Good day and thank you for standing-by. Welcome to the Cognyte First Quarter Fiscal Year 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please be advised that today’s conference is being recorded.

I would now like to hand the conference over to your speaker today, Dean Ridlon, Head of Investor Relations. You may begin..

Thank you, operator. Hello everyone. I'm Dean Ridlon, Cognyte’s Head of Investor Relations. Thank you for joining us today. I’m here with Elad Sharon, Cognyte’s CEO; and David Abadi, Cognyte's 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 cognyte.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 1995 and other provisions of the federal securities laws.

These forward-looking statements are based on management's current expectations and are not guarantees of future performance. Actual results could differ materially from those expressed in or implied by these forward-looking statements.

The forward-looking statements are made as of the date of this call, and except as required by law, Cognyte 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 Cognyte's 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, and other filings we make with the SEC.

The financial measures discussed today include non-GAAP measures. We believe investors focus on non-GAAP financial measures in comparing results between periods and among our peer companies that publish similar non-GAAP measures.

Please see today's presentation slides, our earnings release, and the Investors section of our website at cognyte.com for a reconciliation of non-GAAP financial measures to GAAP measures.

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

The non-GAAP financial measures the company uses have limitations and may differ from those used by other companies. Now, I would like to turn the call over to Elad..

Thank you, Dean. Welcome, everyone, to our first quarter conference call. I'm pleased to report a good start for the year with solid Q1 results across several key metrics. Revenue grew sequentially came in ahead of our expectation at $73 million.

I'm very pleased with our gross margins increasing by [800 basis points] [ph] compared to Q1 last year and gross profit increasing 7% year-over-year on a network adjusted non-GAAP basis. Free cash flow was very strong coming in at $70 million also ahead of our expectations.

Today, I'll start with a review of our first quarter of significant wins in market dynamics. Next, I'll discuss our differentiated technology and how we believe we're well-positioned to leverage the latest AI innovations to increase customer value. And lastly, I'll discuss our updated outlook for the year.

I would now like to review some of our significant wins in the quarter that highlight our differentiated technology and deep customer relationships. Our investigating analytics solutions help national security, law enforcement, national intelligence, and other security organizations to accelerate investigations.

The first deal is for approximately $8 million with an existing national intelligence customer for its mission to combat drug trafficking and other high impact crimes around the borders.

We believe we're selected because of our cutting edge technology that consistently outperformed solutions from other vendors during the variety of operational activities performed by this customer. The second deal is with an existing national security customer for approximately $9 million.

It represents an expansion of our customers' capabilities and functionality for its mission to address an increase of terror and criminal activities in the country. We believe we're selected due to our ability to accelerate security investigations and the long-term relationship we have with this customer.

The third deal is for approximately $5 million from an existing national security customer. The deal is to expand capacity and widen the operational capabilities of their solution to more effectively combat our activities. We believe we're selected based on our long track record of success in value creation.

The common thread we see through these wins is our innovative and differentiated investigating analytic solutions and our ability to help customers successfully create operational volume. Looking at the current market dynamics, we see a noticeable change versus what we saw last year.

A year ago, many customers suffered from budget uncertainties, which impacted the visibility and ability to plan ahead. This year, more customers are expressing confidence in the budgets and plans. Our customers increase confidence, support our expectations for the year, and is translating into more discussions about future needs.

For example, at recent industry conference, we saw a higher level of attendance and interest from customers. Overall, we clearly see more customers returning to normal behavior this year, compared to what was happening a year ago. Next, I would like to discuss our innovation and differentiation.

Our customers face unique challenges when it comes to investigating analytics and decision making. They have to fuse and analyze data at scale from a large variety of different sources, including sensitive data. The objective is to uncover insights quickly to accelerate investigations.

Cognyte is focused on investigating analytics in order to uncover hidden connections inside large diverse data sources. We have been doing this for many years by continuously improving the [investment analytics] [ph] and incorporating artificial intelligence models in our solutions. The recent developments in AI provide us with new opportunities.

