Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Cognyte Third Quarter Fiscal Year 2024 Earnings Conference Call. [Operator Instructions] Please note that today's conference may be recorded. I will now hand the conference over to your speaker host, Dean Ridlon, Head of Investor Relations. Please go ahead..

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, 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 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 Elad..

Thank you, Dean. 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 inspiring show of solidarity. Our hearts go out to those affected by a horrible attack in Israel and its consequences.

Cognyte's mission is to help make the world a safer place and we strive to meet this commitment every single day. The company knows how to respond to challenging circumstances, and we'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 the 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 two 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 70.2% and gross profit grew faster than revenue, and we delivered positive operating income ahead of our expectations.

During the quarter, we continue to win deals with both new and existing customers, recognize the strength of our innovative technology and its ability to deliver to them high 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 how AI 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 how our advanced solutions are differentiated and why customers choose Cognyte. Our investigative analytic solutions have national security, law enforcement, national intelligence and other organizations to accelerate and perform more effective investigations.

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

We believe we were selected because of our customer successful experience with our previous deployment and our unique ability to fuse and enrich large amounts of data and deliver insights that are vital to identify cyberattacks on a nationwide scale.

The second win is for approximately $50 million from an existing national law enforcement agency to combat criminal activities. It was a single source deal to upgrade the existing solution to address the customers' evolving needs. We believe we won 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 the illegal cryptocurrency transactions in real time. The deal is for approximately $3 million and it's a multi subscription.

We believe the customer chose our solution because it quickly provides unique value using our innovative AI and proprietary algorithms for pattern recognition within high volumes of data. We continue our focus on expanding in the U.S. And during Q3, we had two wins with new customers.

Both deals are competitive, and we believe we won because of our superior technology and the high value our solutions deliver. Customer engagement remains a focus area for us. Last month, we participated in Milipol Paris, 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 the artificial intelligence that we continue to incorporate into our solutions. I will now further elaborate on how AI helps driving valuable decision intelligence to our customers.

Customers view us as a strategic trusted partner that provides innovative solutions that help them improve the speed, accuracy and success rate of their investigations and make timely decisions by generating critical insights from enormous amounts of diversified data. We help them do this by utilizing decision intelligence capabilities.

Decision Intelligence involves advanced analytics and AI, including machine learning technologies along with data fusion, data virtualization and collaboration tools to augment and improve decision-making. The goal is to empower humans 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 manual 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.

Traditional analytical tools tend to simply summarize trends or provide insights that are sometimes insufficient and limit the ability to take actions. With more powerful analytics solutions are deployed. These tools 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 non-technical experts, including analysts, investigators and decision makers.

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

We continue to leverage the latest AI 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 and embed the latest innovations together with our domain expertise in investigative 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% year-over-year growth at midpoint on an SCS 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-year on an SCS adjusted non-GAAP basis. We now 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 customers continue to face significant and growing challenges across many use cases and look to us for solutions that help them accelerate investigations, make decisions faster through decision intelligence and mitigate a variety of threats. Our customers' U.S.

domain experts and a trusted partner and frequently tell us that our solutions significantly improved the results 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 our 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, Elad, and hello, everyone. Our discussion today will include non-GAAP financial measures. The conciliation 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 include a financial dashboard with a tab that detail our historical results, excluding the divested Situation Intelligence solutions. We are very pleased with the 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.

We continue to win significant deals from both existing and new customers, reflecting the demand for our cutting-edge investigative analytics solutions. Q3 revenue grew both sequentially and year-over-year, coming in at $79.4 million, up $2.3 million from Q2 and $17.9 million from Q3 last year.

Gross profit grew faster than revenue and was up 4.5% sequentially and 48.4% year-over-year. Q3 gross margin was 70.2%, 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 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 overall revenue grew by $18 million, representing 8.5% 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 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 are on SAS 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 to 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 operations of $24.8 million. The positive cash flow from operation 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 long charter RPO continued to be strong. Total RPO at the end of Q3 was $585.7 million, and short-term RPO was $290.9 million. In our view, this 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 are now raising our revenue outlook to $311 million, plus or minus 5%, reflecting approximately 10% year-over-year growth on an SAS adjusted non-GAAP basis at the midpoint of the revenue range. Now let me share with you more color about our outlook.

We're 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 an SAS 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 of about $8 million for the year, an additional improvement of $1 million versus our outlook last quarter. In terms of EPS, we are now expecting a $0.24 annual non-GAAP EPS loss at the midpoint of the revenue range, an improvement of $0.09 versus our previous outlook.

Q4 non-GAAP EPS is expected to be loss versus a gain 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 positions us well for growth and improved profitability.

To summarize, we believe we are a market leader in investigative analytics and they have 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 increase the value our customers generate from our solution and help drive demand. The combination of our cutting-edge technology, large and lower customer base and the opportunity to address the needs of existing and new customers position us well profitable growth.

We are very pleased with the progress we 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 '25 during our Q4 earnings call.

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

Operator?.

[Operator Instructions] And we have a question coming from the line of Mike Cikos with Needham. Your line is open..

Hi, guys. Congrats on the solid execution here in a couple of quarters that have been shrunk together at this point. Good to see for the Cognyte story. So hats off on that. I did want to start on the 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 from both new and existing customers.

