Cognyte Software Ltd.

Welcome to the Cognite Third Quarter Earnings Conference Call. My name is John. I'll be your operator for today's call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. During the question-and-answer session, if you do have a question, press the bar then 1 on your touchtone phone. Please note the conference is being recorded. And I will now turn the call over to Dean Ridlund.

Thank you, Operator. Hello, everyone. I'm Dean Ridlund, Cognite's new Head of Investor Relations. Thank you for joining us today. I'm here with Elad Sharon, Cognite CEO, and David Abadi, Cognite CFO. Before getting started, I would like to mention that accompanying our call today is a WebEx with slides. If you would like to view these slides in real time during the call, please visit the investor section of our website at cognite.com, click on the Investors tab, click on Webcast the 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, 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 20-F for the fiscal year ended January 31, 2021, filed with the SEC on April 29, 2021, 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 investor section of our website at cognite.com for 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. We're excited to have you join the Cognite team. Welcome, everyone, to our third quarter conference call. I'm pleased to report third quarter revenue and diluted EPS coming in above the high end of our guidance. Non-GAAP revenue was $119 million dollars, The non-GAP EPS was 21 cents. Adjusted EBITDA also came in strong at $22 million. During the quarter, we received many large deals, including multiple 7 and 8-digit deals, driven by our security analytics platform. As we approach completing our first year as an independent company, I'm pleased with the execution of our software strategy. We experienced sequential revenue growth in Q2 and Q3, and expect to finish the year with strong sequential growth in Q4. With six weeks left in the year, we are refining our annual outlook. We now expect $480 million of revenue, or around 7.5% year-over-year growth, with 10% gross profit growth, and $0.90 of EPS at the midpoint of our revenue expectations. David will elaborate on our guidance later in the call. Our growth strategy? is to empower security organizations with an open analytics platform to help them address many different security use cases. I would like to start my discussion today with a review of some of the large deals we received in Q3 that reflect the execution of this strategy. The first is an approximately $15 million deal from a national security agency that added new functionality. This is a good example of how our platform can help customers address their growing needs to accelerate complex investigations with our latest innovations in security analytics. The second and third examples are two deals, each of approximately $10 million in connection with capacity expansion of our platform. These two deals are good examples of how we help customers scale their solutions to analyze the increasing amount of data they capture and address evolving security threats. We believe these large deals reflect our laser focus of innovation in artificial intelligence and data analytics and our customers' ability to leverage our platform to address many different use cases. For example, a use case of our platform is accelerating organized crime investigations. Security agencies seek to identify members of criminal organizations, understand the organization's ecosystem, including the leadership, funding sources, and intentions and ultimately prevent crimes before they happen. In today's digital world, criminals leave behind many digital footprints that can be very useful in accelerating investigations. The amount of digital information that is available to security agencies is growing rapidly, but it's also very diverse and difficult to analyze in order to find actionable insights. Our platform is built with significant domain expertise and enable security agencies to leverage digital footprints to connect the dots and reach quick conclusions by fusing and analyzing data from a wide variety of sources. I believe organized cloud investigations is a good example of how we support many use cases of our analytics platform to help our customers address the evolving security challenges. As we look forward, We believe the security analytics market is in its early stages and we are well positioned for long-term growth. Many customers recognize that homegrown solutions can no longer keep pace with growth in data volume and diversity. They seek open analytics platform from a trusted partner that can support multiple use cases. Solutions that can fuse data at scale from different sources and generate high-quality insights faster to mitigate a wide range of security threats before they fully unfold. We have a long history of innovation that has enabled us to establish Cognite as a leading vendor of security analytics software. With nearly 1,000 people in R&D, primarily based in Israel, we are committed to continuing to lead the market with developing highly sophisticated tools for our customers. Our market leadership is not just about our technology. Customers also have confidence in our ability to deliver value based on our track record of innovation and previous deployments. We intend to maintain our market leadership by continuing to collaborate with our customers to stay on the cutting edge of artificial intelligence and security analytics to address the evolving needs of the world's most sophisticated security agencies. In summary, we are pleased with our third quarter results and are on track for a solid first year as an independent public company. And with the strong execution of our software strategy, we expect to deliver 10% gross profit growth for the year. Looking forward, we are in a large and growing market with positive industry trends and are well positioned for long-term growth. Now, let me turn the call over to David to discuss our Q3 results and outlook in more detail. David?

