Q2 2024 Cognyte Software Ltd Earnings Call

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 purpose.

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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 allot.

Thank you, Dan and welcome everyone to our second quarter Conference call.

I am pleased to report that our positive momentum continues.

During the quarter, we continued to win deals with existing customers as well as with new strategic customers recognized the strength of our innovative technology and the value it delivers.

Our team executed very well and we had another quarter of solid results.

Revenue grew both year over year and sequentially.

Adjusted non-GAAP basis and came in ahead of our expectations at $77 million.

We also saw further improvement in gross margin, which was up 450 basis points over Q2 of last year.

Gross profit increased 13% year over here on NSS adjusted non-GAAP basis.

Adjusted EBITDA was positive for the quarter two quarters earlier than projected and.

And free cash flow was positive again this quarter due to the positive EBITDA and continuing strong collections.

Okay.

As a reminder, we took many actions last year to address the challenges, we faced and put the business back on track.

A focus of the business of your agenda divested SaaS adjusted the cost structure improved our capital structure and focused our investments on high potential opportunities in R&D and sales, including investing in AI.

We are realizing the benefits of our actions and improved execution.

We were again visibility resume guidance and have raised our outlook for the three quarters in a row.

We believe the positive momentum will continue and we are on a path of sustainable growth.

Now I will start with a review of our significant wins.

Then I'll share with you a few use cases that illustrates how our use of AI and other innovations differentiate our solutions and deliver significant value to our customers.

Lastly, I'll discuss our updated outlook for the year.

I will now review some of our recent significant wins that highlight our market leading differentiated technology.

Our investigative analytic solutions have national security law enforcement National intelligence, and other security organizations to accelerate and perform more effectively investigations.

The first one is for more than $20 million with a new national security customer for its mission to combat terrorism and national credits.

We believe we were selected because of our cutting edge technology, including how we leverage artificial intelligence, which delivers the impactful results.

We consistently outperformed solutions from other vendors during a variety of railroad operational scenarios.

In addition, we believe the customer valued our deep domain expertise and use us as a strategic partner to help them address their long term evolving needs.

The second win is for approximately $4 million.

From a new unit inside an existing national intelligence customer to conduct our activities.

We replaced an incumbent vendor and deliver selected because of our higher investigation volume.

The customer was seeking a set of solutions to address the evolving needs by enabling a broader group of users with various skill sets and expertise to maximize the intelligence value delivered.

The third win is with a new national intelligence customer for approximately $2 5 million.

To identify and prevent threats during operations.

The customer chose us after a competitive process due to our superior technology with.

We delivered better operational results during comprehensive field trial in different operational scenarios.

Also we recently had another new customer win in the U S.

And the incumbent vendor fallen competitive bid and we continue our focus on expanding in the U S market over time.

Our cutting edge solutions and deep domain expertise drive our leadership position and help us to continue to win significant deals from both existing and new customers.

Customers view us as a strategic partner that provides innovative solutions that help them generate timely critical insights from their data accelerate investigations and improve the speed and accuracy of their decision making.

In our last call I talked about our use of artificial intelligence in our solutions.

Now I'll drill down a bit more on our innovative technology and examples of a few customer use cases.

<unk> focus is on investigating analytics to help our customers improve the speed and success rate of their investigations by effectively analyzing enormous amounts of structured and unstructured data and generating timely impactful insights.

We have been doing this for many years and develop unique domain expertise and advanced technology in investigative analytics.

We believe that recent investments in AI technology is accelerating our innovations and positions us as a highly differentiated leader in the investigative analytics market.

We have embedded are modest and our solutions to improve velocity and accuracy of customer insights from data.

For example, the introduction of cutting edge AI technology for pattern recognition enables our customers to avail. Previously August cover well connections among entities under investigation, such as bad actors and financial transactions.

This technological advancement important investigation success rates and accelerate time to resolution.

Customers are reacting positively to these recent advancements.

To help illustrate customer benefits of our solutions, let's look at to security use cases.

The first use case is for combating drug trafficking.

<unk> phosphate UNH spread responsibility of detecting and preventing drug trafficking activities amongst major international borders.

This really sits where it often involves organized groups that exploit well established routes conceal their identities and attempts to master illegal activities as legitimate ones.

Within our solutions are modest play a pivotal role in expediting the analysis of our customers' data sources.

Our software helps customers identify suspicious activities, such as unusual behavior and automatically trigger for users by using AI pattern recognition.

