Cognyte Software Ltd.

Hello, everyone, and thank you for joining our first conference call as an independent public company. My name is Matthew Frankel, and I'm here with Elad Sharon, Cognite CEO, and David Abadi, Cognite CFO. Before getting started, I'd like to mention that accompanying our call today is a WebEx with slides. If you'd like to view these slides in real time during the call, please visit the IR section of our website at cognite.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 in this call may contain forward-looking statements within the meaning of the Private Security Litigation Reform Act of 1995 and other provisions of 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, Cognite 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 Cognite's actual results to differ materially from those indicated in these forward-looking statements, please see our annual report on Form 20F for the fiscal year ended Jan 31, 2021, when filed, and other filings we make with the SESB. The financial measures discussed today include non-GAAP measures. as we believe investors focus on those measures in comparing results between period and among our peer companies. Please see today's presentation slides, our earnings release, and the investor section of our website at Cognite.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 supplemental information regarding our operating results when assessing 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, Matt, and welcome everyone to our first conference call as an independent public company. With the mechanics of the separation from various behind us, we are now a pure-play security analytics software company, laser-focused on addressing the needs of our customers and accelerating our growth. I would like to begin today's call with a view for fourth quarter and fully resolved, followed by a discussion of market trends and outlook. In Q4, non-GAAP revenue came in at $125 million, slightly higher than we expected, bringing non-GAAP revenue for the year to $447 million. On a GAAP basis, Revenue was $124 million and $443 million, respectively. The first half of last year was impacted by global travel and other restrictions due to the pandemic. The business environment improved throughout the year. We experienced sequential revenue growth every quarter and entered FY22 with a higher software mix. With the first quarter almost completed, we are off to a strong start to the year. Looking back on FY21, we made significant progress with our software model strategy ahead of expectations, and I'm pleased to announce that we now view it as being complete. We expect that the completion of this transition will benefit our future growth rate. For the full year, 85% of our revenue came from software, driving gross margin in excess of 70%. We believe our security analytics platform strategy is resonating well with our customers and is driving many of our competitive wins. In Q4, we continue to win multi-million dollar deals, including two 8-figure deals, and I will discuss a few of them later in the course. Next, I would like to review our market opportunity. We estimate our total addressable market to be approximately $30 billion, growing 10% per year. We believe there are three trends behind the demand for security analytics software. First, governments and enterprise security organizations face more complex challenges and threats are becoming more difficult to detect. Second, there is a growing volume and diversity of structured and unstructured data, and data is augmented and spread across organizational silos. And third, leading security organizations seek open security analytic solutions, solutions that can fuse data at scale from different sources and generate high-quality insights faster to mitigate threats before they unfold. CookNight is well-positioned to continue to win large deals from existing and new customers based on our strength of our platform and our reputation for delivering value. Our technological strengths include an open platform, a broad portfolio, and the ability to generate real-time or near-real-time insights for a wide range of security use cases. Our brand leadership is based on a strong track record with more than 1,000 customers in more than 100 countries around the world for over two decades. Let me share with you a few examples of why we win. The first example is a $10 million queue for order from an existing customer. a national security agency that was looking to shorten the time of security investigation and realized they needed to modernize the technology that powered the investigation. They selected Cognite due to our open analytics platform and the ability to give them to keep pace with emerging threats. They also had confidence in our ability to deliver value based on our track record in previous deployment. This is a good example of a customer with challenges that are constantly evolving who recognizes the need to modernize technology that powers investigations with an open analytics platform. The order came from an existing customer consistent with our expectations that 90% of our revenue each year is reoccurring. We're also winning new customers due to our global leadership position. The second example is a $7.5 million order from a new customer, a ministry of public security that was looking to upgrade their capabilities by replacing their homegrown solution. Our solution has many benefits over homegrown solutions, including real-time insights, openness, and the ability to implement quick technology refreshments. We believe that many security organizations today still use homegrown solutions, and we see this as a significant opportunity for Cognite. A third example is a $6.5 billion win from another new customer. This law enforcement agency recognized the need to connect organizational silos to better achieve the strategic mandate. Behind this large win is our ability to fuse data from multiple data silos and apply advanced analytics to help them address multiple security use cases with an open platform. We believe these large wins reflect our differentiation and our ability to grow with existing customers and win new customers. Now that the activities related to the spin-off are behind us, we have shifted our focus to accelerating growth and extending our market leadership. We are a leader in a very exciting market, and we are well positioned to continue to deliver rapid innovation with our open analytics platform. For the current year, we expect around 10% revenue growth, and we target our revenue growth rate and margins to further improve in FY23 and FY24. Now let me turn the call over to David to discuss our Q4 results and outlook in more detail. David?

