legal and ICT.
Along those lines I'm pleased to welcome Dean <unk>.
Investor Relations executive team.
We are on track to deliver solid results during our first year as a standalone public company and expect to finish the year with 10% gross profit growth.
Our open platform is being embraced by customers I think.
Address a wide range of security use cases and allow for customization.
With evolving security challenges.
<unk> is a leader in a large and growing market.
We are well positioned for sustained long term growth.
With that I would like to hand, the call over to the operator to open the lines for questions.
Operator.
Yeah.
Thank you and now begin the question and answer and if you do have a question press Star then one on your Touchtone phone if you wish to be removed from the queue. Please press the pound sign or the hash key.
Once again, if you do have a question press Star then one on your phone.
And our first question is from Mike because from Needham <unk> company.
Hey, guys. Thanks for taking the questions here I did want to circle up on the revenue guidance today understand.
I understand that we are seeing is $10 million reduction at the midpoint based on the worsening travel restrictions around the pandemic and the third party component shortages you guys were talking about could.
Can you help us think about how much of that $10 million is from pandemic versus the component shortages is it a 50 50 split or is it 64, how should we think about that.
Hi, Mike. Thanks for the question, so I'll try to give more color about the guidance. So there's a number of factors that we take into account one.
Good about guidance.
This quarter there were several recent development, we have to consider including as you mentioned more COVID-19 related travel restrictions in certain countries.
Related to the emergence of the army cooling and the persistence of the Delta of around and just as a reminder, we're a global software company and for most countries. We can deploy without dravo. However, there are certain customers that we go out travel and some of those are being impacted by Covid right now.
Another factor is you've mentioned the recent shortage of third party components that is required to deliver certain opposed filter solution.
So here I want to remind you that the majority of our revenue comes from software and however, there are certain solutions that require proprietary hardware.
To enable us to deliver a sculpture.
And in the first year as a public company, although we lowered our revenue outlook, we expect to overachieve, our gross margin goal and meet our initial outlook for growing gross profit and EBITDA and the gross profit is expected to grow by 10% and nobody else can be done by 15%.
And I would also like to point out that wasn't used revenue because it's a move towards high margin software.
There is very little impact.
EPS.
As of the quantification.
We factor in many different.
It factors into the guidance, we have you know uncertainties and upsides.
And it's quite difficult to.
Quantify each of the individual elements of by itself, but because of assumed debt.
It took down the guidance by $10 million. So there is an impact of a few millions of feeds but generally speaking, it's very difficult to to call. Each one of the elements by itself.
Yeah, I hope this answers Mike.
Yeah. It helps it does help and.
The travel restrictions around the pandemic I just want to make sure I'm being clear on this it sounds like it's primarily government mandates right, it's not like or maybe you can actually provide some color on this is it customers not letting you on site to perform the installation out of out of caution on the airport or is it almost entirely really.
Due to government mandates.
Yes, so you're right, it's mainly related to governments for government.
Sometimes we are not allowed to work remotely because of certain regulations they have.
So we use our global presence, we have many employees around the world and many offices around the world as you know so when we have local forces it easier, but when it comes to other customers.
There do not let us getting decided because of their own restrictions, we cannot fly because of all restrictions.
Creates a little bit of a delay.
Delaying the deployment timeline.
Okay.
Okay. Okay, and then the final thing that I wanted to touch on before I turn it over for the component shortages that we're seeing.
I'm curious how long has this has this been an issue for you guys and can you explain which components you're experiencing those shortages.
Yeah. So.
In some use cases, we believe our software embedded in network appliances.
<unk> acquired from third party.
And there is a global shortage of certain of their components. The appliances are small parts of the value of the deal.
However, we can't recognize the revenue from our software until these appliances are becoming available.
This is a recent development we didn't see before we were able to.
We have everything we need so far.
Currently we see some.
Delays and shortages.
In this respect and we are working with our vendors in order to to make sure that we have more inventory.
Future needs.
And that that was going to be my my last question for you on the topic. So.
If we werent facing these shortages now I understand that you're working with your vendors. So can you help us understand have have lead times gotten worse recently or are they getting better since you are working with investors with investors starting with your vendors and then the follow up would be do you anticipate this being a one quarter phenomenon or.