In addition, our use of AI enables our solutions to more quickly predict potential hotspots and routes for drug smuggling activities.

Those valuable insights have investigation units in closing cases faster and more effectively.

Yeah.

The second use case is related to detection and prevention of their activities.

Financial intelligence units are tasked with detecting and disrupting the flow of funds to tear organizations.

Telephonic involves the illicit financial transactions money laundering, and other covert activities that facilitate terrorist activities.

The challenge lies in the fact that these transactions often mask as donations charity and fraudulent purchasing of goods.

Operator: Non-GAP financial information should not be considered in isolation from as a substitute for or superior to GAP 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-GAP financial measures the company uses have limitations and may differ from those used by other companies.

Our solution utilizes algorithms to analyze vast amounts of financial transaction data from various customer data sources, including Bank records money transfer services and crypto currency exchanges.

The system utilizes a pattern recognition algorithms to continuously monitor these data streams to identify patterns and anomalies and financial transactions that may indicate potential term funding activities.

We continue to leverage the latest developments for commercially available models and our own AI Research lab.

Dean Ridlon: Now, I'd like to turn the call over to Elad. Thank you, Dean.

Elad Sharon: Welcome everyone to our second quarter conference call. I'm pleased to report that our positive momentum continues. During the quarter, we continue to win deals with existing customers, as well as with new strategic customers, recognize trends for innovative technology and the value it delivers. Our team executed very well and we had another quarter of solid result. Revenue grew both over here and sequentially on an SS-adjusted non-GAP basis and came in the head of our expectations at $77 million.

Looking ahead, we believe our ability to embed the latest innovations quickly together with our domain expertise and investigating analytics will further enhance our differentiation and the value we provide to our customers.

Elad Sharon: We also saw further improvements in growth margin which was up 450 basis points over Q2 last year and growth profit increased 13% over here on an SS-adjusted non-GAP basis. Adjusted EBDA was positive for the quarter, two quarters earlier than projected and three customers was positive again, this quarter, due to the positive EBDA and continuing strong collections. As a reminder, we took many actions last year to address the challenge that we faced and put the business back on track.

We continue to invest in AI to generate demand and contribute to driving long term growth.

Turning to our outlook for this fiscal year <unk>.

Given the importance of his ability and our performance. During Q2, we are raising our revenue guidance for the year to $307 million plus or minus 2% represented eight 5% youre very growth at the midpoint on NSS adjusted non-GAAP basis.

With revenue expected to grow by eight 5%, we now expect gross profits to grow faster if more than 15% year over year on NSS adjusted non-GAAP basis.

Given our positive adjusted EBITDA in Q2, and our improved revenue outlook and profitability. We are now expecting positive adjusted EBITDA for the year.

Looking beyond this year given the recent innovations in AI, we have identified potential opportunities to expand our business with both existing and new customers.

Elad Sharon: We focused the business on fewer agendas, the vested SIS adjusted the cost structure, improved our capital structure and focused our investment on high potential opportunities in our Indian sales, including investing in AI. We are realizing the benefits for our actions and improve the execution. We regain visibility, resume guidance and have a great outlook for the three quarters in a row. We believe the positive momentum will continue and we are on a path of sustainable growth.

We believe that the combination of positive industry trends, our innovative technology, and our large global customer base position us well for growth.

Before I summarize I would like to recognize the significant contributions than Bortner had metric organized over the last three decades in Israel is <unk> CEO and after the spinoff at Cognex Chairman of our board.

Elad Sharon: Now, I will start with a review of our significant wins and then I'll show it to you a few use cases that illustrates how our use of AI and other innovations differentiate our solutions and delivers the significant value to our customers and lastly, I'll discuss or update the outlook for the year. I will now review some of our recent significant wins that highlight our market leading differentiated technology. Our investigative analytic solutions have national security, law enforcement, national intelligence and other security organizations to accelerate and perform more effective investigations.

<unk> had a tremendous impact on the creation and growth of our business over the years and his wisdom and knowledge, we are a great asset of ignite.

I personally am appreciative for all his support and advice.

We then stepping down as a director I am looking forward to collaborating with all chunk in his new role as our chairman.

The rest of the board to continue to drive growth and profitability at cognizant.

To summarize.

Our customers continue to face significant challenges across many use cases and look to us to help them accelerate investigations and mitigate the wide variety of threats.

We have established long term relationships with many of our customers and they view us as domain experts and trusted partners.

