Q1 2023 Cognyte Software Ltd Earnings Call
Securities of a pervasive and governments continue to seek in readyative solutions to address the thre. Second, we are market leader in investigating our allyics- we with the long history of growth and innovation. And third, we have developed deep relationships with our customers around the world and have a strong track record and impretication in the security market. Now let me turn the call over to David to provide more callor about our Q1 results. David, Thank you, relied and the lower one our discussion today will include non-gaapth financial measures. A concileration between our GAAP and non-gaapth financial measures is available as being mentioned in our earning dels and in the Investor section of our website at. Let's say we are not happy with our Q1 results. Revenue for Q1 came in $86.4 million, a significant decline from last year. Our revenue mix include 3: teenam software, softthe services and professional services, and another.
In Q1 we experienced a mix change relative to Q1 last year as followsoftware revenue was $24.9 million, a sharp decline year-over-year due to customer deployment relays and slow pipeline conversion.
Let me start with the customer deployment delays, as ladd mentioned, with customers that has their own supply chain, issue which impacted our revenue for the quarter.
With regards to slow pipeline conversion, we continue to experience delay in converting our pipeline to ordder with, then impacted our book-to-ship revenue.
Regarding soft, your service revenue, it came in at $45.8 million, down by $4.9 million year-over-over-year, primarily due to fveroral customer reducing support and subscription spend.
This revenue mix exchanged impacted our gross margin results.
Our nagga gross margin and gross profit were 61% and $52.7 million expectively.
The GST profket decline of approximately $31 million year-over-year is primarily due to a decline in overall revenue.
About $22 million of this decline is due to the lower software revenue.
q1- non-GAAP operating expense, where $74.8 million similar to Q4 level.
Speaker 1: With a non-GAAP operating loss of $22.1 million and adjusted theda loss of $18.2 million.
None that we look at the P training at 79 strength loss.
I would like to mention that our diluttedly P Los reflects a $29.5 million non-dect tax charge.
This is a result of our non-GAAP tax memythology that is based on expected cash tax rate for the year.
Consistent with previous yearth practice.
Methodology can create volatility.
Our actual cash tax payment in Q1 were $3 million.
As I D mentioned early in qtwo.
We took steps to reduce our cost structure and we expect these actions to result in non-GAAP Q3 OpEx of about $7 million.
Speaker 1: Turning to the balance sheet, we entered the quarter with one other than $7 million of cash, cash quivalents and short-term investments.
This balance reflects Q1 solid collections and includes $5 million from our existing credit facility.
To remind you, during Q4 we drew down our 100 the million dollar credit facility and during Q1 we paid back $5 million.
Overall cash yielding operation in Q1 was $8.7 million, mainly due to our loss.
Regarding inventory giving the supply chain environment, we took steps to increase our level of inventory by a few million dollars to allow better flexibility to address market demands for our solution.
Our balance sheet also reflects a $6.2 million a cool related to an alleged imfringement of an easily patent claim which will set up and paid in Q2.
If we look ahead, let me summarize where we stand today.
We believe these who are facing a tappering in nature, and we are taking specific steps that will enable us to emerge stronger over time.
We will continue to monitor the environment and resume guidance as soonme as practical.
cogni has more than two decades of delivering innovative solutions.
Strong capitalmer relationships, profitable growth.
We have a long-term opportunity in front of us in helping our customer to add the security trreds.
With that, I would like to end the call over the operator to open line for questions.
Thank you. Who will now begin the question-and-answer session? If we drove the question, prress zero and one on your touch T phone.
If you wish to be removed from the queue per zero, then two if you're using a speaker phone, you may need to pick up the handset first before pressing the numbers.
Speaker 2: Once again. If you have a question, please press zero and one on your touchtone phone.
Our first question is from Mike coes from Needham, in company.
My guys, thanks. Thank for taking the questions here and I apologize for the background noise. The first question I had: I know that we're now.
Essentially done what the second month in the second fiscal quarter, right two months under our belt here. With that said, I'm curious: have you guys seen any changes so far in pipeline conversion? More supply chain constraints that would make you think that the business is getting either either worse from where we were in April quarter or better from where we are in the April quarter. Just curious if you could talk to what's played out in May and June So farth.
Hi my. So we are clearly in a period of flevisibility. During the call, I shared examples of multiillion dollar orders slepped out of the quarter.
That were expected for the quarter. one of them was related to an order that is in the back roub already. The other one was an order that was supposed to be booksheet order that we were supposed to book and deployed.