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 the deals that are being won for - from both new and existing customers, like you obviously have a good line of sight and visibility into these deals.

Are customers demonstrating increased confidence with respect to their budgets? Or 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 helpful..

Yes. Thank you, Mike. So our customer mission is to increase the speed, accuracy and success rate of investigations. The demand drivers are strong and solid, which means, first of all, the bad actors are more sophisticated. They're more organized, well-funded, using the advance technology themselves and better at hiding.

Customers also have to deal with data volumes and diversity that are growing quickly. And as a result, the complexity for uncovering critical insights and conclude investigations successfully and on time is becoming more complicated for them. And for that reason, they need the investigative analytics technology.

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

Customers - you mentioned existing customers, for example, existing customers, have to continue and buy more in order to scale up their solutions to deal with more data and more diversified data and they also need to add more functionality in terms of more analytics, more AI 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 examples I gave earlier in the call, -- so we had two significant deals from existing customers. One of them added another use case for threat hunting. It's related to cyber threats on a national level.

The other one is an upgrade of functionality and having more capacity and capabilities to generate more insights. And the third one is related to crypto currency. So you can see many different use cases. And all of them require the technology, which means fusing and analyzing data at scale with strong analytics to uncover hidden insights.

So we see that many customers, existing and new ones need this technology. The traction is very good with customers and we feel good about the growth opportunity..

Got it. And while we're on the top line conversation around those customers as well? I know in your prepared remarks, you cited those two new customer wins in the United States specifically, right? And good to hear that there were competitive wins and you guys went out on technology and the value proposition.

Can you give us an update on progress in the U.S.

market? How are we trending as far as building out pipeline and getting more of these deals ideally across the finish line?.

Yes, sure. So first of all, about the U.S. market, we keep our decision to expand process in the U.S. We think that it presents an opportunity for us. Market penetration is obviously 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 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, what we saw is that we are able to win deals that both were competitive wins. It was in two different states.

In both, it was replacing incumbents. And in both we won because of the high value our technology delivers. We see it as a process, and we believe that we'll be able to gradually grow 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 reason, we were able, first of all, to be ahead of our expectations in Q3, but also improve visibility and increase - give guidance or 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% you're talking to for the full year and 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 70.2% 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 that's more seasonal in nature? Any reason why that gross margin would be declining sequentially?.

Yes. Mike, it's David. In general, gross margin may reflect - in general, gross margin can fluctuate between 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 growing in the software and also in the - overall in the professional services.

So you can see that the dynamics behind the gross margin are the right dynamics. The more revenue for software, you see the better gross margin. In any given quarter, there may be, I would say, limited fluctuation that can take place. Given the current backlog that we see in the scheduling for Q4, we are focusing now 69% for the full year.

But it is always an opportunity like to improve the gross margin over time. We believe that given the strength of our solution and the technology advantage that we bring to the table, we can get gross margin on the right direction and continue with this trend over time..

Got it. Thank you, David. And thank you, Elad for the thoughtful responses. I’ll turn it over to my colleagues..

Thanks Mike..

[Operator Instructions]. And our next question coming from the line of Peter Levine with Evercore ISI. Your line is open..

Hi, guys. Thanks for taking my question here and I thought it's a great way to go out to you and your families back at home.

But maybe the first question appreciate the color in the quarter, but anything that you can kind of help guide us for fiscal '25 in terms of when - how do you think about an inflection in the business? And then when you think about the top line, maybe just help us understand the visibility you have today and the confidence that back to your commentary around seeing some reacceleration into next year.

Just maybe help us frame that out for - as we think about our models..

Yes, hi Peter. So we have a strong global customer base. We have differentiated technology. We have a lot of traction with customers. We do see their needs. We are pleased with the execution that we had in the last few quarters. We have good visibility into our backlog and it's reflected in Q3 performance and also in the guidance we gave.

We believe that we should see more growth and margin expansion over time.

The reason for that is that the demand drivers, as I mentioned before, which is the bad actors that are becoming more sophisticated, the data volumes that are growing and customers have to scale up their solutions, and also the fact that it's more difficult to uncover hidden insights and actually prevent threats before they unfold is becoming more and more complicated.

We see this - those demand drivers continue and becoming a stronger over time. And for that reason, we believe that 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 '25 in next earnings call in Q4 call..

Perfect. And then maybe share with us in terms of metrics for the business, net retention, gross retention in the quarter, any changes that you've seen nine months since 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. So from a KPI perspective, there was no - I would say, there was not any indicator that show us that something goes to the wrong direction. Actually, the opposite. We do see the positive trend. Overall, we are continuing to deliver and execute our plan ahead of our expectations.

On top of that, we were able to bring the backlog to higher levels. So overall, if you look at the KPI that we are looking on the day-to-day, we're seeing a positive trend. We are not sharing customer retention and stuff like that. But in general, we do see strong renewals and a positive trend across the execution..

Perfect. Thank you very much for taking my questions..

Thank you, Peter..

[Operator Instructions] And I see no further questions at this time. I'll turn it back to Dean Ridlon 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 concludes the conference for today. Thank you for your participation. You may now disconnect..