Elad Sharon: The first win is for more than $20 million with a new national security customer for its mission to combat terrorism and national threats. We believe we are selected because of our cutting-edge technology, including how we leverage artificial intelligence, which delivers the impactful results. We consistently outperform solutions from other vendors during the variety of real-world operational scenarios. In addition, we believe the customer valued our deep domain expertise and use us as a strategic partner to help them address their long-term evolving needs.

These relationships will continue to be a significant asset for us.

We are pleased with our second quarter results and positive momentum and are raising guidance for the current year long term, we expect continued growth and improved profitability.

Now, let me turn the call over to David to provide more details about our Q2 results and outlook.

David.

Thank you Ella and Hello, everyone. Our discussion today will include non-GAAP financial measures a reconciliation between our GAAP and non-GAAP financial measures is available and Dean mentioned in our earnings release and in the investors section of our website. Our website also includes a financial dashboard with a ton of detail our historical results.

Elad Sharon: The second way is for approximately $4 million for a new unit inside an existing national intelligence customer to combat terror activities. We replaced an incumbent vendor and delivered selected because of a higher investigation value. The customer was seeking a state-of-the-art solution to address the evolving needs by enabling a broader group of users, which varying skillsets and expertise, to maximize the intelligence value delivered. The third way is with a new national intelligence customer for approximately $2.5 million to identify and prevent threats during operations.

<unk> divested situation intelligence solutions.

We are very pleased with our improved performance over the last few quarters and Q2 revenue gross margin adjusted EBITDA and cash from operations came in ahead of our expectation.

We continue to win deals from both existing and new customers, reflecting the demand for our cutting edge investigating analytic solution.

Elad Sharon: The customer chose us after a competitive process due to a superior technology. We delivered better operational results during comprehensive field trials in different operational scenarios. Also, we recently had another new customer win in the U.S. We replaced an incumbent vendor following a competitive bid and we continue our focus on expanding in the U.S, market over time. Our cutting-edge solutions and deep domain expertise drive our leadership position and help us to continue to win significant deals from both existing and new customers. Customers view us as a strategic trusted partner that provides innovative solutions that help them generate timely critical insights from their data, accelerate investigations and improve the speed and accuracy of their decision-making.

Q2 revenue grew both sequentially and year over year coming in at $77 million.

At $3 7 million from Q1, and $4 2 million from Q2 last year.

About 87% of our revenue was software.

Gross profit grew faster than revenue and was up six 2% sequentially and 31% year over year.

Q2 gross margin was 69, 2% up 450 basis points from Q2 last year, primarily due to the increase in software revenue.

We are pleased with our software gross margin of 77, 4% and our professional services gross margin of 65%.

Our gross margin reflects our competitive differentiation and ability to continuously create value for our customer.

Elad Sharon: In our last call, I talked about our use of artificial intelligence in our solutions. Now, I'll build on a bit more of our innovative technology and examples of a few customer use cases. Ignat's focus is on investigating analytics to help our customers improve the speed and success rate of their investigations by effectively analyzing the number of amounts of structures and unstructured data and generating timely, impactful insights. We have been doing this for many years and developed unique domain expertise and robust technology in investigating analytics.

All the metrics I just discussed are on SaaS adjusted non-GAAP basis.

Our Q2, non-GAAP operating expenses were $54 2 million.

Similar to Q1 level.

Over the last few quarters, we spoke of the organization and improve our cost structure, resulting in sequential revenue growth higher gross margin and return to positive adjusted EBITDA and significantly reduced operating loss.

Our Q2, non-GAAP operating loss was <unk> 9 million and.

And adjusted EBITDA was positive $2 3 million.

Elad Sharon: We believe that recent investment in AI technology is accelerating our innovations and positions as a highly differentiated leader in the investigative analytics market. We have embedded their models in our solutions to improve velocity and accuracy of customers insights from data. For example, the introduction of cutting-edge internet technology for partner cognition enables our customers to reveal previously undiscoverable connections among entities under investigation, such as bed actors and financial transactions. These technological advancement in putting investigations success rates and accelerate time to resolution. Customers are reacting positively to these recent advancements.

We generated breakeven adjusted EBITDA for the first half of the year ahead of our expectation.

Turning to cash during Q2, we delivered positive cash from operations of $6 3 million.

For the first half of the year with positive cash from operation of $25 2 million.

The positive cash from operations was driven by our improved financial results and strong cash collection.

In terms of balance sheet, we ended the quarter with cash of about $77 million and no debt.

