Q3 2024 Cognyte Software Ltd Earnings Call

Okay.

Good day, ladies and gentlemen, thank you for standing by Mark Kaufmann third quarter fiscal year 'twenty 'twenty four earnings conference call.

At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need the Buzztime one one on your telephone.

You will then hear an automatic message advising you and me.

Note that today's conference maybe recorded.

I'll hand, the conference I'll, let you speak of house bandwidth one head of Investor Relations. Please go ahead.

Thank you operator, Hello, everyone I'm Dean Ridlon cognates head of Investor Relations. Thank you for joining us today.

Here with a large strong cognate CEO and David a body cognate CFO.

Before getting started I would like to mention that accompanying our call today is a presentation.

If you'd like to view these slides in real time during the call. Please visit the investors section of our website at Cognex Dot com click on the investors' tab.

Click on the webcast link and select today's conference call.

I would also like to draw your attention to the fact that certain matters discussed on this call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095 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 cognex actual results to differ materially from those indicated in these forward looking statements.

Please see our annual report on form 20-F for the fiscal year ended January 31.

2023.

Other filings, we make with the SEC.

The financial measures discussed today include non-GAAP measures.

We believe investors focus on non-GAAP financial measures and comparing results between periods and among our peer companies the published similar non-GAAP measures.

Please see today's presentation slides.

Our earnings release, and the investors section of our website at Cognex Dot com for a reconciliation of non-GAAP financial measures to GAAP measures.

non-GAAP financial information should not be considered in isolation from as a substitute for or superior to GAAP financial information, but is included because management believes it provides meaningful information about the financial performance of our business and is useful to investors for informational.

And comparative purposes.

The non-GAAP financial measures that the company uses have limitations and may differ from those used by other companies.

Now I would like to turn the call over to allot.

Thank you, Dan and welcome everyone to our third quarter conference call.

I want to start to thank our employees customers partners investors and friends for standing with Israel and for the expiring shelf solidarity.

Our Hearts go out to those affected by the hotel tuck in Israel and its consequences.

Congratulations to help make the world a safer place and he strives to meet this commitment every single day.

The company knows how to respond to challenging circumstances, and you've made the necessary adjustments to continue to effectively run the business.

We remain focused on our mission and we continue to deliver on our commitments to our customers, bringing them to highly advanced technology, they need to make the world safer.

Now turning to our results.

We are pleased with our continuing improvement in our performance over the last few quarters.

In Q3 revenue gross margin operating income and adjusted EBITDA came in ahead of our expectations.

Revenue grew both year over year and sequentially and came in at $79 million.

non-GAAP gross margin came in at 72% and gross profit grew faster than revenue.

We delivered positive operating income ahead of our expectations.

During the quarter, we continued to win deals with both new and existing customers recognize the threat for innovative technology and its ability to deliver to their highest value.

The visibility we currently have into our business together with our Q3 performance allow us to raise guidance again for the year.

Now I'll start with a review of several of our significant wins.

Then I'll elaborate on highway continues to drive valuable decision intelligence to our customers.

And lastly, I'll further discuss our updated outlook.

Let me share a few of our recent wins that help illustrate our advanced solutions are differentiated and why customers just Koch Knight.

Our investor is one of the leading solutions have national security law enforcement National intelligence that other organizations to accelerate at a far more effective investigations.

The first one is for approximately $50 million with an existing national security customer for its threat hunting mission to prevent cyber attacks on a national level.

We believe were selected because of our customer successful experience without previous deployment.

Our unique ability to fuels and enrich large amounts of data and deliver insights that are vital to identify cyber attacks on a nationwide scale.

The second win is for approximately $50 million for monetization take National law enforcement agency to conduct criminal activities.

It was a single source deal to upgrade their existing solution to address the customers' evolving needs.

We believe in one because of our high value, we deliver and track record of strong execution.