Thank you, Elad, and hello, everyone. Our discussion today will include non-GAAP financial measures. A consideration between our GAAP and non-GAAP financial measures is available, as Dean mentioned, in our earning release and in the investor section of our website. We had a solid third quarter with revenue, adjusted EBITDA, and EPS coming ahead of our expectations. Behind our results was the ongoing demand for our solution from both existing and new customers. During the quarter, we won many large orders, driven by our cutting-edge artificial intelligence and security analytics platform. In Q3, Nangap revenue came in at $118.7 million, just as EBITDA came in at $22.1 million, and diluted EPS came in at 21 cents. Year-to-date, Nangap revenue was $350.3 million, Adjusted EBITDA was $61.8 million, and diluted EPAs came in at $0.58. With three quarters behind us, I would like to provide an update on our software strategy and how it is positively impacting our financial results. Our software mix continues to improve this year as we sell less hardware and professional services. I'm pleased to report that our software strategy drove a double-digit increase in gross profit during the first three quarters, and we expect 10% growth for the full year on a non-GAAP basis. We've been steadily increasing the percentage of our revenue generated from software over the last few years, and we believe that gross profit is an important metric this year as we continue to drive higher software mix. The execution of our software strategy has benefits for both our customers and Cognite. For customers, by deploying our software platform, they benefit from faster innovation, easier installation, and frequent technology updates. For Cognite, shifting to higher software mix is improving our financial model, growth opportunities, and competitive differentiation. Let me now discuss our overall guidance. Our outlook for FY22 is $480 million of non-GAAP revenue with a range of plus or minus 2%, reflecting approximately 7.5% year-over-year growth. This revised outlook reflects certain recent events affecting the timing of deployments, including new travel restrictions in certain countries leading to a worsening of the pandemic, recent shortage of third-party components required to deliver spectrum of our software solutions, and other factors. We continue to expect profit to go faster than revenue, and in addition to double-digit gross profit growth, we expect adjusted EBITDA to go 15% year-over-year normalized for the spin-off dish energies, primarily related to establishing a public company infrastructure with standalone IT, finance, legal, and other public company and compliance functions. We also expect our non-GAAP diluted EPS to come in at $0.80 at the midpoint of the revenue range. Since the spin-off, we have built our public company functions to operate independently, including expanding our finance, legal, and IT teams. Along those lines, I'm pleased to welcome Vin as our investor relations executive. We are on track to deliver solid results during our first year as a standalone public company and expect to finish the year with 10% gross profit growth. Our open platform is being embraced by customers as it addresses a wide range of security use cases and allows for fast innovation to keep pace with evolving security challenges. Cognite is a leader in a large and growing market, and we are well positioned for sustained long-term growth. With that, I would like to hand the call over to the operator to open the lines for questions. Operator?

Thank you, and I'll begin the question and answer session. If you do have a question, press star then 1 on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. Once again, if you do have a question, press star then 1 on your touchtone phone. And our first question is from Mike. He goes from Needham & Company.

Hey, guys. Thanks for taking the questions here. I did want to circle up on the revenue guidance today. Understand that we are seeing this $10 million reduction at the midpoint based on the worsening travel restrictions around the pandemic and the third-party component shortages you guys are talking about. Can you help us think about how much of that $10 million is from pandemic versus the component shortages? Is it a 50-50 split or is it 64? How should we think about that?

