Q4 2022 Cognyte Software Ltd Earnings Call
Today's conference is scheduled to begin shortly please continue to standby and thank you for Kent.
[music].
Good day, and thank you for standing by welcome to Cognex fourth quarter and fiscal year 2022 earnings conference call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
To ask a question during this session you will need to press star one.
And your telephone.
Please be advised that today's conference is being recorded.
If you require any further assistance please press star zero.
I would now like to hand, the conference over to your Speaker today, Dean Ridlon head of Investor Relations. Please go ahead.
Thank you operator, Hello, everyone I'm Dean Ridlon Cognex head of Investor Relations. Thank you for joining us today I'm here with a lot your own cognate CEO and David a body cognate CFO .
Before getting started I would like to mention that accompanying our call today is a presentation.
You'd like to view these slides in real time during the call. Please visit the investors section of our website at cognate dot com click on the investors' tab click on the webcast link and select today's conference call.
I'd also like to draw your attention to the fact that certain matters discussed on this call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995, and other provisions of the federal Securities laws.
These forward looking statements are based on management's current expectations and are not guarantees of future performance.
Actual results could differ materially from those expressed in or implied by these forward looking statements.
The forward looking statements are made as of the date of this call and 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 29 2021.
And other filings, we make with the SEC, including our annual report on form 20-F for the fiscal year ended January 31, 2022, which we expect to file shortly.
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.
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'd like to turn the call over to a lot.
Thank you, Dan and welcome everyone to our fourth quarter conference call.
In Q4 revenue was one the other $125 million at about a $7 million sequential increase from Q3, and approximately $3 $5 million below the midpoint of our guidance.
non-GAAP EPS was <unk> 16.
Our results reflect the continued supply chain issues that we discussed during our last earnings call.
Well as a lower conversion of our pipeline than we expected at the time of our last conference call.
I will discuss both issues in more detail in a minute.
During the quarter, we want many larger deals, reflecting the strength of our portfolio and the market needs for cutting edge investigating on analytics to address evolving security threats.
Also we continue to execute well on our software strategy and in Q4, our non-GAAP gross margins increased 180 basis points year over year to 73%.
I would like to start today with a review of our Q4 bookings activity.
In Q4, we continue to win large deals from existing customers that demonstrate the strength of our customer relationships and how they look to us to help them address evolving security threats.
The first is unfortunately at a million dollar deal from law enforcement agency that is replacing homegrown solution due to our technology's ability to keep pace with evolving threats.
This is a good example of how our customers are facing security challenges that are constantly evolving and come to us to modernize the investigative analytics technology with an open analytics platform.
The second deal is for books of at least $8 million in connection with the platform capacity expansion.
This is a good example of how our customers look to us for the latest and investigating on analytics capabilities to keep pace with the increasing variety and volume of data.
The third deal was also four 8 million.
And he presents an existing customer, adding another solution for our portfolio and displacing the incumbent vendor.
This is a good example of how customers are placing solutions from other vendors due to the confidence in our ability to deliver value and our track record in previous deployments.
These large orders from existing customers highlight our long term relationships the evolving needs of our customer base and the confidence our customers have in our technology.
Okay.
We continue to win large deals in Q4, I think broke orders. However, overall Q4 bookings came in lower than we expected at the time of our last earnings call.
While we still ended the year with significant help your funds of $112 million. This IPO level is $40 million lower than the prior year.
We identified two main issues contributing to lower than expected Q4 bookings and I would like to discuss these issues and how we are addressing them.
First is the supply chain issues, we discussed during Q3 and that continued into Q4.
As a reminder, on average approximately 20% of our revenue comes from appliances solutions that consists mostly of software but include some Hollywood components.
We are currently having difficulties sourcing some components, which affect our ability to timely deliver backlog orders and the impact on revenue.
In addition to revenue and bumps we have started to see some customers delaying placing new over this little other solutions I'm, good with deliveries of private holders.
We are executing on a couple of initiatives that will address the supply chain issues.
We are working with suppliers to build up inventory to minimize the bulk of the component shortages.
Cost of such inventories many model, but it is hard to find suppliers with available stock.
In addition, we have started to how do we design and expect to finish the redesign by Q3 of this year.
The new design win among other improvements include components that are more readily available.