Our longer charter Marcio continued to be strong total IPO at the end of Q2 was $581 million in short term IPO was 282 million approximately the same level as Q1.

Elad Sharon: To help illustrate customer's benefit from our solutions, let's look at two security use cases. The first use case is for combating drug trafficking. Law enforcement units better responsibility of detecting and preventing drug trafficking activities, and on the measure in the national border. This series is where it often involves organized groups that exploit well-established routes, conceal their identities, and attempts to master illegal activities as legitimate ones. Within our solutions, AI models play a pivotal role in expediting the analysis of our customers' data sources.

This healthy backlog.

With our continued solid results allow us to increase our outlook for the current year for the third consecutive quarter.

For fiscal 2024, we're now raising our revenue outlook to $307 million, plus or minus 2%, reflecting approximately eight 5% year over year growth on the SaaS adjusted non-GAAP basis at the midpoint of the range.

Now, let me share with you more color on how we see the remainder of the year evolving.

Elad Sharon: Our software helps customers identify suspicious activities such as unusual behavior and automatically trigger alerts for users by using AI patterns recognition. In addition, our use of AI enables our solutions to more quickly predict potential hotspot and routes for drug smuggling activities. Those valuable insights help investigation units in closing cases faster and more effectively.

For revenue, we expect Q3 to be at a similar level to Q2.

We are increasing our full year non-GAAP gross margin expectation to 68% an improvement of 150 basis points versus our previous outlook and year over year improvement of 520 basis points on the SaaS adjusted non-GAAP basis.

Gross margin may fluctuate between quarters based on the revenue mix.

Elad Sharon: The second use case is related to detection and prevention of terror activities. Financial intelligence units are tasked with detecting and disrupting the flow of funds to terror organizations. Telefunding involves illicit financial transactions, money-long ring, and other covert activities that facilitate terrorist activities. The challenge lies in the fact that these transactions often mask its donations, charity, and fraudulent purchasing of goods. Our solution utilizes the algorithm to analyze vast amounts of financial transaction data from various customers' data sources, including bank records, money-transven services, and digital currency exchanges.

For our non-GAAP operating expense, we expect total expenses of approximately $220 million for the full year.

Our improved cost structure combined with revenue growth will allow us to improve operating margins over time.

Yeah.

Given our strong performance in Q2, and our expectations for the second half of the year. We now expect to have positive adjusted EBITDA of about $2 million for the full year at the midpoint of the revenue range.

We continue to work on optimizing our cash tax payments as a result of this work we're expecting to record a non-GAAP tax provision of about $9 million for the year versus our initial estimation of $12 million.

Elad Sharon: The system utilizes a part of the cognition algorithms to continuously monitor these data streams to identify patterns and anomalies in financial transactions that may indicate potential terror funding activities. We continue to leverage the latest AI developments from commercially available models and our own AI research lab. Looking ahead, we believe our ability to embed the latest innovation quickly together with our domain expertise in investigating analytics will further enhance our differentiation and the value we provide to our customers. We continue to invest in AI to generate demand and contribute to driving global growth.

In terms of EPS, we're now expecting a 33.

Annual non-GAAP EPS loss at the midpoint of the revenue range and improvement of 'twenty versus.

Versus our previous outlook.

Our non-GAAP EPS for the second half of the year is expected to be about zero due to fluctuation in our non-GAAP tax expenses. We currently expect Q3, non-GAAP EPS to be slightly positive and offset by similar negative non-GAAP EPS in Q4.

To summarize we're very pleased with our improved performance over the last few quarters.

To leverage our financial results and drive revenue growth and margin expansion.

Elad Sharon: Turning to our outlook for this fiscal year, given the importance of visibility and performance during Q2, we are raising a revenue guidance for the $370 million plus or minus 2%, representing 8.5% of your growth at the midpoint on an SES-adjusted non-gab basis. With revenue expected to grow by 8.5%, we now expect growth profits to grow faster at more than 15% of your revenue on an SES-adjusted non-gab basis. Given our positive adjusted EB-9 Q2 and our improved revenue outlook and profitability, we are now expecting positive adjusted EB-9 for the year.

Our healthy backlog, coupled with our continuing solid results allow us to increase our outlook for the current year for the third consecutive quarter.

We are a market leader investigative analytics and they are a strong and lengthy track records with customers around the world.

We continue to add capabilities and improve the performance of our solution by leveraging the latest technologies, including emerging innovation in artificial intelligence.

We believe this technology color innovation increased operational value our customers generate from our solutions and drive demand.