Thank you, Elad, and hello, everyone. Our discussion today will include non-GAAP financial measures. A conciliation between our GAAP and non-GAAP financial measures is available, as Max mentioned, in our Earnings Release and in the IR section of our website. As Elad mentioned, we have a strong finish to the year, with revenues that came in slightly ahead of our expectations. For Q4, non-GAAP revenue came in at about $125 million, and adjusted EBITDA came in at $24 million. Non-GAAP gross margin was 71%, up 200 basis points year-over-year. During Q4, we won multiple seven and eight-digit orders. from existing and new customer, driven by our ongoing demand for our analytic software and our strong differentiation. For the year, we generated $447 million of non-GAAP revenue, achieving sequential revenue growth each quarter. Non-GAAP growth margin came in at 71%, up 530 basis points year over year. Adjusted EBITDA came in at $89 million for the year, compared to variance reporting of $90 million. This $1 million difference was driven by variance cost allocation methodology when Cognite was still a part of variance. As Cognite was part of variance in FY21, we don't view EPS as meaningful for last year. Over the last few years, we have made investments to transition from a system integrator model to a software model. These investments are behind us as we completed the transition. We are now focused on accelerating our revenue growth with gradual margin expansion. We are pleased to report that last year, 85% of our revenue was generated from software, up 450 basis points from two years ago. Our long-term objective is to gradually increase the software mix up to a level approaching 90% of revenue. Over the last few years, we have seen a dramatic improvement in growth margin, reaching 71% on a non-GAAP basis in FY21, nearly 1,000 basis points since FY19. Going forward, we expect our growth margin to gradually improve consistent with the expected improvement in our software mix. Turning to FY22, I'm pleased to share that we have started the year with a strong first quarter. There are a couple of days left before Q1 ends, and our current forecast for revenue is between $113 and $115 million, representing 10% to 12% year-over-year growth. We also expect strong Q1 profitability with EPS of at least $0.15. For the full year, we expect $490 million of revenue, plus or minus 2%, reflecting approximately 10% year-over-year growth at the midpoint. We expect annual EPS to come in at $0.80 at the midpoint of the revenue range. Our confidence in the outlook has improved due to a strong Q1, faster delivery cycle as a result of our transition to software models, and a steady and gradual increase in recurring revenue. Let me share with you a little more color on how we see the year progressing. For revenue, we expect sequential increase throughout FY22. with year-over-year growth of over 10% in Q1, slightly below 10% in Q2 and Q3, and approximately 10% in Q4, bringing total revenue to $490 million. We expect gross margin to be up year-over-year to approximately 71.5%, with gross margin saturation quarter-to-quarter based on our revenue mix. For operating expenses, we expect Q1 to be slightly below Q4 fiscal year 21, followed by sequential increases throughout the year. As previously discussed, we expect OPEX to increase 15% for the full year, primarily due to the $15 million of separation-related disenergies. For taxes, we expect our cash tax rate to be slightly above 10%. For share count, we assume 67.25 million weighted average fully diluted shares in FY22. Personal calculation taking the full effect of the spin-off from variance. Based on these assumptions, We expect around 15 cents of EPS in both Q1 and Q2, increasing sequentially in Q3 and Q4, for a total of 80 cents for the full year. Our EPS guidance of 80 cents reflects $85 million of adjusted EBITDA, or 40% year-over-year growth in adjusted EBITDA, normalized for the spin-off dis-energies. In summary, Following the separation from Variant, we are excited about the journey ahead as a pure-play security analytics company. With cutting-edge analytics and AI technology and strong track record, we are well-positioned to grow in a large addressable market driven by favorable trends. For the current year, we expect 10% revenue growth, and 14% normalized adjusted EBITDA growth. Looking beyond the current year, we expect revenue growth to accelerate and our margins to continue to expand as we execute on our growth strategy. With that, I would like to hand over the operator to open the line for questions.