Or is this potential too.
To extend for a couple of quarters at this time.
Yes, so as it is the recent development, we are working with them starting to recently to make sure that it doesn't.
<unk> business for the longer term, it's hard to tell whether it's you know weeks or months, but but generally speaking it's a recent development.
Having said that again I want to remind you that the.
The portion of the of the appliance within our overall business.
He's not he's.
He's not huge so so this is something that oh.
I believe we'll be able to overcome over time.
And we're taking the necessary steps in the short term again looking at these windows of time to help them with all the purchasing department to find the interesting components.
Great. Thank you I'll turn it over to any of my colleagues. Thank you guys.
Thank you.
Our next question is from FERC.
From Evercore.
Great. Thanks for taking my question. This is Peter Levine in for Kirk.
So to piggyback off the last question considering the nature of the data that you deal with when you talked about travel restrictions I get the implementation kind of you see a slowdown but are you also seeing a slowdown perhaps in new pipeline builds because youre reps can't go on site can you maybe kind of just to say for what.
What that looks like in terms of reps getting on site versus implementation delays.
Yes, so obviously as we all see the QEP.
Yeah.
Security challenges the only growing we do see that and we see strong demand for our solutions.
The issue is more related to timing of deployment.
Of course flight restrictions also makes it harder for us to approach customers of our marketing activities.
For those areas.
Ronnie do I think about two years already doing those.
What are you, mostly and quite successfully so far.
It's mainly related to the deployment timing.
I hope this answers your question.
That's fair enough and then.
I know you haven't guided for fiscal 'twenty three yet I'm sure we will get that next quarter, but can you give us maybe just a brief insight into kind of what youre thinking based on what you see today and how that's going to impact pipelines deal flow for next year. Thank you.
So.
You mentioned, it's David.
As you mentioned, we will share our guidance for next year and during their Q4 call.
As you remember back in the beginning of the year and I can get back in January we showed the three year plan that calls for double digit revenue growth.
At this point, we expect it to be this year under 10% data revenue growth.
We did 10% gross profit.
Okay cool.
The guidance in Q4.
Great. Thank you very much for taking my questions.
Thank you.
Next question is from Brian Rotenberg from Imperial capital.
Yes, thank you very much.
Looking at fiscal 'twenty three.
It sounds like it's more.
Pandemic related is there anything regional bank.
That youre selling into is in Africa is it all travel into the U S can you talk.
Talk about where it is regionally.
Is your issue or is it everywhere.
And because it seems like it's more of a pandemic rather than a.
Travel pandemic, rather than a shortages of equipment is that correct.
Yes, so again, it's a when you did the guy that guidance, it's quite difficult to separate the different elements, but generally speaking about the pandemic.
Again, we do have a global presence we have offices around the globe. We have the global engineers and Salesforce are in northern Italy is actually most of the territory. So it's not a wide issue for us it's more of a temporary and changing because the dynamics are changing.
It's also changing from one side to the other.
Two different countries. So it's country related it's not a full territory related and it's also related to where we are.
Present are physically with our people.
All we have to we woke up and by traveling to decide so it's something that I would say is country specific and changing from time to time according to the pandemic.
And changes.
Okay, and then just as a follow up on.
As I'm looking at 'twenty, three and 'twenty four.
As we have to.
You're growing 7%, 8% this year.
Is that reasonable to continue even in this current.
Date of Covid and everything else to see that kind of growth in 'twenty, three or should we be seeing higher or lower.
Now that I'm asking for guidance, but I just want some general directional guidance.
Yes.
To begin I will.
Uh huh.
Something like that.
We will share our FY 'twenty three guidance during the Q4 call.
But.
Again in January when you lay out the year, a three year plan, we called for a double digit.
And.
Currently as you mentioned Mike.
Seven 5% revenue growth strong gross profit growth.
And within.
But as you know.
For this year.
Okay. Thank you.
Yeah.
Our next question is from Brad Reback from Stifel.
Great maybe just one more on fiscal 'twenty three as you look at the first quarter April.
It's up against a pretty difficult comp I think the hardest of the year.
How should we just sort of think about that were there one time items that positively impacted <unk> this current fiscal year, which which might lead to.
Situation, where.