We are currently focused on leveraging the latest innovation to enable our customers to derive even greater value from the data. We believe there are new market segments that face investigating analytics challenges that present us with good expansion opportunities over time.

We believe that our long-term market leadership in investigating analytics combined with our technological strength and our strong relationships with our large customer base across the globe position us well to leverage AI innovation and drive long-term growth.

Looking at our outlook for this fiscal year, given the improved visibility, we are raising our revenue guidance for the year to $303 million, plus or minus 2%, representing 7% year-over-year growth at the midpoint on an SIS Adjusted non-GAAP basis.

With revenue expected to grow by 7%, we now expect gross profit to grow faster at more than 10% year-over-year. As for cash flow, we are now expecting positive cash flow from operations for the full-year.

Looking beyond this year, given 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 large global customer base position us well for long-term growth.

To summarize, our customers continue to face significant investigative challenges across many used cases. Our mission is to help them accelerate investigations and mitigate a wide range of threats before they unfold. And our customers view us as domain experts and trusted partner.

We are pleased with our first quarter results and positive momentum and are raising guidance for the current year. Long-term, we target continued growth and margin expansion. Now, let me turn the call over to David to provide more details about our results and outlook.

David?.

Thank you, Elad, and hello everyone. Our discussion today will include non-GAAP financial measures. The reconciliation between our GAAP and non-GAAP financial measures is available as Dean mentioned in our earnings release and in the Investors section of our website.

Our website also includes a financial dashboard with a tab that details our historical results, excluding the divested situation intelligence solutions. We are pleased with our Q1 financial results as we add solid performance across revenue, gross margin, cash flow, and bookings.

The ongoing demand for our cutting edge investigative analytics solutions continued to be strong during the quarter and we continue to win deals from a variety of customers. Q1 revenue came in at $73,000,000, up $2,000,000 from Q4, Total revenue came in at $25 million, representing 6% sequential growth and 11% year-over-year growth.

Gross profit was up 9% sequentially and 7% year-over-year and our software gross profit grew faster than software revenue and was up 90% sequentially and 80% year-over-year. Q1 gross margin was 68.4%, up 250 basis points from Q4 and up 800 basis points from Q1 last year, primarily due to an increase in software revenue.

Our gross margin reflects our competitive differentiation and ability to create value for our customers. All of the revenue, gross profit, and gross margin growth rates, I just discussed are on SIS Adjusted non-GAAP basis. Our Q1 non-GAAP operating expenses were $55.7 million, slightly higher than the Q4 level.

Over the last few quarters, we improved our execution, better focused the organization, and improved our cost structure resulting in sequential revenue growth, higher gross margin and a significant reduced operating [cost] [ph]. Our Q1 non-GAAP operating loss was $5.5 million and non-GAAP adjusted EBITDA loss was $2.3 million. Turning to cash.

We generated a significant positive cash flow from operation of $19 million during Q1. The positive cash flow was driven by our improved financial results and strong cash collection. In terms of the balance sheet, we entered the quarter with cash of about $73 million and no debt. Our long and short-term RPO continued to be strong.

Total RPO at the end of Q1 was $581 million, and short-term IPO was $283 million, approximately the same level as of Q4. This healthy backlog and continued demand allow us to increase again our outlook for the current year. Turning to fiscal 2024.

For the full-year, we are raising our revenue outlook to $303 million, plus or minus 2%, reflecting approximately 7% year-over-year growth on an SIS Adjusted non-GAAP basis at the midpoint of the range.

Our revenue outlook is driven by our current view of the backlog deployment schedule for this year and assumes in similar macro environment conditions. Let me share with you more color on how we see the remainder of the year evolving.

For revenue, based on current short and backlog deployment schedule, we expect Q2 revenue similar to Q1 and the second half to be higher than the first half.

As a result of the strength and quality of our backlog, and recent booking, we're increasing our full-year non-GAAP gross margin expectation to 66.5%, an improvement of 150 basis points versus our previous outlook and year-over-year improvement of 375 basis points on an SIS Adjusted non-GAAP basis.