The second issue is lower pipeline conversion.
We concluded that we need to strengthen our leadership team to drive better conversion on the pipeline.
Looking back to Q4, we entered the quarter with a large pipeline and based on analyzing the convergent performance. We do not believe we have lost any key deals to competition and do not see significant changes in the competitive environment.
It is also important to note that most of Q4 pipeline deals that we expected to close were from existing customers.
Our relationship with our customers remained strong and we hope to close these deals in the future.
Based on this analysis, we initiated the search and I'm happy to report that in Q1, we already hired a new chief revenue officer.
The new CLO greenstock overnight extensive experience in driving growth and leading large teams.
We believe the actions we have taken will help mitigate the identified issues and support our long term growth strategy.
Next I would like to discuss our visibility at the present time.
In addition to the issues. We just discussed we believe the conflict in Ukraine may be closing the polls for some government customers around the world, especially in EMEA.
While we will not drive any revenue from Russia. It's unclear at this point, what the impact will be on our business. This year and it could result in more or less spending as customized maybe prioritize the security budgets.
At this time, our ability to focus this theory with any level of physician is limited and we are not providing guidance. We will continue to monitor the market and resume guidance as soon as practical.
We are clearly disappointed that we are not in a position to provide guidance.
Near term, we have taken specific steps to address the issues, we identified and we are confident in our long term growth opportunity due to first market fundamentals have not changed the market is large and growing security threats are increasing and governments are seeking innovative solutions to address these threats.
Second we are a market leader with a long history of growth and innovation.
Third we have deep relationships with our customers around the world and fourth we have successfully migrated our business to a software model, which drives gross margin well above 70%.
Now, let me turn the call over to David to provide the beautiful color about our results.
David.
Thank you <unk> and Hello, everyone I'll discussions today will include non-GAAP financial measures.
Affiliation between our GAAP and non-GAAP financial measures is available as Dean mentioned in our earnings release and in the Investor section of our website.
non-GAAP revenue for Q4 came in at $125 $3 million.
Up slightly from the previous year, but below our expectations due to the issues we experienced in the quarter that I discussed earlier.
I was supposed to strategy continued to have positive impact on our results.
Our non-GAAP gross margin increased 180 basis points over the previous year and non-GAAP gross profit came in at $91 million.
Yeah.
We were able to drive non-GAAP operating income of $57 million.
<unk> had EBITDA of $23 million and non-GAAP diluted EPS came in at 16 cents.
I would like to mention that our EPS loss on a GAAP basis reflects evaluation allowance, we took on our deferred tax asset.
Out of $12 $7 million.
This valuation allowance was triggered by the expected realization timing of our deferred tax asset.
Cash used in operation in Q4 was approximately $7 million, mainly due to our booking activity timing of collection and lower advance payments.
Now, let me turn to our full year results.
Our full year results reflect execution of our we're still fit strategy.
Total non-GAAP revenue increased six 4% year over year to $475 6 million lives now.
non-GAAP software revenue grew faster than our total revenue at 89% year over year.
Our gross margin increased 200 basis points over the previous year.
And our non-GAAP software gross profit grew 12, 4% on the agent that percent software revenue growth.
From a mix perspective, non-GAAP recurring revenue was 49% of total revenue or $232 5 million, an increase of two 2% year over year.
And non-GAAP repeat revenue from existing customer was about 95% from total revenue.
Similar level last year.
Regarding our appeal, we ended the year with 511 $6 million.
$41 million year over year.
Our short term appeal was $302 million.
$53 million year over year.
Adjusted EBITDA for the year was $82 $1 million.
non-GAAP diluted EPS was <unk> 74 cents.
Turning to the balance sheet, we ended the year with $163 million of cash cash equivalent and short term investments.
This balance includes $100 million, we drew from our existing credit facility, which was put in place at the time of the spinoff for working capital.
And potential M&A.
Yeah.
If we look at our fleet 23.
Let me summarize where we stand today.
We believe the recent issues, we're facing are short term in nature.
The fundamental of our business I still lead the long term opportunity remains intact, and we are well positioned to capture the growth opportunity in front of us.
With that I would like to end the call over to the operator to open the line for questions.
Operator.