At the same quarter. So the situation is still volatile and for that reason there is still broad range of potential outcomes and the uncertainties. It's a level that we cannot give guidance at this point of time.
About the pipeline, it can tell you the pipeline is a Hey pipeline. We see lower conversion rate on the other side. We didn't see any losses of K deals and we are focusing on accelerating pipeline conversion.
Okay and yeah, you get ahead. I'm sorry. Good yeah, Please. Good, I'm listening.
Speaker 3: I was going to say on the RPO. I know that you guys had mentioned that we saw a sequential increase by a few million dollars. I think is is what you guys had pulled out. Could you help us stick about the composition of that RPO and what I mean by that? I know that there's a certain amount of RPO which can be recognized over the next 12 months versus RPO that can be recognized thereafter. So the the sequential increase in RPO that we're talking about, was it expected to be recognized in the next 12 months cent or is it longer term in nature?
Yes So usually we entered today with an Oppo and two third of the oppoal is for the year and the one third is for the years after. So usually's that's the range.
And I think it's similar at this point of time as well.
Okay okay, and then the last question before I turn it over to my colleagues. But on the inventories, I know that you guys cited the increases we're seeing in inventory, which is reflected on the balance sheet, as providing you guys increase flexibility. Is there more to do there? As far as continuing to take the inventory balan CES up, is there something you're comfortable with that at the current state?
Yes So just to when everyone about 20% for business is related to a sofwter that is installed on a bedded product. A portion of it is related to the shortage of components challenge that we faced.
At this point of time. We increased the inventory level to alevelevel. That is sufficient for us, and just want to remind you that we also went to redesign process that should be completed in Q3, So we do have the mitigations we need for that.
Thank you all and and over my colleagues.
Thank you, Mike.
Peter lebine from Evercore ISI.
Great Thank you for taking my question I guess once you obviously look at growth in sales or any funnel metrics.
youknow, into R SA couple weeks ago and it seems like security spending across the Board, corporate and federal, seems pretty healthy. So was there, you know what? Was there a new competitor that had a feature you didn't have? Or maybe you're just not selling well against. I know you called down the, the prepared remarks, but maybe talk about just the competitive landscape, any new developments evolving that. You see that perhaps may be contributing to kind of some of the pipeline conversions. Or you know pipelines, just not building a strong.
Yes So maybe I'll share with you all to heit from our customers, our customers telling us that they face growing challenges, consciousit with challenges. They need more analytics, their security challenges are becoming more complex and they need more investigative tools. So this has no change in customers: don't need their technology.
About competition. We don't see any significant change in competition. As you remember, we are many is in this business more than 25 years. We have a large customer base in more than one and countries and we have deep relationship and repetition among our customer base and also superiate technology. So when we talk to customers, we do not see any or here anything that is related to change in the competitive landscape and we believe that we are still in market leadership positionabout the pipeline: the pipeline is healthy. It's not about the size of the pipeline, but it's about the low conversion rate of the pipeline.
And we shared earlier in the call what we see. We see challenges that are related to supply chain in the customer side and we also see the changes in the environment- the macroeconomic and the geopolitical environment- that might be related to what we face in the market, but I do not think the competitive landscape has changed in any significant way.
And maybe just a final question, maybe two parts. Here is is: one is: can you explain to us what the new C o C o, you know, what he's doing today versus is kind of what you saw a year ago, like what changes is he making and then say you, you talked about a reduction in headcount. Can you explain to us where that's coming from? Is it sales of marketing as it R and D just ccur, or know where the reductions are?
Yes So let's start with the crro. First of all, I must say that I'm really excited. Having been joined in the company is a sil executive with a great addition to the team.
His main focus, of course, is accelerating pipeline conversion. That's what we see as the main challenge of our- for us obviously now and the borders open here- and his team eting with customers extensively. The focus is to better understand the custoers' challenges and mainpain points and to focus the sales fors on the top priorities of each and every customer. As I mentioned in earlier, in the call there are many interviews are doing with the customers. We try to understand where they focus, they ment challenges and to try and help them solve it. So I'm pleased with the progress is making and we also have the entire executiive.
Believe you said roughly 5% cuts it. Will that impact second quarter and third quarter to a positive where cash flows from operations turns back positive?
So as we during the call we did the cost saving across across the organization and actually when we're looking at Q3. We expect our nongap operating expense to be around $7 million. Obviously giving the fact that we are not perviding any guidance. We also will not referred to the cash the cash. But if we look at the overall we believe that.
That the carren situation really BU $107 million of cash should there be enough and.