Gross could be below trend line for <unk>.
Thank you Bruce.
Lastly, I mentioned that before but when you look at on that so I think the impact related to the look of our guidance.
It's a different decision.
The shortage in components is well advanced.
Certain elements in the business.
Yeah.
May have an impact.
Few millions and on the other side of the story there.
Our ability to deliver and deploy our software remotely and we were able to beat in the last.
Two years actually.
He is with us for a long time.
And very successfully.
We believe that can be able to continue to do the same.
That's it for the layout of next year, it's too early for us to get there but.
Part of the Q4, we shed some color on how we see the use.
And Allen going to CBA evolving over time.
That's great and then just one quick follow up as you think about M&A.
What's the potential for you guys to execute any of that in 'twenty three.
Yes.
First of all our plans in these historical results were mainly relying on organic growth. We have 1000 R&D people. We are innovating, we're not relying on <unk>.
In order to execute our plans, having said that we have at least three of tuck in M&A in order for us to be able to create more value to our customers and accelerate.
And the offerings.
One area and the other area is the most strategic M&A, we look at it as well.
Case by case basis.
When you find something relevant of course, we'll consider it and take decisions.
So to make the long story short then to summarize.
Tuck in M&A as we always have pipeline for those and when we find it relevant we do it well most strategic M&A is something that we look at the longer term not for the short term.
Great. Thank you very much.
Thank you.
And we have a question from Mike <unk> from Needham <unk> company.
Hey, guys. Thanks for getting me back on I I did have just a couple of more questions. The first.
Coming back to those component shortages.
Or any of these components are sole sourced.
I would think my God, so actually it's not.
So first but we do have Mike.
I would say very common the component that we are looking at is the reason that like when.
When you look at the challenge we've seen that there is something that we can what county.
It could be like you know difficult breakthrough something there that you.
You see two things have happened you said the timing is it the time to make changes.
Can you pass it could be like.
And you as two months or two months a few weeks versus now that it's becoming like a few months or the price is going up so overall again.
Because our software in the Andes is.
Working on that.
Yeah.
Okay.
But that in.
Seven pieces, but it's only specific cases that required that.
From a magnitude over from a challenge to providing this EBIT something.
Relatively magical yes, just to elaborate on this Mike most of our software is running on the off the shelf.
However.
Some of it is running on certain appliances and for those certain appliances. We have a few components that are we face shortages. So it's something that is limited it's not something that is.
Major reflects maybe a portion of our business.
I hope you saw.
It does it does and if I'm looking at the the.
The gross profit guidance for the year.
10% year to year, it actually implies that Q4 gross margins declined from Q3.
And I'm wondering that that sequential decline that's embedded in your guidance is that based on increasing costs for these components or why would we be yeah.
Can you help us think about why we would be seeing the gross margins declined from Q3 to Q4.
First Michael it's David.
Imagine a slight decline.
Providing a high level of gross profit.
And target and we share in Macao, you are looking at the 10% growth and it's mainly depends on the overall mix and based on that.
Commission, where are we going to learn.
Obviously, you can see that.
Over the first nine months of the year.
We would like to delivering strong gross margin quarter over quarter, and we're very pleased from where we are.
Okay.
Great and then just just one other question I know.
I know, we're all thinking about fiscal 'twenty, three and fiscal 'twenty four maybe not.
Specific guidance, but given that you guys have nearly a year under your belt now as an independent company and.
We've referenced those three year targets that you guys did put out excuse me at the time of the at the time of the spin.
Its cognate willing to reiterate we're back.
The fact that it's still expects to attain those those targets that were initially laid out.
At the time of the spin.
So.
Again.
In January we lay out the way that we see.
Our everything is going to evolve obviously as part of our annual purchases, we looked at everything from scratch and then adjust the plan is inquiry.
Yeah.
We shared the detailed plan in Q4 and.
And <unk> did not mix you can see the seeds of change over the year end.
Our strong gross margin with cheaper than our say our ability.
Continued success.
So although the guidance will take place in Q4.
Okay. Thank you.
Thank you Mike.
And we have a question from Louie Dipalma from William Blair.
Good afternoon.
Yeah.
I know that afternoon.
Good morning.