The third win is with a new federal agency to help them be anonymize illegal crypto currency transactions any real time.

The daily saw approximately $3 million and he's a multiyear subscription.

We believe the customer chose our solution because it quickly provides unique value using going are very very high and proprietary algorithms for pattern recognition within high volumes of data.

We continue our focus on expanding in the U S and Euro in Q3, we had two wins with new customers.

Both of these are competitive and we believe you wanted to close the far superior technology and the high value our solutions deliver.

Customer engagement remains a focus area for us.

Last month, we participated in meaningful berries, which is a leading security industry conference.

During the conference we had good customer traction and many productive conversations.

We believe that 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.

In our recent calls I gave a few examples of how our customers leveraging artificial intelligence that we continue to incorporate into our solutions.

Now further elaborate on how we are driving valuable decision intelligence to our customers.

Customers do with us as a strategic trusted partner that provides innovative solutions that help them improve the speed accuracy and success rate of the investigation and make timely decisions by generating critical insights from an almost amounts of diversified data.

We help them do this by utilizing decision intelligence capabilities.

And decision intelligence involved in advanced analytics, and AI, including machine learning technologies.

I agree that the fusion data virtualization and collaboration tools to augment and improve decision making.

The goal is to empower illness to make faster and more accurate decisions.

Our decision intelligence enabled solutions provide our customers a holistic accessible view of their data and deliver actionable insights that would be virtually impossible to obtain through legacy technology or Manuel analysis.

These capabilities provide significant value to our customers.

With increasingly sophisticated capabilities of bad actors together with the challenge of constantly evolving technology and data overload the ability to make smarter and timely data driven decisions that become even more critical and complicated.

Additionally, analytical tools tend to simply summarized strength of providing insights that are sometimes insufficient limit the ability to take actions.

We are all powerful analytic solutions are deployed these stores are often only available to a limited group of data scientists or technical experts.

Our solutions address those challenges by rapidly uncovering and delivering critical insights and making those insights accessible to technical and nontechnical experts, including analyst investigators decision makers.

It also empowers space on how to ask questions challenge ideas and make use of data driven insights rather than relying on historical trends, so gut instincts in making key decisions.

We continue to leverage the latest developments for commercially available models and our own AI research lab to further enhance our solutions ability to deliver impactful results to our customers.

We believe our ability to continue on the very latest innovations together with our domain expertise and investigating on analytics will further enhance the value we provide to our customers and our differentiation.

Turning to our outlook for this fiscal year.

Given our performance during Q3 and current visibility we are raising our revenue guidance for the year to $311 million, plus or minus 1%, representing approximately 10% growth at the midpoint on NSS adjusted non-GAAP basis.

With revenue expected to grow by about 10%. We now expect gross profit to grow faster at more than 20% year over ear on NSS adjusted non-GAAP basis.

We expect adjusted EBITDA for the year to be about $8 million.

Looking beyond this year, we believe that the combination of positive industry trends, our innovative technology, and our large global customer base position us well for growth and improving profitability.

To summarize our COO.

Customers continue to face significant ongoing challenges across many use cases and look to us for solutions that help them accelerate investigations make decisions faster toward decision intelligence and mitigate the variety of threats, our customers view us as domain experts and a trusted partner and frequently tell us that our solution significantly improve the result.

Enabling them to effectively perform their missions and make the world safer.

Our established long term relationship with customers continue to be a significant asset for us.

We are pleased with our third quarter results and our return to profitability and are raising guidance for the current year.

Looking beyond this year, we expect continuing revenue growth and further improvement in profitability.

Now, let me turn the call over to David to provide more details about our Q3 results and outlook.

David.

Thank you <unk>.

So everyone. Our discussion today will include non-GAAP financial measures.

Filiation between our GAAP and non-GAAP financial measures is available and then mentioned in our earnings release and in the Investor section of our website.

Our website also include a financial dashboard with the tab the detailed our historical results, excluding the divested situational intelligence solutions.