Elad Sharon: Looking beyond this year, given the recent innovations in AI, we have identified potential opportunities to expand our business with both existing and new customers. We believe that the combination of positive industry trends, our innovative technology and our large global customer base, position as well for growth.

Looking beyond FY 'twenty four we believe our financial results will continue to benefit from the recent positive momentum.

The combination of our cutting edge technology, large and loyal customer base and the opportunity to address the needs of existing and new customer <unk>.

<unk> us well for growth.

With that I would like to end the call over <unk> to open the line for questions.

Elad Sharon: Before summarized, I would like to recognize the significant contributions then Bodner had made to Cognite over the last three decades in his role as very CEO and after the spin-off as Cognite's chairman of our board. Then had a tremendous impact on the creation and growth of our business over the years and his wisdom and knowledge were a great asset to Cognite. I personally am appreciative for all his support and advice. With that stepping down as a director, I'm looking forward to collaborating with El Shunk in his new role as our chairman and with the rest of the board to continue to drive growth and profitability at Cognite.

Operator.

Thank you ladies and gentlemen, if you have a question or comment at this time. Please press star one on your telephone. If your question has been answered or you wish to move yourself from the queue. Please press star one again, we will pause for a moment, while we compile the Q&A roster.

Our first question comes from Mike <unk> with Needham Your line is open.

Hey, Thanks for getting me on the on the Q&A.

Mike <unk> from Needham and I have two questions here.

Elad Sharon: To summarize, our customers continue to face significant challenges across many use cases and look to us to help them accelerate investigations and mitigate the right variety of threats. We have established a long-term relationship with many of our customers and the viewers as domain experts and trusted partners. These relationships will continue to be a significant asset for us. We have pleased with our second-order results and positive momentum and a raise in guidance for the current year.

First to award a log.

Gratulation on that new customer win for over $20 million.

I wanted to ask can you give us additional insight I know that you discussed the use cases for AI like like drug trafficking as an example, but for this customer specifically that $20 million new customer.

Yeah.

With some of the use cases, where some of the AI capabilities that cognex has which which allowed you to win that customer.

Elad Sharon: Long-term, we expect continued growth and improved profitability.

And also any commentary you have as far as how competitive is it.

David Abadi: Now, let me turn the call over to David to provide more details about our Q2 results and outlook.

Competition was versus maybe other.

Solutions out there on the market that would be very helpful.

David Abadi: David?

David Abadi: Thank you a lot and hello everyone. Our discussion today will include non-gap financial measures. A reconciliation between our gap and non-gap financial measures is available and dimensioned in our annual aid and in the investor section of our website. Our websites also include a financial dashboard with a tag that detailed our historical results including the divested situation intelligence solutions. We are very pleased with our improved performance over the last few quarters. In Q2, revenue, growth margin, adjusted dividend and tax reform operation came in ahead of our expectation.

Yes sure Thanks, Mike.

So.

Our customers mission is mainly to increase the speed accuracy and the success rate of the investigations and time is of essence here.

And actually it was a competitive bid to.

<unk> will be theirs.

Yeah.

It was actually to be able to uncover hidden insights relations between entities and patterns and anomalies in behavior out of this data.

Over the competitive process, we were able to demonstrate over POC L.

David Abadi: We continue to win deals from both existing and new customers reflecting the demands for our cutting-edge and investigative analytic solutions. Due to revenue, growth was sequentially and year-over-year coming in at $77 million. At $3.7 million from Q1 and $4.2 million from Q2 last year. About 87% of revenue was software. Goats for fit grew fastest in revenue and was at 6.2% sequentially and 13.1% year-over-year. Q2 growth margin was 69.2%. At 450 basis points from Q2 last year, primarily due to the increase in software revenue.

Capabilities.

The competitors that do the same.

And actually over time, both of them were disqualified the last one.

The technical learnings.

The win was a competitive win a new customer and National Security won his main challenge was related to.

Investigate through activities and predict Daryl risks.

Data is a large amounts of data that he has to deal with and the idea is to be able to accelerate investigation in a way that they'll be able to find.

I actually hidden relations and he didn't behaviors that cannot be done with legacy technology <unk>.

David Abadi: We are pleased with our software growth margin of 77.4% and our professional services growth margin of 16.1%. Our Goats margin enslaved our competitive dispensation and ability to continuously create value for our customers. All the metrics I just discussed are on SIS-adjusted non-gap basis. Our Q2 non-gap operating expense were $54.3 million similar to Q1 levels. Over the last few quarters, we focused the organization and improve our cost structure. Resulting in sequential revenue growth, higher growth margin and return to positive adjusted EBDA and significantly reduce operating loss.