As a reminder, I ask a question you will need to press star one on your telephone to withdraw.
Sorry, your question press the pound key.
Please standby, while we compile the Q&A rosner.
Our first question comes from Mike <unk> with Needham <unk> Company. Your line is open.
Hey, guys.
Thanks for taking the questions here I did want to.
Circle up on the guidance and it really.
I'm thinking through I know that you guys have been talking to visibility of the business and the amount of our business.
Business coming from existing customers year in and year out.
And trying to juxtapose that to the.
I guess, the lack of visibility that we're talking to today.
I guess what what.
Has changed in the recent three months it really hinders you guys from from giving any.
Any guidance in the out year or even even if we were talking about just the quarter I would think most of that businesses.
He is well thought about as you guys have these existing relationships with your customers.
Yeah. Thanks, Mike.
So actually let me remind you that.
So that's we discussed earlier in the call.
So there is a components and lifestyle brand conversions.
And also the recent geopolitical developments its unrelated to Q4.
Our recent developments.
The combined impact visibility.
We're taking proactive actions to improve our visibility in terms of the answer but I want to give you more color about each one of those so let's start with the shortage of components. We discussed since early in Q3 call.
We saw that some of the components related to the appliances solutions are not available.
We talk to <unk> was the first one is to increase inventory absolutely we're able to do some of it but it seems that the.
It's difficult to find the most stock and.
We initiated the redesign of the houses. So this is a temporary disruption that we expect to resolve later in the year.
And it's also by the way our influence and new bookings.
For from customers that are waiting for those orders to be fulfilled.
When it comes to the con.
Conversion of the pipeline. It is important to say that we've seen no change in the competitive landscape.
We didn't lose any customers and in the example, I gave earlier in the call we can see those customers come.
To us again, and again also with large deals.
Analyzing as permanent conversion, we don't see a longer sales cycle.
And that is resulting in the lower than expected bookings in bookings in Q4 actually the economy. The appeal and the bookings weakness is mainly related to Q4.
We did take a few steps one of them is related to leadership.
And also we had early this year.
Global sales kick off the <unk>.
Barry.
And we are.
Focused mainly on how we improve the biobank conversion, we didn't execute well and we are going to improve it.
We did take some steps, including Eh adjustment.
Yeah adjustment of the commission plan to incentivize faster deal closure.
Scrutinizing, the pipeline and re prioritizing resources based on opportunities.
And also now when the travel restrictions have lifted.
Our team is we put on the ground closer to customers, which.
Which is very important in our industry.
On top of those.
The recent geopolitical situation in Ukraine.
As I mentioned in the call, we do not generate any revenue from Russia. However, we do expect that.
It will create disruption.
For sure for the short term and for the longer term it could create headwinds those headwinds.
Both directions are possible and we are monitoring the situation.
And so overall, if you look at the visibility taking all of them together and combined.
This creates a actually.
Uncertainty.
And.
Because of that we are not able to provide meaningful guidance the range actually is too large.
And giving guidance at this point of time is.
He is not there is impossible.
He said.
All of those disruptions, we believe are temporary in nature.
Ill discuss the solutions point too.
Each one of them.
And we believe that the long term opportunity remains intact.
I hope this answer.
Yeah.
If I just.
Slipping to two of those real quickly I know, we spoke about the inventory.
Last quarter.
And the supply chain constraints being continuing to be a headwind, but if I look at the balance sheet. Your inventory balances are still lower.
Lower even sequentially.
Can you just give us an update I guess.
Are we are we really rating for the.
The redesigned to be completed in Q3 for that supply chain too to normalize at this point.
Yes, so actually the inventory you see me lot of them won't be as long as before and then the.
So those components is quite marginal.
The revenue impact is mainly for the software portion of these <unk>.
Our solutions.
Unrelated willing to dean's into inventory.
It is a is a is a quite a marginal cost. So you don't expect the inventory to go up dramatically smaller numbers.
Okay. Okay.
I guess, yes.
The question becomes you can't recognize that that software revenue until you have the inventory and then can you ship the appliance to your customer.
And then the I guess the knock on effect.
From that is that your customers or.
We're not putting in new orders until they can get their prior orders delivered.
So it's like a good.
One one follows the other that's the way to be thinking about this and what customer behavior is right now.