We are very pleased with the continuing improvement in our performance over the last few quarters.

Q3 revenue gross margin operating income and adjusted EBITDA came in ahead of our expectations.

We continue to win significant deals from both existing and new customer, reflecting the demand for our cutting edge investigative analytic solutions.

Q3 revenue grew both sequentially and year over year coming in at $79 $4 million up.

Up to <unk> million dollars from Q2, and $17 9 million from Q3 last year.

Gross profit grew faster than revenue and was up four 5%.

<unk> and 48, 4% year over year.

Q3, gross margin was 72% up 910 basis points from Q3 last year, primarily due to the increase in software revenue.

We are pleased with our software gross margin of 78, 9%.

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

Our Q3, non-GAAP operating expense were $54 $5 million similar to the level in previous quarter.

Our Q3, non-GAAP operating income was $1 $2 million and adjusted EBITDA was $4 6 million.

In the first nine months of the year, our revenue grew by $18 million, representing 85% year over year growth and our software revenue grew by $19 million, representing 10, 1% year over year growth.

Our year to date non-GAAP gross margin increased by 730 basis points to 69, 3% and our non-GAAP gross profit increased approximately 21% year over year as a result of our high software revenue and the value we deliver for our customers.

All the metrics I just discussed.

Adjusted non-GAAP basis.

We are pleased with our execution and we see trend of continuing improvement in our financial performance.

Our revenue growth, coupled with improved gross margin and cost structure and drive margin expansion and operating income.

During the first nine months of the year, we generated $4 7 million of adjusted EBITDA ahead of our expectation.

Turning to cash for the first nine months of the year with a positive cash flow from operation of $24 8 million.

The positive cash flow 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 $74 million and no debt.

Our longer term <unk> continued to be strong.

Total IPO at the end of Q3 was $585 7 million.

And shortly mark deal was $299 million.

In our view these healthy backlog combined with our continuing solid results allow us to increase our outlook for the current year for the fourth consecutive quarter.

For fiscal 2024, we're now raising our revenue outlook to $311 million, plus or minus 5%, reflecting approximately 10% year over year growth on the necessary as adjusted non-GAAP basis at the midpoint of the revenue range.

Now, let me share with you more color about our outlook.

We are increasing our full year non-GAAP gross margin expectation to 69% an improvement of 100 basis points versus our previous outlook and year over year improvement of 620 basis points on SaaS adjusted non-GAAP basis.

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

Given our strong performance in Q3, and our expectation for Q4, we now expect to have positive adjusted EBITDA of about $8 million for the full year at the midpoint of the revenue range, an increase of about $6 million versus our previous outlook.

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.

About $8 million for the year and additional improvement of $1 million versus our outlook last quarter.

In terms of EPS, we are now expecting a 24% annual non-GAAP EPS loss at the midpoint of the revenue range, an improvement of 9% versus our previous outlook.

Q4, non-GAAP EPS is expected to be loss versus again in Q3 as a result of fluctuation in our non-GAAP tax expenses.

We believe that the combination of positive industry trend, our loyal and global customer base together with our innovative technology, and our LC backlog positioning us well for growth and improved profitability.

To summarize we believe we are a market leader in investigative analytics and they are a strong and lengthy track record with customers around the world.

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

We believe these innovations increased the value our customers generate from our solution and hard drive demand.

The combination of our cutting edge technology, large and loyal customer base and the opportunity to address the needs of existing or new customers position us well for profitable growth.

We are very pleased with the progress we've made this year, including raising our annual guidance every quarter and improving our visibility and profitability.

Looking forward to next year, we expect another year of revenue growth and margin expansion and plan to provide guidance for FY 'twenty five during our Q4 earnings call.

With that I would like to end the call over to the operator to open the line for questions.

Operator.

Thank you, ladies and gentlemen to ask a question you will need to press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again please.