Hi, Mike. Thanks for the question. So I'll try to give more color about the guidance. So there are a number of factors that we take into account when we develop our guidance. This quarter, there were several recent developments that we had to consider, including, as you've mentioned, more COVID-related travel restrictions in certain countries that are related to the emergence of the Omicron and the persistence of the Delta variant. Just as a reminder, we are a global software company, and for most countries we can deploy without travel. However, there are certain customers that require travel, and some of those are being impacted by COVID right now. Another factor, as you mentioned, is the recent shortage of third-party components that is required to deliver certain of our software solutions. Also here, I want to remind you that the majority of our revenue comes from software, However, there are certain solutions that require proprietary hardware to enable us to deliver our software. In the first year, as a public company, although we lowered our revenue outlook, we expect to overachieve our gross margin goal and meet our initial outlook for growing gross profit and EBITDA. And the gross profit is expected to grow by 10% and normally EBITDA by 15% year-over-year. I would also like to point out that while we reduced revenue because of our move towards high margin software, there is a very little impact on EPS. As of the quantification, we factor in many different factors into the guidance. We have uncertainties and upsides, and it's quite difficult to quantify each of the individual elements by itself. But you can assume that if we took down the guidance by $10 million, so there is an impact of a few million of each. But generally speaking, it's very difficult to color each one of the elements by itself. I hope this answers, Mike.

Yes, it helps. It does help. And for the travel restrictions around the pandemic, I just want to make sure I'm being clear on this. It sounds like it's primarily government mandates, right? It's not like Or maybe you can actually provide some color on this. Is it customers not letting you on-site to perform the installation out of caution on their part, or is this almost entirely related to government mandates?

Yes, so you're right. It's mainly related to governments. For governments, sometimes we are not allowed to work remotely because of certain regulations they have. So either we use our global presence, we have many employees around the world and many offices around the world, as you know. So when we have local forces, it's easier. But when it comes to other customers that either do not let us get in the site because of their own restrictions or we cannot fly because of our restrictions, this creates a little bit of delay in the deployment timeline.

Okay. Okay. And then the final thing that I wanted to touch on before I turned it over, for the component shortages that we're seeing, I'm curious, how long has this been an issue for you guys, and can you explain which components you're experiencing those shortages in?

Yes, so in some use cases, we deliver our software embedded in network appliances that are acquired from third parties, and there is a global shortage of certain of their components. The appliances are a small part of the value of the deal. However, we can't recognize the revenue from our software until these appliances are becoming available. This is a recent development. We didn't see it before. We were able to have everything we need so far, and currently we see some delays and shortages in this respect, and we are working with our vendors in order to make sure that we have more inventory for future needs.

And that was going to be my last question for you on the topic. So if we are facing these shortages now, I understand that you're working with your vendors, but can you help us understand, have lead times gotten worse recently or are they getting better since you are working with investors, with investors, sorry, with your vendors? And then the follow-up would be, do you anticipate this being a one-quarter phenomenon or is this potential to extend for a couple of quarters at this time?

Yes, so as it is a recent development, we are working with them starting recently to make sure that it doesn't affect our business for the longer term. It's hard to tell whether it's weeks or months, but generally speaking, it's a recent development. Having said that, again, I want to remind you that the portion of the appliance within our overall business is not huge. So this is something that I believe we'll be able to overcome over time. And we are taking the necessary steps in the short term, again, working with vendors and trying to help them with our purchasing departments to find the missing components.

Great. Thank you. I'll turn it over to any of my colleagues. Thank you, guys.

Thank you.

Our next question is from Kirk Natterney from Evercore.

Great. Thanks for taking my question. This is Peter Levine in for Kirk. So to piggyback off of the last question, you know, considering the nature of the data that you deal with, when you talked about travel restrictions, you know, I get the implementation kind of you see a slowdown, but are you also seeing a slowdown perhaps in new pipeline builds because your reps can't go on site? Can you maybe kind of just decipher what what that looks like in terms of reps getting on site versus implementation delays?

Yes, so obviously as we all see, security challenges are only growing. We do see that, and we see a strong demand for our solution. The issue is more related to timing of deployments. Of course, flight restrictions also make it harder for us to approach customers for marketing activities. But for those areas, we are now running, I think, about two years already, doing those efforts remotely and quite successfully so far. So it's mainly related now to the deployment timing. I hope this answers your question, Kirk.