Gross margin will fluctuate between quarters, based on the revenue mix. For our non-GAAP operating expenses, we continue to expect total expenses of about $220 million for the full-year and to be relatively flat throughout the year.

Our improved cost structure combined with revenue growth and higher gross margins will allow us to improve operating margins over time. We remain on track to achieve our goal to drive positive non-GAAP adjusted EBITDA during Q4 of this fiscal year. As a result, we are now expecting a smaller annual EPS loss.

The midpoint of the revenue range, we are now expecting a $0.53 annual non-GAAP EPS loss, an improvement of $0.07 versus our previous outlook. Our non-GAAP EPS will fluctuate quarter-to-quarter, partially due to our non-GAAP tax expenses. We expect our Q2 non-GAAP EPS loss to be larger than Q1, primarily as a result of our non-GAAP tax methodology.

Turning to cash flow, given the strong cash flow from operation we generate in Q1 and improved financial outlook, we are now expecting positive cash flow from operations for the full-year.

We continue to expect about $10 million of payment for CapEx, partially offset by additional receipts from the SIS divestiture related to the holdback and price adjustment, which we expect to receive during the second half of the year.

To summarize, we are a market leader in investigative analytics and have a strong and lengthy track records with customer 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 technological innovation increased the operational value our customers generate for our solution and help drive demand. We are pleased with our first quarter results. We now expect about $303 million of revenue, plus or minus 2% and improving gross margin and profitability for FY 2024.

We're expecting positive cash flow from operations for the year. Looking beyond FY 2024, we believe that the combination of our cutting edge technology, large and loyal customer base, and the opportunity to address the needs of new customers position us well for long-term growth.

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

Operator?.

[Operator Instructions] And our first question will come from Mike Cikos of Needham.. Your line is open..

Hey, guys. Mike Cikos here. Appreciate the pronunciation on the last name there, but thanks for getting me on here. Wanted to start out with the quarter itself and then going over some of the upside and outperformance if you guys were able to deliver? First, obviously revenue was above what we had anticipated.

I know you guys were talking about flat sequentially versus this up, right? So, can you help us think about how the revenue came together in the quarter that was able to help you guys deliver that outperformance? That's the first question I'd like to delve into. And then I have a couple of follow-ups..

Yes. So, hi Mike. Yes, indeed, we see a healthy demand [positive momentum] [ph] in the market over the last two quarters already and we're continuing to win significant deals. The reasons for the – being ahead of expectations for Q1 is mainly related to backlog conversion scheduling. That's the reason we're able to deliver more within the quarter..

And just to pull it out because like your backlog bookings, right, if I think about the disclosures you guys provided today with RPO and current RPO climbing, from 4Q to 1Q by a couple of million dollars, right? So, when you're calling out that backlog conversion, should I interpret that as like backlog came in earlier than you guys had anticipated and you were still able to backfill that based on the fact that those RPO and current RPO balances climb sequentially? Like can you tease that out?.

Yes. So, maybe before talking about the RPO, I want to share with you a little bit about the market dynamics today because I think it's important. We discussed the active demand, discussed the positive momentum, we have strong backlog long and short-term, but we also see more and more customers that are more confident in the budgets and plans.

And the – actually the Q1 results are derived by accelerated customer readiness and for us being able convert more backlog into revenue within the quarter. And that's what, what we see. Actually, we see more and more customers in better position.

And this is the reason we were able to deliver more in Q1 and also raise the outlook for the year for [303] [ph]..

Got it and appreciate it. And I know that you guys had also, again, coming back to the RPO for a second. The RPO and current RPO, you guys said that's flat sequentially. If I go back to my notes, it's actually up by a couple of million dollars. So, call it flat on a percentage basis, but the – you did grow it from 4Q to 1Q.

One of the things that I'd like to hear, what has the typical cadence been? Like, if I go from 4Q to 1Q last year, the year before that, traditionally, is RPO and current RPO climbing sequentially from Q4 to Q1 or no?.

So, RPO is reflected by multiple elements, including multiple year support contract and other elements that can impact on the total.