Yeah, that's correct some of the customers are waiting for the previous orders to be fulfilled in order for them to generate value from the from the Solutia and for us to recognize revenue we need to install our software on the appliance once the plant is not available we cannot do it we cannot deliver and deploy on the customers cannot generate value.
And for that reason some of the customers are holding new orders be for until they get the previous ones.
And what we have.
Very good relationship with customers. So it's under it's under control, we manage engage we discuss it with the customers and maintain a good relationship with them.
We believe it's a timing issue and once it's resolved.
The business when we are back on track.
Okay.
Thanks, I'll turn it over to my colleagues. Thank you.
Thank you our next question from Kirk <unk> with Evercore ISI.
Your line is open.
Okay.
Hi, guys. This is actually Peter Berkeley on for Kirk I appreciate you taking the questions here.
So I guess I kind of want to double click on the conversion you seemed a little bit further on that and I. Appreciate you calling out that the longer sales cycles, you're seeing and maybe some leadership changes you've made.
But I'm just curious are those deals that are sort of you know.
Getting pushed out a quarter and you you would expect to close next quarter or are these more projects that are sort of getting delayed indefinitely.
Please <unk> your line is conference call will resume momentarily.
Okay.
The conference call has now resumed.
I think we had a communication issue I. Appreciate this we could repeat the question.
Sure No problem. This is actually Peter Berkeley on for Kirk I. Appreciate you taking my question here.
So I just I kind of wanted to dive a bit further into that conversion issue would be called out.
And I appreciate you calling out the longer sales cycle and you know our leadership changes you're making.
But I'm just curious are these deals that are getting pushed out a quarter and you would expect it to close next quarter or is that more projects that are getting delayed more indefinitely.
Yes.
We don't think we lost any any deal the pipeline is solid.
So about the timing of the execution and closing deals.
We believe that over time, we were able to close.
The deals are.
Got it got it deals with us.
We are taking all clearly we didnt execute good enough, we will hopefully improve the execution of the of the sales execution and that's what we do.
Clothing, refreshing processors, including refreshing the executive leadership.
And other actions, we take in order to accelerate.
So.
Got it that's helpful color and then maybe just one other quick one if I could sneak in.
Just as it relates to the geopolitical conflict in Ukraine.
I, just kind of want to make sure I'm understanding this correctly. So it sounds like its more at this stage for you guys. It's.
More uncertainty is creating.
Not really.
Whether it could potentially be a tailwind architected to be a headwind moving forward, obviously as security becomes kind of more front and center versus the trade off of them.
Potentially less spending or what have you I'm sorry.
Thinking about that correctly.
Yes, so first of all I do hope that the situation with you all soon.
Yeah, Yeah absolutely.
Well it could be a potential impact on our business, obviously, mainly in EMEA.
It's a volatile situation customers.
<unk> customers some of them are you.
Confused it's a recent development.
They may consider reconsider budgets and priorities and it can mean for us it can be headwind or tailwind in.
Too early to say, what the impact will be.
Having said that historically after conflicts.
It's driving more demand for security, but for the short term.
We expect the disruptions.
Helpful. Thank you I appreciate it.
Thank you.
Our next question comes from Brian <unk> with Imperial Capital. Your line is open.
Yes, thank you very much.
So one of the comments that you guys made was on the market growing.
And you expect to kind of grow with the market.
So I'm just trying to get from a maybe a long term perspective beyond 'twenty three looking at 'twenty four 'twenty five the market's growing in the mid single digits is that.
The right number.
So we believe that in a regular day as the market is growing double digit.
Maybe I'll give some color on both the long term opportunity.
When looking at the market, we see that market fundamentals have not changed.
We discussed it before the security threats are increasing.
There is growing in volume and diversity and for that reason the demand for our investigative analytic solutions, resulting.
Resulting in expected to grow over time.
We also don't see change in the competitive environment.
Yeah.
If you look at recognize it does support our customers.
With advanced technology, and innovation and our repeat business coming from existing customers I think it's a good vote of confidence a customer who's now technology and innovation.
They recognize the value our solutions deliver.
We also have good customer relationships.
Our largest global customer base.
We believe that the long term opportunity is there.
In addition to that.