What percentage of revenue during the quarter was recurring and separately what percentage of revenue in general overall through the hardware appliance that you referenced the.
Shortages.
Okay. So.
David.
Thanks for the question.
Although the tank revenue needs around 50% of the total revenue.
And if you look at the overall.
Overall revenue that element that may be deliberate.
Appliances is when.
As a percentage of total revenue, but if you want to look at the shortage of the of the revenue each says much smaller.
Portion, yes, I hope, they're splitting the revenue.
<unk> and <unk>.
<unk>, so it's not something that's everything quantified.
I do want to put kind of like an additional square we are disruptive so the majority of the revenue.
Is software and the deployment costs and this is like something thats relevant for.
Most of our solutions.
Second cases.
We have software that's deployed on the <unk>.
Certain appliances and within this group of Florida.
Certain things that are and we see there is shortage, it's not all of them each day.
Specific products and on that morning.
Monitoring it.
Increasing our inventory level to ensure that we would not have to deal with the high level of charges, but again in the <unk>.
Big picture you can see level of inventory that we are working on relatively low level of Cogs within our solution.
He is very small in the cases that we are using appliances, which we facing shortage is also very limited.
Great.
<unk> to the recurring revenue I believe it has been a goal for the company to increase.
The percentage of recurring revenue, but I think over the past.
Nine months.
Level has.
Lined at that 50% is that is that true or has there been any increase over the first nine months of the year and the recurring revenue percentage.
So.
Back in January when we shared our.
The outlook for the <unk>.
A couple of years.
We shared that we believe that 50% of the recurring revenue represent.
It correctly, where we are in there the way we are offering.
Yeah.
Sure.
And plan to add more over time.
<unk> revenue, which.
A positive impact, but this is not something that will impact on the short term, it's more long term.
Yeah.
Okay. Thanks, and my last question for the $10 million in and guidance reduction.
Do you have.
Specific visibility.
In terms of.
When you will recognize those deals that had been pushed back or is it your expectation that that $10 million is gone forever.
Deals where were canceled.
Yes, so I'll take this one and no. It has not gone so it's only a matter of deployment timing and.
One is related again to the pandemic. So it's hard to say when exactly we can lend in specific countries that you have to deploy.
The deals are there and the customer needs. The solutions, we provide a lot of value to our customers. So in security challenges are only becoming more complex. So the need is there.
It is.
Disappeared and for that reason, it's only a matter of timing in terms of the housing shortage.
David mentioned.
And this is something that is specific to certain areas within the appliances that we need in order to deploy our software in delivery.
And this is something that we believe.
I can say.
So a couple of months, but this is something that we believe.
We will be able to overcome what we do proactively as again.
Going to approach our vendors in order for them to do.
But to increase the inventory in Q1.
And by the way, we use our purchasing people to hook them and.
Put our hands on the missing the boat so we do whatever it needs to be done in order to to.
Results of this discipline.
But again customers are waiting they need the solutions and this is something that we will deploy as soon as.
The ecosystem and the conditions will allow us.
I Hope I hope this gives you won't be answering.
Okay. So did you say that you don't have visibility in terms of when you will receive the proper components to deliver.
Is that $10 million in revenue.
So again.
David.
We have like we are monitoring the relevant component that we're missing on that I would say like on almost a daily basis to see like Adidas timelines of 17 between getting the next few weeks and.
But overall, we need to.
Our level of inventory because this is what they see as a concern for you to do.
And as I've mentioned alright.
Alright to predict now that you'd say two weeks issue or four weeks issue, but we believe it is a very short term one so.
So I don't think that it's going to stay with us for a long period we.
It seems that it's something that.
And currently under controlling endeavor.
Cyclic impact.
Cyclic test solution that we are selling.
Yeah.
And by the way that they can charter attention sorry by the way just to make sure. We all understand that it's not that the entire $10 million related to the shortage alright.
Also related to.
The flight restrictions et cetera, so just to make sure that we understand.
Perfect.
But ultimately he said that it's all timing related right.
There haven't been any cancellations.
Correct no cancellations.
Great. Thanks.
That's it thank you.
Thank you.
And when we have no further questions at this time.
Thank you all.
And thank you ladies and gentlemen. This concludes today's call. Thank you for participating and you may now disconnect.
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