Thank you. We will now begin the question and answer session. If you have a question, please press star, then 1 on your touch-tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you use any speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star, then 1 on your touch-tone phone. And our first question comes from Dan Ise from Wedbush.

Yeah, thanks, and great quarter. Congrats to Stand Alone Company. So can you give us a little more detail, as much as you can provide on that replacement of the homegrown solution in terms of some of the dynamics there? Thanks.

Yeah, sure. Thank you, Dan, for the question. So many organizations have developed their homegrown solutions over the years, either with the help of their IT organizations or system integrators. However, with the pace of innovation required, closed systems and customized systems are simply unable to keep up anymore. These solutions are usually rigid. It's hard to maintain. It's hard to refresh. It's cost ineffective. And the value for the customer is declining over time. And this is becoming even a bigger issue for our customers because the threats are more sophisticated. Bad actors are also using more advanced technologies and better at hiding. And the potential damage is growing. So our security analytics platform is open, which means that it can be easily integrated with our customer ecosystem and its data sources. It can be frequently refreshed with advanced and innovative technology and keep pace. So in the example I shared with you earlier, this was exactly the situation. I gave three examples. The second one was related to a new customer. who wanted to replace its homegrown solution with advanced technology. We had a successful demonstration and the customer was happy with the results, with our ability to quickly connect to its data sources and being able to generate insights quickly. Given the fact that many security organizations are still using homegrown solutions that cannot address the evolving security and technology challenges, replacing them with our platform presents us with a significant opportunity. I hope this helps to frame things up for you.

That's great. That's great. And then just last question. Just talk about, like when you think about 22 and given pretty optimistic forecast, just walk through getting that level of conviction. Is it just visibility, pipeline? You're seeing more and more deals Can you talk about that just to give some color on the longer-term analog things?

David, do you want to take this one? Yes. Thank you, Dan. I will take it. So, yes, we have strong confidence for the year. First, we expect a stronger Q1. As I shared with you, we are aiming to be between like $113 to $115 million. Second, we see good demand and growth trends in the industry. And third, we have an open discussion with our customers and our customers looking for expansion. This kind of discussion increase our level of confidence and we have a high confidence on the coming year. And I want to remind you that about 90% of our business is coming from our existing customer base. And on top of that, we continue to win new customers. So overall, with this dynamics, we feel very good about this year.

Great. Thanks.

Our next question comes from Mike Seacoles from Needham & Company.

Hey, guys. Thanks for taking the questions this morning. I just had a couple of quick questions I wanted to touch on. The first, I know that you guys had mentioned the improving backdrop as we move further away from COVID-19, and I just wanted to get a better sense with where we are today. Are you seeing things spring up? Is that largely behind us at this time? And then maybe in conjunction with that, how does that affect... your ability to get in front of customers and maybe accelerate some of the steel pipeline that you're seeing from the demand in the market?

Yes, so related to COVID, COVID is changing the way our customers are working, which is positive, and let me explain why. We are working in a security market and historically our customers insisted to do everything on-site. This created the high dependency on travelers and making the sales and deployment cycles longer. COVID forced everybody to behave differently and shown us all that a lot can be done remotely. And the reason this is good for us is that it created the shortest cycle and the deployment cycle. And I think these are trends that will continue. So yes, we see it as an overall positive impact. As of the position at the moment related to COVID, you know that Q1 last year was tough for everybody globally. But we saw a relief along the year. We've had a sequential growth quarter over quarter. And we do expect this improvement to continue throughout FY22 as well.

Thank you for that. And then I guess just another question. I guess as it ties back to this most recent quarter that you're reporting, right? So I think you had mentioned that revenues actually came in slightly better than you had expected. And I wanted to get a better understanding. What drove that upside? Was it your ability to win customers quicker than you had previously anticipated, or maybe some renewal or existing customers coming in earlier than expected? I'm just curious what drove that upside as well.

So... It's David. So we had Q4 arriving slightly higher than what we expected, a couple of million. Mainly, as we mentioned, the demand is there, and we were able to deploy faster, and that allowed us to drive more revenue, and we were pleased with that.