To capitalize our operation. Maybe a elabories on that. If you remember, we withdrew the credit facility back on December last year.
And given that we had one more and seven of cash by end of Q1, we decided to repay $5 million. We believe this is sufficient to run the business.
Okay then, along those same lines, do you anticipate any further headcount, or is this where you are on a kind of stable for the next couple of quarters?
We gave it a lot of goal. We believe that the challenges that we are facing contemporary in nature and, given that the pipeline sulty and we believe that it's tempo in nature, we think that this is the appropriate level of cost reduction that we had to make.
We took to the decision and we completed that in June . So for now we believe this is the level of cost structure that we need to run the business, given the account environment.
Okay and then last question, this real quick, just trying to understand: it's your government customers that are dragging their there's their feet in. You're relating this primarily to the slow. Is there a reason, a specific reason? I know there's a lot of reasons out there, but there's a slowness and the conversion and I'm trying to point to is that COVID-19, is that the war, is that a combination of everything'm? I'm just trying to narrow down.
Yes So I don't think the COVID-19 is an issue anymore. I think that the COVID-19- now when is, while it's behind us, it's easier for us to meet customers face to face, and we do it extensively.
What we see generally is that it's related to. It might be related to supply chain- I give an example earlier in the call- and also potentially to macroeconomic and geopolitical situation, but customers will not provide us with the precise reasons, So it's our speculations.
Okay Thank you.
Thank you, goodbye.
Question press zero and one on'm your touch one phone.
And we have a question from Mike seeos from need him and company.
Guys thanks for getting me back on here. I just had a couple more questions. I wanted to find tune on my side and maybe just just to help the crowd here. But, B dav, could you remind us how much of your revenue each quarter typically comes from perpetual licenses versus the, the term-based licenses?
So actually, with most of our revenue coming from perpetual licenses, the 10 M base is a relatively minor.
Okay So that I'm assuming north of 50%, like is it close to inety percent or 90%? How high is that? Perpetual contribution?
It's the main majority like close to the more than everyventty 5% of our revenue coming from pertual. When we look at the software revenue.
Okay and when we think about the linearity of each quarter again, just can you help us think that third month each quarter, what is the typical revenue contribution to the total sales for the quarter? Is the third month of the quarter? Pull a 50%, is it 60%? How should we be thinking about typical cadence within each quarter?
So as I I mentioned like, we have two type of source of revenue in any given quarter: revenue that's coming from the backlog that is planned to deliver through the quarter and there is the revenue that's coming from what it's called book to ship order that we get within the quarter and are planned to be shipped through the in the same quarter. At any given quarter the change between the monthes can be a different. Usually, like any other software company, the last month of the quarter and obviously also the last weeks of the quarter.
Are highly pointed. Okay, and then one more question if I could. There was a comment, I think, in the prepared remarks that several customers were reducing their important substrictions with coodnim impacted your software services during the quarter. Could you help us think about what's causing customers to reduce?
That support and subscription piece and it. I'm guessing it's atypical in the fact that you're calling it out, but how should to be thinking about that?
So first of all, it's important to say that the customers are still with us, and those are active customers. Some of them, most of them, are with us for many years, and both multiple for solutions over the years.
For whatever reason they have, they decided to reduce spend in some areas related to support and subscriptionand to free some budgets to other purposes. It could potentially be that there byy other solutions from us. This this is a a possibility. This happens from time to time, but all those customers are still with us and continue to be important customer for us for many years.
Great Thank you.
Thank you, Mike.
Great Thanks very much, I think. Just a couple of quick ones here. The seven million of opex- just to clarify, that's for three q- says it should be something higher than that here in two Q.
It's for Q3. Obviously we don't, when we do that, the cost reduction it sometime, it like everything is effective. So for Q3, we are expecting non-GAAP operating expenses of $7 million.
Okay that's helpful. Thank you on that and then on the.
The maintenance question. I know you talked about the.
The historical precedent that happens from time to time where people cut back. Can you give us a sense? The last time maintenance declined 10% year-over-year historically?
No I cannott remember by a heart now. No, but it might be. Sometimes the customers decide to you move, shift budgets from relatively old solutions to new solutions or update and upgrade the new mony and modernisee the solutions. So this might happen, but I cannot. I cannot remember by heart. We can check it offline and come back to you.
That's great. Thanks very much. Thank you now and I now I'll turn it like to turn the call back over to Dean redlum for closing remarks.
Thank you operator, and thank you everyone for joining us on today's call. How 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, Ladies and gentlemen. That concludes today's call. Thank you for participating, and you may now disconnect.