In this case it.

Was playing.

A major role.

In addition to being able to deal with the large amount of data and diversified data.

And also being able to do this in a very efficient manner in terms of the flows.

So this is a very important win for us and we're pleased.

To have another new customer a large one and also the others.

The wins from one of them is from another new customer and the other one is a new department of.

Both existing customers. So it's very good.

See that Delek us the customers appreciate.

With our technology differentiation and advanced technology.

David Abadi: I will give you two non-gap operating laws with $0.9 million and adjusted EBDA was positive to $2.3 million. We generated breakeven adjusted EBDA for the first half of the year and for our expectation. Turning to cash, during Q2 we delivered positive cash of operation of $6.3 million. For the first half of the year, we had positive cash of operation of $25.2 million. The positive cash of operation was driven by our improved financial result and strong cash collection.

That's great. Thank you a lot and congratulations again on that on that large customer win it.

If I just turn to the financials for a second and probably have a follow up here for David.

But one of the things that struck me when we were going through this is the spike in professional services revenue.

And I just wanted to get a better sense when we see.

<unk> revenues jumped like this is it fair to think that that is a reflection of the new customer wins that cognizant is talking to here or is there something that play where you.

You might have.

And incremental professional service.

Benefit.

Servicing let's say existing customers can you help us think about that as well as potentially what benefited that professional services revenue during the.

David Abadi: In terms of balance sheet, we entered the quarter with cash of about $77 million and no debt. Our long and short-term IPO continued to be strong. Total IPO at the end of Q2 was $581 million and short-term IPO was $282 million, approximately the same level of Q1. This healthy backlog, coupled with our continued solid results, allows us to increase our outlook for the current year for the third consecutive quarter. For fiscal 2024, we are now raising our revenue outlook to $370 million plus or minus 2%, selecting approximately 8.5% year-over-year votes on an SAS-adjusted land-gap basis at the midpoint of the range.

The second quarter here.

Yes, so in Q2 actually with slightly more revenue that's coming from professional services and they can also with the 60% of gross margin, but again like the majority of the revenue 87% of the revenue came from software when we looking from a trend perspective, you can add.

That's a given quarter a little bit more proficient in services, but if you look at the <unk> numbers, you will see that they almost day, 88%, 89% of the total revenue came from software. So I don't think that <unk>. It's just a fluctuation that may take place between quarter over quarter.

As for the wins the wins took place there.

David Abadi: Now, let me share with you more color on how we see the remainder of the year evolving. For revenue, we expect Q3 to be at a similar level to Q2. When creating our full year land gap, go smudging expectations to 68%, and improvement of one of the 50 basis points versus our previous outlook and year-over-year improvement of 520 basis points on an SAS-adjusted land gap basis. Go smudging may fluctuate between quarters best in the revenue mix.

This quarter, but obviously the revenue will be recognized.

Future period, usually these type of.

The deals that are larger deals can recognize over a.

Multiple quarters so.

Didn't impact the Q2 revenue.

Got it. Thank you and one quick follow up as well I know that you guys are taking up the.

Gross margins for the full year as well.

That improvement that we're seeing and it seems to be a reflection of the growing software revenue mix is there anything else that you guys are doing internally there hope that that software gross margin and I'm wondering if it's just a matter of tighter procurement from your vendors or.

David Abadi: For our land gap operating expense, we expect total expenses of approximately $220 million for the full year. Our improved cost structure, combined with revenue growth, will allow us to improve operating margins over time. Given our strong performance in Q2 and our expectations for the second half of the year, we now expect to have positive adjusted EBDA of about $2 million for the full year at the midpoint of the revenue range. We continue to work on optimizing our cash tax payment.

Engineering on your side to it.

They figure out a better way to drive efficiencies in your own cost in delivering these solutions to your customers or anything there.

On the software gross margins and what you guys are doing to drive that improvement would be beneficial as well and then I'll turn it over to my colleagues. Thank you guys.

So.

We are very pleased with the gross margin in H, one and Q2 and actually very pleased that we're able to increase our gross margin to 68% for the full year and it represents 520 basis points more than our initial plan.