All right, and maybe last question if I could, but if I'm just thinking about the forward outlook that you guys have provided with the expectation that revenues beyond fiscal 22 should be able to accelerate, I guess, can you comment on what's expected to drive that acceleration? Are you guys changing anything in your go-to-market motion, or is it just the recognition among some of these organizations with a internally built homegrown solution recognizing that they need to evolve what they have and go with an open platform to keep up with these evolving threats?

Yes, so the market is growing 10% a year and we plan to go faster over time. And the main growth barriers are related to, first of all, the growing demand for security analytics software. The challenges are more complex and analytics became even more crucial for our customers. On top of that, we see faster adoption of open security analytics platform and our transition to software model allows easier and faster deployments and updates and maintain high value over time. And we discussed that previously when we discussed the benefits of a homegrown solution that is a very good opportunity for us. The third one is related to our innovation. We are doing ongoing innovation and bringing innovation to the market, driving more value to existing customers so we can go deeper and wider. And as David mentioned, about 90% of our business comes from existing customer base. So we continue to develop and innovate in order to provide them with growing value. And the same goes for new customers. And we have about 1,000 professionals doing that. And we gain tens of new customers every year with the history of Land and Expand. When we start with new customers, they come to us and buy more and more solutions to address more and more use cases. And to summarize, the growth drivers are a combination of the growing demand, our advanced offering, the differentiation, and our go-to market for going deeper and wider for existing customers and land and expand for new customers.

Thank you very much. I'll see you before.

Our next question comes from Kirk Madden from Evercore ISI.

Great. Thank you. This is Peter Levine in for Kirk. So to piggyback off of your prior comment on pipeline strength, can you dissect how much of that might be net news versus upsell and that percentage mix shift? How is that trended throughout fiscal 21 and your expectations into fiscal 22? And then maybe perhaps, you know, what would have to go wrong for you not to hit your fiscal FY22 target? It seems like, you know, I think the trends are in your favor, but just curious to know what would have to go wrong. Thanks.

Thanks, Peter. There was, like, a few questions there, so let me try to take one by one and share, like, our view. During FYE 21, as you can see from the results, we continue with the improvement in our software mix, meaning that we were able to sell more and more from our software. And over time, like we improve our mix from around 82% in FYE 21 into, sorry, from FYE 20 into almost 85% in FYE 21. And these trends allow us to drive also better profitability. As for growth and confidence for our growth, so actually, Elad was like taking it in the previous question, but I repeat, the demand in the market is there, and we see more and more customers looking for the open software solution. And that allow us to address the demand by our solution that can be deployed in a faster way versus in the past. And overall, we believe that this will allow us also to achieve our FY22 targets. Does this address your question, or do you need more color?

No, that's fine. And then maybe just one more for you, David. Do you see a materially different post-COVID expense profile for Cognite as it relates to sales and marketing, travel expense, real estate? Just curious to know what your take is on that. And thank you again for the questions, and congrats on the quarter.

Thank you. So again, from an OPEX, we lay out how we believe that the next year will look from an OPEX perspective. Due to the dis-energies, we expect to have in FY22 an incremental $15 million that represents the cost of being an independent as part of the spin, which is mainly related to finance, IT, legal, and the compliance function. Taking that into consideration, we do see operating leverage by having normalized EBITDA that adjusted for these energies that will allow us to grow by 14%, approximately 14% a year over year. As for an overall OPEX, we do see benefit that the positive impact of COVID, which allow us to work more effectively and remotely with our customers and our drive better margins on the level of the growth margin and the overall margin on the on our organization. Any follow-up question or are you okay with that?

Yes, thank you. Thank you for taking my questions.

Our next question comes from Mike Sekels from the Edelman Company.

I did just want to circle up because I know you guys have commented that 90% of your revenue each year comes from existing customers. And I just wanted to see if we could get better clarity. Thanks again for the customer use cases earlier where you outlined some orders from existing customers. But can you give us a better idea what Are you driving deeper penetration within these existing customers, and can you help us understand that penetration rate? Or is it more a function of greater data ingestion into your platform as well as addressing the use cases that maybe you previously hadn't?