Please standby, while we compile the Q&A roster.

And we have a question coming from the line of Mike <unk> with Needham Your line is open.

Hey, guys congrats.

Congrats on the solid execution, given the couple of quarters that have been shrunk together at this point.

Good to see for the card back stories, so hats off on that I did want to start.

On the rare.

Revenues and I know that you guys are discussing the significant number of new deals or I'm, sorry, a significant number of deals that were won during the quarter, both from both new and existing customers can.

Can you help us think about what you guys are actually seeing out there in the market and where I'm going with this is that the deals that are being one.

For from both new and existing customers like you obviously have good line of sight visibility into these deals.

Our customers demonstrating increased confidence with respect to their budgets.

Sure.

Is it potentially is there any movement in sales cycles or sales velocity, increasing if you could talk through budget and sales velocity.

Those two would be would be helpful.

Yes, Thank you Mike.

Yeah.

So our customer mission is to increase the speed accuracy and success rate of investigations.

And the demand drivers.

We are a strong and solid which means.

First of all the bad actors that'd be more sophisticated they're.

Organized well funded using the best technology themselves.

And better at hiding.

Customers also have to deal with are there the volumes and diversity that are growing quickly.

And as a result, the complexity for uncovering critical insights.

And then conclude investigation successfully and on time is becoming more complicated for them and for that reason.

They need the investigative analytics technology.

It's a race you know because this is not a static situation customers.

You mentioned or existing customers for example, existing customers have to continue and buy more in order to scale up their solution to deal with more data and more diversified data and they also need to add more functionality in terms of more analytics boy I in order for them to uncover more insights out of their existing data sets.

And this is driving the need of the customers.

About the example, I gave earlier in the call.

And so we had two significant wins from our existing customers.

One of them added another use case for threat hunting.

It's related to our cyber threats on the national level.

The other one is an upgrade of functionality and having more of a capacity and capabilities.

To generate more insights.

And the third one is related to keep the currency. So you can see many different use cases and all of them require.

The technology, which means fewer zinc and analyzing data at scale.

With strong analytics to uncover hidden insights so we see that our many customers existing and new ones and Needless technology. The traction is very good at customers and we feel good about the growth opportunity.

Got it and while we're on the topline conversation around those customers as well.

Prepared remarks, you sided those two new customer wins.

In the United States, specifically right and good.

Good to hear that they were competitive wins and you guys went out on technology.

And the value proposition can.

And getting more of these deals ideally across the finish line.

Yes sure so.

First of all about the U S market, a we keep our decision to expand presence in the U S. We think that presents an opportunity for us.

The market penetration is obviously it takes time, it's a process, it's not like a repeat business from existing customers.

We had to adjust some.

To make some product adjustments, we have to work on brand awareness.

And mainly we have to push out our incumbents.

So we see interest in our products, we were able to deliver already for customers from previous deals we had.

And in Q3 actually won't be so is that we're able to.

And when deals.

Both are our competitive wins it was in two different states.

In both it was replacing incumbents and in both were born because of the high value our technology delivers.

We see it as a process, we believe that we'll be able to gradually go.

So the business in the U S over time.

About the general market I think you asked before we do see more and more countries.

Having better visibility into the budget.

And for that reason for this is a reason we were able to first of all too.

Yeah.

Are you ahead of our expectations in Q3, but also improved visibility and increased guidance give guidance raise guidance for Q4 and for the year.

I hope this answers Mike.

It did it did and maybe one more question before I turn it over to my colleagues, but I know good to see the gross margin guidance here.

Creeping up by another point for that 69% Youre talking to for the full year.

The gross margin growth actually.

Coming in at 20% plus on a year over year basis right. So I just wanted to get a sense is there any reason why from Q3, where you did 72% versus Q4.

Why gross margins would decline is there something we should keep in mind either from what you guys see in your backlog or maybe anything thats more seasonal in nature.