David Abadi: As about $9 million for the year, versus our initial estimation of $12 million. In terms of EPS, we are now expecting a 33 cent annual non-gap EPS loss at the midpoint of the revenue range and improvement of 20 cents versus our previous outlook. Our non-gap EPS for the second half of the year is expected to be about zero due to fluctuation in our non-gap tax expenses. We currently expect Q3 non-gap EPS to be slightly positive and offset by similar negative non-gap EPS in Q4.

Looking at the trends and what drives the gross margin I think the gross margin is the clear evidence of our differentiator it solution and now the customer and appreciate.

The value we provided a lot mentioned the deals that we win although they are not in the revenue, but they are consistent with what we see in the market and how the backlog it looks we're seeing a.

Good.

That backlog with a high quality that will allow us to drive gross margin.

David Abadi: To summarize, we are very pleased with our improved performance over the last few quarters. We continue to leverage our financial results and drive revenue growth and margin expansion. Our energy backlog coupled with our continuing solid results allows us to increase our outlook for the current year for the third consecutive quarter. We are a market leader in investigative analytics and they have a strong and legacy track records with customers around the world.

So from that perspective.

We'll be able saw an impact in the future when we're looking at.

What change you could see that one of the things the change this quarter is the professional services and its based basically as a result of actions that we took to improve our professional services cost structure.

To allow us to be in a better position overall when we when we look at the gross margin.

David Abadi: We continue to add capabilities and improve the performance of our solutions by leveraging the latest technologies, including emerging innovation in artificial intelligence. We believe this technological innovations increase the operational value our customers generate from our solutions and that drives demand. Looking beyond F824, we believe our financial result will continue to benefit from the recent positive momentum. The combination of our cutting edge technology, large and lower customer base, and the opportunity to address the needs of existing and new customer, position us well for growth.

We are monitoring carefully if it's like from a cost per sale perspective, but I think that the major thing that impact gross margin is the ability to sell our solution as a premium solution the customer demonstration of depreciation.

Depreciation for this value that allow us to sell it in the right pricing.

Yeah.

Thank you very much.

Again, ladies and gentlemen, if you have a question or comment at this time. Please press star one on your telephone again, if you have a question or comment. Please press star one on your telephone.

Operator: With that, I would like to end the call over the operator to open the line for questions. Operator? Thank you, ladies and gentlemen. If you have a question or a comment at this time, please press star 1-1 on your telephone. If your question has been answered, you wish to move yourself from the queue. Please press star 1-1 again. You'll pause for a moment while we compile our Q&A roster.

And I'm not showing any further questions at this time I will turn the call back over to Dean.

Thank you operator, and thank you everyone for joining us on today's call with a.

A lot of David and I are planning to visit Boston and New York early next month and hope we can see some of you then.

In the meantime should you have any questions. Please feel to reach out to me and we look forward to speaking with you again next quarter.

Thank you ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

Michael Cikos: Our first question comes from Mike Seacos, and need him. Your line is open. Hey, thanks for getting me on the Q&A. Mike Seacos here from Need him. And I have two questions here. The first two, a lot. So a lot. Congratulations on that that you customer went for over $20. I wanted to ask, can you give us additional insight? I know that you discussed use cases for AI like drug trafficking as an example.

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Michael Cikos: But for this customer specifically, that $20 million new customer, some of the use cases were some of the AI capabilities that the cognite has which which allowed you to win that customer. And also any commenter you have as far as how competitive this competition was versus maybe other solutions out there on the market. That would be very helpful. Yes, so thanks, Mike. So our customer's mission is mainly to increase the speed accuracy and the success rate of the investigation and time is of essence here.

Yes.

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Michael Cikos: And actually, it was competitive bid with few bidders. And the need was actually to be able to uncover hidden insights, relations between entities and patterns and anomalies in behavior out of this data. Over the competitive process, we're able to demonstrate over POC capabilities, the competitors did the same. And actually, over time, both of them were disqualified and we were the last one to meet the technical learnings. So the win was the competitive win, a new customer, a national security one.

Yes.

Michael Cikos: His main challenge was is related to investigate terror activities and predict terror risks. The data is a large amount of data that he has to deal with. And the idea is to be able to accelerate investigation in a way that they'll be able to find an actually hidden relations and hidden behaviors that cannot be done with legacy technology. So where I, in this case, was playing a major role in addition to being able to deal with the large amounts of data and the specified data and also being able to do this in a very efficient manner in terms of user flow.