There's no specific pattern like, we could see like that the RPO in general can grow from quarter-on-quarter, but overall our RPO is very strong and our ability to convert more backlog in Q1 and giving the Q1 overall result gave us the ability to improve our outlook for the year.

I believe that the RPO that we have, the short-term and the long-term support our future growth and it's very solid..

Thank you for that, David. I do appreciate the fact that you guys are talking about the 1Q outperformance with this backlog conversion and customer readiness, but at the same time, both RPO and current RPO balances remain strong. So, thank you for calling that out.

I think the latest item that I really wanted to talk to you, appreciate the color on Q2 and the fact that you're able to maintain that flat OpEx for the remainder of the year, which I know we had spoken about last quarter.

But if I look at the gross margins, that's the last item I really wanted to hit on with you guys before I turn it over to my colleagues. With gross margins, obviously, you guys were well ahead of expectations.

So, can we do a similar, I guess line of questioning versus what we just did with revenue? First, for gross margin, what helped drive that outperformance in Q1? And then second, what provides you the confidence to now take up gross margin, 150 bps for the year versus what we had anticipated previously?.

Yes. So, Mike, maybe I'll start and then David will continue. We do see higher quality of the bookings. So, the mix is better. Mix better means more softer revenue in the mix. And this drives higher gross margin overall. We do see also that we do expect that when revenue goes up, the gross margin will also improve over time.

About the specifics, David, do you want to add?.

Yes. I will elaborate on that. So, obviously we are very pleased with our gross margin in Q1 and also the ability to improve our outlook for the year. In total we believe that year-over-year will be almost 400 basis points, 275 basis points improvement.

The main reason behind it is the quality of the booking more software revenue, we see also in the mix in Q1 that our total software revenue were in a higher mix, it was almost 90% of our revenue. This trend that we are able to continue to deliver our – and we said our premium solution with high margin and drive the gross margin over time.

And now we are looking for the year with the 6.5%, and the main reason is the Q1 performance continue with last year and overall backlog which give us the confidence that we'll be able to drive it..

That's great. And I know we're talking about the mix. So, just to put a final point on it. So, the assumption is that I guess the mix will normalize a little bit for the rest of the year and that's why we should expect Q2 through Q4 to come down from the 60% level in Q1.

But at the same time the bookings quality is what's benefiting that overall gross margin.

Is that a fair characterization?.

Yes, that's fair..

Terrific. I'll turn it over to my colleagues. Appreciate it. Thank you so much..

Thank you..

Thank you, Mike..

And one moment for our next question. And our next question will come from Peter Levine of Evercore. Your line is open..

Great. Thanks guys for taking my question here. Elad, your commentary earlier on the call, you said better budget discussions seems like customers are returning to normal behavior of our last year.

Can you kind of just maybe dive into that a little bit deeper, explain to us, kind of what you're seeing on the top of the funnel conversion rates and then your expectations, I think, throughout the rest of the year in terms of the macro impacting your ability to further reaccelerate?.

Yes, sure. Thanks, Peter. So, we see a healthy demand and positive momentum and it's over the last two quarters already. We continue to win large deals. The backlog is strong as we discussed before and also our customers saying – most of our customers are saying that actually they are more confident about the budgets and the plans.

And we also expect the demand for our solutions to continue and increase and there are actually few drivers for that. First of all, we discussed it earlier in the call that customers challenges are becoming more complex and growing.

So, in order for them to be able to do the job, they need [monolithics] [ph] more and more capabilities related to dealing with big data and it's really important for them to get this technology. Also, our customer's objective is being able to accelerate in time the investigation, this is one. Second, to improve the accuracy of the investigation.

And third, to make it successful. Make it successful means to reach conclusive outcome. So, it's about time, strength of the insight that they generate from the solution, and being able to conclude investigations. And more analytics and more AI capabilities are extremely important for them, and actually present even greater value over time.

So, for that reason, we see the demand of customers improving along the way. And we believe that the recent developments will also generate more demand. I can give you an anecdote just to give you more color. We participated an industry tradeshow a couple of weeks ago in Europe, big one.