Any reason why that gross margin would be declining sequentially.

Yeah, Hi, Mike It's David.

In general gross margin May flex.

And you know maybe a gross margin cannot fluctuated between the quarter over quarter, but overall as you can see the trend is very positive you can see that over the last few quarters.

Our gross margin is going in there.

In the software and also on the overall leader proficient in services. So you can see that.

The Nymex behind the gross margin or the right dynamics and the more we're a revenue for software do you see the better gross margin in any given quarter there may be.

I'd said limited the fluctuation that can take place given the current mix that we see in the scheduling for Q4, we are focusing now 69 for the full year, but there is always opportunity to improve gross margin over time, and we believe that given the strength of our solution and the technology advantage that we have.

<unk>.

To the table, we can get there.

Gross margin in the right direction and continue with this trend overtime.

Got it thank you David and thank you a lot for the thoughtful responses I'll turn it over to my colleagues.

Thanks, Mike.

Yes.

Thank you.

As a reminder, ladies and gentlemen would you like to ask a question. Please press star one on your Touchtone telephone.

And Thats Star one to ask a question, we'll give it a moment.

Sure.

And our next question coming from the line of Peter Levine with Evercore ISI. Your line is now open.

Hey, guys. Thanks for taking my question here.

Yeah, My thoughts go out to you and your families at home.

Maybe the first question.

Appreciate the color on the quarter, but.

Anything that you can kind of help guide us for fiscal 'twenty five in terms of when how do you think about an inflection in the business and then think about the topline maybe just help us understand the visibility you have today and the confidence that back to your commentary around seeing re acceleration into next year, just maybe help.

Frame that out for you.

As we think about our models.

Yes, hi, Peter So where we have a strong global customer base, we have differentiated technology, we have a lot of traction with customers.

We do see the.

Their needs.

We are pleased with the execution that you had in the last few quarters.

Have a good visibility into our backlog.

And it's reflected in Q3 performance and also in the guidance we gave.

We believe that our we should see more growth and margin expansion over time and the reason for that is that the demand drivers I mentioned before which is the bad actors that are becoming more sophisticated data volumes that are growing and customers have to scale up their solutions.

And also the fact that it's a more difficult to uncover hidden insights and actually prevent threats before downfall is becoming more and more complicated. We see this demand those demand drivers continue and become even stronger over time and for that reason, we believe that Oh, we can continue.

And growing top line and with margin expansion.

Going forward.

About the specifics of the numbers for next year, we'll give guidance for FY 'twenty five and next earnings call in Q4.

Perfect and then maybe share with us in terms of metrics for the business.

Net retention gross retention in the quarter or any changes that you've seen.

Nine months into your fiscal year, you can share with us any color in terms of metrics that get you more excited about the outlook.

Hi, Peter.

It's David.

Format Kpis perspective.

It was no I would say there was no any indicators that show us at attempting go where it goes to the wrong direction actually the opposite we do see it.

Positive trend.

Overall.

We continue to deliver and execute to our plan and if our expectations on top of that we were able to.

And.

Bringing the backlog to higher levels of overall, if you look at the Kpis that we're looking on the day to day, we're seeing a positive trend.

We are not sharing Gary.

Customer retention and stuff like that but in general we do see strong renewals and then positive trend across the execution.

Perfect.

You very much for taking my questions.

Thank you Peter.

Thank you and again, ladies and gentlemen of BMO question. Please press star one one.

Yeah.

And I see no further questions at this time I'll turn it back to Dan <unk> for any closing remarks.

Thank you operator, and thank you everyone for joining us on today's call. We are planning to visit the U S. Early next month and hope to see some of you then.

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

Ladies and gentlemen that does conclude our conference for today. Thank you for your participation you may now disconnect.

[music].

Okay.

[music].

Okay.

[music].

Okay.

[music].

Okay.

[music].

Okay.

[music].

Okay.

[music].