Michael Cikos: So this is a very important win for us and we are pleased to have another new customer, a large one and also the others are wins from one of them is from another new customer and the other one is a new department of existing customers. So it's very good to see that the customers appreciate our technology differentiation and advanced technology. If I just turn to the financials for a second and probably a follow up here for David, but one of the things that kind of struck me when we were going through this is the spike in professional services revenue and I just wanted to get a better sense when we see.

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Michael Cikos: The pro serve revenues jump like this is that they're to think that that is a reflection of the new customer wins that cognite is talking to you or is there something at play where you might have an incremental professional service benefit tied to servicing let's say existing customers can you help us think about that as well as potentially what benefited that professional services revenue during the second quarter here. So in Q2 actually with the slightly more revenue that coming for professional services and they came also with the 60% of growth margin, but again, like the majority of the revenue 87% of the revenue came from software when we looking from a trend perspective, you can have it's a given quarter a little bit more professional services, but if you look at the age numbers, you will see that they almost.

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Michael Cikos: 88 or 89% of the total revenue came from software, so I don't think that it's a pick it's just a you know fluctuation that may take place between quarter over quarter. As for the wins, the wins took place this quarter, but obviously the revenue will be recognized over a future period, usually this type of deals that are large deals can recognize over multiple quarters. So it didn't impact the Q2 revenue. Got it.

Michael Cikos: Thank you. And one quick follow up as well, I know that you guys are taking up the growth margins for the full year as well. That improvement that we're seeing it seems to be a reflection of the growing software revenue mix. Is there anything else that you guys are doing internally to help that that software grows margin? And I'm wondering if it's just a matter of tighter procurement from your vendors or engineering on your side to figure out a better way to drive efficient season in your own cost and delivering the solutions to your customers anything there.

Yes.

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Michael Cikos: On the software growth margins and what you guys are doing to drive that improvement would be beneficial as well. And then I'll turn it over to my colleagues. Thank you guys. So we are very pleased with the growth margin in H1 and Q2 and actually very pleased that we're able to increase our growth margin to 68% for the full year and it will present 520 basis point more than our initial plan.

Yes.

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Michael Cikos: Looking at the trends and what drives this growth margin, I think the growth margin is the clear evidence of our differentiator solution and all the customer appreciate the value we provided. And a lot mentioned, you know, the deals that we've been, although I'm not in the revenue, but they are consistent with what we've seen the market and how the backlog is looks, we're seeing a good backlog with the high quality that will allow us to drive the growth margin.

Yeah.

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Michael Cikos: So from that perspective, this will be also an impact in the future when we're looking at what change you could see that one of the things that changed this quarter is the professional services and it's based basically as a result of action that we took to improve our professional services cost structure, to allow us to be in a better position. Overall, when we look at the growth margin, we monitor carefully if it's like from a cost perspective, but I think that the major thing that input growth margin is the ability to sell our solution, the premium solution, the customer demonstration of our appreciation for this value that allow us to sell it in the right pricing.

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Michael Cikos: Thank you very much. But again, ladies and gentlemen, if you have a question or a comment at this time, please press star 1-1 on your telephone. Again, if you have a question or a comment, please press star 1-1 on your telephone. And I'm not showing the operator. And thank you, everyone, for joining us on today's call. Elad David and I are planning to visit Boston and New York early next month. And I hope we can see some of you then.

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Michael Cikos: In the meantime, should you have any questions? Please feel to reach out to me. And we look forward to speaking with you again next quarter. Thank you, ladies and gentlemen. That's conclude today's presentation. You may now disconnect and have a wonderful day. [inaudible] Peter Levine, John Cikos, Peter Levine, John Cikos, Peter Levine, John Cikos, Peter Levine, John Cikos, Peter Levine, John Cikos, Peter Levine, John Cikos,[inaudible] Peter Levine, John Peter Levine, John Cikos, Peter Levine, John Cikos,[inaudible] Michael Cikos, Peter Levine, Michael Cikos, Peter Levine, Matthew Frankel, Peter Levine[inaudible] Peter Levine, Matthew Frankel, Peter Levine, Matthew Frankel, Peter Levine, Matthew Frankel, Peter Levine, Matthew Frankel, Peter Levine, Matthew Frankel, Peter Levine, Matthew Frankel,[inaudible] Peter, Peter, Peter,[inaudible] Peter, Peter,[inaudible] Michael Cikos, Peter Levine, Matthew Frankel, Shaul Eyal, David Abadi, Elad Sharon, Dean Ridlon, Cognyte Software Michael Cikos, Peter Levine, Matthew Frankel, Shaul Eyal, David Abadi, Elad Sharon

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