And actually, we saw that is well attended more participants than we used to see before. Many requests for meetings and demos, lots of interest in modernizing the technology with more analytics, more AI, customers are now unlike last year that they were talking about pressing current needs.

They were talking to us about future needs and what else needs to be done in their side in order for them to be able to accelerate their performance. So, all of those are very encouraging signs. So, I feel good about where we are today and I feel good about being able to continue growing in the long-term.

I hope this gives you some color about the dynamics of the market..

Yes. Thanks for the color. And maybe the last one is, good to see free cash flow tick higher.

Maybe just talk about the levers that you're pulling internally on the sales and marketing side, R&D side, what's the trade off? I mean, if you're going to deliver a little bit more leverage, maybe talk about what the trade-off is or maybe just, again, just emphasize on, kind of where you're cutting costs while still being efficient in terms of growth? Thank you..

So actually, just to make sure that we understood the question, the question is about our margin expansion and the ability to trade-off between increased investment on OpEx versus growth.

Is that correct?.

Correct..

So, last year we had like to make a lot of decision about our cost structure and versus the opportunity. And when we look at, we believe that the opportunity is here. We are playing in this market for a long time. We're market leader. We know our customer base for a long time. Our solutions are very innovative and customer love what we provide them.

We need to think about like cost structure and what is the right thing to do, you need to balance between your short-term and long-term. I think that we build a very well organized organization that allow us to be there when the growth will come and capture it.

I think that you can see that in Q1 the results we are growing, we are improving our margin, and then we look that it will continue over time..

Perfect. Thank you for the color guys..

I'm sorry. [Operator Instructions] Our next question will come from Shaul Eyal of TD Cowen. Your line is open..

Thank you. Hi, good morning, good afternoon guys.

Of the three contracts that you've mentioned during your presentation, are these all existing clients or are these also new clients? Any displacement opportunities that you're seeing out there?.

Yes. So, the examples that I used this quarter are existing clients. It’s upgrades of capacity and functionality. We did have also new logos there in the quarter, and we did give few examples large deals coming from new customers in previous quarters.

So, timing is changing from time-to-time whether it comes from existing or new customers, but those examples are with existing customers. And the reason they upgrade is that they have the solution, they have the value that they need.

And the drivers for expansions and upgrades are either functionality, adding more analytics, more AI in order for them to be able to accelerate what they need to do or they're dealing with more data. So, those are the drivers and we see it more and more with large customers that are expanding given further as the value is greater now with analytics..

Got it. Thank you for that. Maybe I want to maybe double-click on [indiscernible] prior reply to Peter, was alluding to the fact when growth returns.

What internal steps have you taken to be ready for what might be the next cycle not seeing the stability and maybe even reacceleration? What steps have you taken internally?.

So, given the situation, the macro environment last year, we took several steps. The first one was to focus on where the highest opportunities are in terms of market conditions, going to countries and to organizations that have more pressing needs, but also have the budget. This is one second.

We restructured organization and adjusted the operating expenses to where it should be.

And David mentioned that actually we balanced it in a way that in one hand, we are able to overcome this macro environment, the conditions of the temporary disruption, but on the other hand, continuing to innovate in order for us to be able to capture the growth when market is recovering and that's what [indiscernible] now.

We flattened the organization. We actually slowed down a roadmap that was more to modernize infrastructure and focusing more on value to customers and more analytics and actually focuses and realign the sales force to countries where we see more opportunities. So, we in one hand focused on the market.

If I have to summarize, we focus on markets and countries where we see the potential that is higher and they have budgets, one hand. On the other hand, adjusting the OpEx and prioritizing the activities to increase customer value versus modernizing their platforms. Those were the highlights for last year.

And I see now that I think we took the right decision. I see now that this is actually working for us..

Thank you. Appreciate the color..

Thank you, Shaul. And I would now like to turn the call back to Dean Ridlon for closing remarks..

Thank you, operator, and thank you everyone for joining us on today's call. Should you have any additional questions, please feel free to reach out to me and we look forward to speaking with you again next quarter. Thank you..

This concludes today's conference call. Thank you for participating. You may now disconnect..