So about existing customers, as I mentioned before, the strategy is go deeper and wider, and then the existing customer can start small, addressing some specific use cases and go over time. And you can expand within the organization to different buyers. We can address, you know, investigation teams and later on address operational teams and grow within the organization. And you can take into consideration also the technology changes. The data is growing, so there is a need for expansion in scale. and expansions in analytics capabilities, et cetera. So this is how we grow within existing customers, and this works quite well, as you can see in the numbers. For new customers, it's a let them expand, and usually what we do is start small. It's not always like that. Sometimes we win large deals with new customers, and I gave two examples earlier today. But the strategy is then an expand, which means that we try to penetrate the organization and trying to address specific use case the customer might have and build the confidence with the customer and the trust and the relationship over time. And then it becomes a repeat business like the other existing customers when we give them more and more use cases that they can address with our platform solutions. That's the way we go within our customer base.

Great. Thank you for that.

Our next question comes from Brad Rebeck from CECL.

Great. Thanks very much. With respect to the 490, how should we think about the revenue breakout between the various line items? Should it be similar to the most recent fiscal year, or will it skew a little more heavily towards software? Thanks.

So the trend with the software is continued. Obviously, we were able to achieve already significant progress, and we ended FY21 with 85% of software. The expectation that it will improve slightly, and in the long term, we will get into the level of the 90%, but the S4, S4E22, I would, for modeling perspective, I would assume around 86% of our revenue coming from software.

Great. And then maybe one high level question. As you think about the business going forward, what changes the most now that you're a standalone public company? Thanks.

Yes, so we are now a pure play security analytics software company and there are a few main benefits I can share with you. The first one is brand reputation. We created the customer campaigns explaining to customers as well as partners our vision and strategy and we get a very good response from that. The second one is that we have been able to align the compensation plans of the management and the employees for driving the objectives of the company for this specific market. So we have better focus on our business objectives. And this will also help us with the employer brand to attract the best talents in the market and continue leading with cutting edge technology. So overall, we get a very good feedback from the market. We are very excited about our new chapter and the benefits the SPIN presents us with. So very good feedback so far.

Excellent.

Thanks very much. Thank you.

Our next question comes from Shaul Eyal from Cohen and Company.

Thank you. Good morning. Good afternoon, guys. Congrats on the first quarter as a publicly traded entity. Congrats on performance. I wanted to ask you about the status of your AI and predictive analytics product solution. What can you share with us on that front? And my follow-up will be, Now that you're a publicly traded entity, what's the thinking about pursuing some M&A strategies? Thank you.

Thank you, Shaul. I'll start with the first one, with the AI. In recent years, security challenges have become increasingly complex. We all read in the newspapers that well-organized and well-founded illegal entities are becoming harder to detect as they take advantage of the latest technologies to hide in the shadows. Our platform is designed with several components as its core. The first one is our customers have many different data sources, and our platform is equipped with advanced data fusion technologies that aggregate and enrich structured data, such as travel history, for example, and unstructured data, such as images, video, and social media from different sources. So that's the foundation for actually being able to deal with diversified data at scale. The next component is related to data analytics, including real-time modeling and statistical tools to help analysts accelerate investigations. The next layer is about AI and machine learning models. And we use it heavily in our platform to find hidden patterns in a massive amount of data. And last is intuitive workflows and advanced visualization tools. For example, our customers have the ability to drag and drop an interface and being able to configure the workflow without a need for coding or for our involvement. So to summarize, our platform produces insights using the analytics and the AI and machine learning to predict events and when and where they might take place. And generating those insights in real time or near real time, of course, is crucial for security organizations. Regarding the second question about M&A, so the security analytics software market is highly fragmented. And of course, there are many security companies, by the way, including in Israel, you know, there are many startups and other companies that are offering different security capabilities. Some of them can be synergistic to our business. We are evaluating tuck-in acquisition opportunities on an ongoing basis, and we'll make decisions case by case. Having said that, our strategy for now is to acquire opportunistically, but we also don't have big gaps that we have to fill, as we have about 1,000 professionals developing innovative technologies in-house. But again, if we find something that is interesting for us, we will take the decision accordingly.

Thank you so much. Good luck.

Thank you, Shel.

We have no further questions at this time.

Great. Well, thank you, everyone, for joining us today. And we look forward to speaking to you soon. Have a good day.