As you May know our presence in the U S. It was minimal and we launched our initiative to expand our presence in the U S.
So just to summarize I do see that the long term opportunity is there the market is a healthy market the security threats all growing.
This will generate and drive demand over time.
For that reason, we believe that the long term opportunity is there and so that means that we continue to innovate and deliver value to those to the market.
No. That's good thank you very much for the additional color.
So maybe.
On the reason for you taking out the $100 million revolver, I think you drew that down in.
In the in the period.
And.
Maybe an additional question on the reason for that now youre sitting on a whole lot of cash.
Do you anticipate being cash flow positive in fiscal 2023.
Yes, so at the time of the spin off we put in place a credit facility and the reason for that also working capital as well as M&A.
Since the spin we have drawn and repaid the revolver several times.
And then Q4, we decided to draw the entire revolver.
So can easily return at a if you want.
A question about the addressable yes, we would expect positive cash flow next year.
Great. Thank you very much.
Thank you.
Thank you as a reminder to ask a question at this time. Please press Star then one.
Touchtone telephone.
Our next question comes from Brad Reback with Stifel. Your line is open.
Great. Thanks, very much I think during the prepared remarks, you talked about lower advanced payments for one of the reasons cash flows decline so precipitously year over year can you.
Go into a little more detail on that and what you think happens on that front in fiscal 'twenty three.
Yes. So the main reason for that is the transition to a software model.
When we transitioned to a software model.
Actually see less advances and also a less a such as of completion revenue recognition.
And this is the main reason for that.
But it hasnt that transition has been going on for the last three years.
Okay.
Yes, it's David.
Tradition is taking place for a few years, but obviously, we had some projects from the past that we will continue to fulfill and if you can.
You look over the last few quarter, you will see that we have less and less advances from our customers.
When you are working on the project model, it's very difficult to get some advances in the beginning of the project once you move into a software model.
Less.
Say the business.
<unk>, obviously, we are still looking for advances from our customer.
But this is something that it's more difficult to convince the customer giving effect.
<unk> software.
Got it thanks very much.
Thank you.
Our next question a follow up from Mike <unk> with Needham <unk> Company. Your line is open.
Hey, guys I just wanted to circle up.
Know that we're talking about the longer sales cycles today.
Can you give us a sense, how how much longer or sales cycles today are we talking about.
Another most of that sales cycle or is it still your.
Elong dating in the current environment.
No it's not a dramatic increase slight increase.
I want to address it.
No.
Make sure that.
The pipeline conversion and we have a healthy pipeline and we want to make sure that the pipeline conversion is faster.
I don't think in the <unk>.
With us.
And so thats. The reason we took the action items I've mentioned before.
Related to our execution.
Oh.
<unk>.
Okay can you remind us of that one more time I know that you have the new Chief revenue Officer, who you hired but what other processes have you put in place to ensure that.
Pipeline is converting at a more normalized level.
Yes so.
We have been then you'll see only tell you mentioned before we had the global sales kickoff the consumer Barry. This is an annual event that we have the same it was finally physical luster are dual use of COVID-19 .
The focus of this event was specifically on how we convert pipeline faster.
We also adjusted the commission plan of the sales team.
Incentivize faster and closer.
We are going to the pipeline and scoring sizing the pipeline in a way that we want to repair it ties our resources, where the opportunities also to actually to work more efficiently and effectively on the pipeline.
And another thing we do is we push for more and more travel to see the customers face to face and it was actually.
Impossible previously in certain territories and countries and.
Now on the <unk>.
Third we are able to be.
B closer to customers and that's very important.
In our industry, the security industry face to face meetings.
Vital so so altogether I think we took.
A few items related to executive leadership at <unk>.
Processes.
As well as being closer to customers.
I hope this answer.
Yes. Thank you.
Thank you.
Okay.
Thank you. This concludes the answer session I would now like to turn the call back over to Dean Ridlon for closing remarks.
Thank you operator, and thank you everyone for joining us on today's call should you have any additional questions. Please feel free to reach out to me and we look forward to speaking with you again next quarter. Thank you.
This concludes today's conference call. Thank you for participating.
No.
Okay.
Thank you.
Sure.
[music].
Yes.
Okay.
Great.
Okay.
[music].
Okay.
[music].