Fair enough. And then I know you haven't guided for fiscal 23 yet. I'm sure we'll get that next quarter. But can you give us maybe just a brief insight into kind of what you're thinking based on what you see today and how that's going to impact pipelines, deal flow for next year? Thank you.

So as you mentioned, it's David, Peter. As you mentioned, we will share our guidance for next year during our Q4 call. As you remember, in the beginning of the year, back in January, we showed you the three-year plan to call for WB revenue growth. At this point, we expect to be, this year, under 10% revenue growth, but with the 10% growth, and we'll share the guidance in Q4 call.

Great, thank you very much. Take my questions. Thank you.

Our next question is from Ryan Ruttenberg from Imperial Capital.

Yes, thank you very much. So looking at fiscal 23, it sounds like it's more pandemic related. Is there anything regional that you're selling into? Is it Africa? Is it all travel? Is it the U.S.? Can you talk about where it is regionally? Is your issue, or is it everywhere? Because it seems like it's more of a pandemic rather than a travel pandemic rather than shortages of equipment. Is that correct?

Yeah, so again, when you build the guidance, it's quite difficult to separate the different elements. But generally speaking, about the pandemic, Again, we do have global presence. We have offices around the globe. We have global engineers and Salesforce in all territories, actually, most of the territories. So it's not a wide issue for us. It's more temporary and changing because the dynamics is changing. It's also changing from one time to the other. to different countries. So it's country related. It's not full territory related. And it's also related to where we are, you know, we are present physically with our people or we have to walk by traveling to the site. So it's something that I would say is country specific and changing from time to time according to the pandemic changes.

Okay. And then just as a follow-up, as I'm looking at 23 and 24, as we have to, you're growing 7% or 8% this year. Is that reasonable to continue even in this current state of COVID and everything else to see that kind of growth in 23, or should we be seeing higher or lower? I know that I'm asking for guidance, but I just want some general directional guidance.

Yes, so it's David again. I will repeat myself a lot here. But, you know, we will share our F4E23 guidance during our Q4 call. But, again, in January, when we lay out the year, the three-year plan, we call for a data digit. And currently, as you mentioned, we are at 7.5% revenue growth with a strong gross profit growth. And we will provide guidance, you know, for this year. Okay, thank you.

Our next question is from Brad Reba from .

Great. Maybe just one more on fiscal 23. As you look at the first quarter, April, it's up against a pretty difficult comp. I think the hardest of the year. How should we just sort of think about that? Were there one-time items that positively impacted 1Q of this current fiscal year, which might lead to a situation where growth could be below trend line for 1Q? Thanks.

Thank you, Bert. Like I mentioned before, like when we look at all the aspects, like the impact, the way that we look at our guidance, and the The shortage in components is relevant for certain elements in the business which may have the impact of a few millions. And on the other side of the story, we have our ability to deliver and deploy our software also remotely. And we were able to do it in the last two years, actually. COVID has been with us for a long time and very successfully. And I believe that we'll be able to continue to do the same. As for the layout of next year, it's too early for us to put together. But as part of the Q4, we'll share some color how we see the year over, how we're going to see the year evolving over time.

That's great. And then just one quick follow-up. As you think about M&A, what's the potential for you guys to execute any of that in 23? Thanks.

Yes, so as of M&As, first of all, our plans, and by the way, historical results, were mainly relying on organic growth. We have 1,000 R&D people. We are innovating. We are not relying on M&As in order to execute our plans. Having said that, we have a history of tucking M&As in order for us to be able to create more value to our customers and accelerate the offerings. This is one area. And the other area is the more strategic M&As. We look at it as well in a case-by-case basis. When we find something relevant, of course, we consider it and take decisions. So to make the long story short and to summarize, tackling M&As, we always have pipeline for those. And when we find it relevant, we do it. For more strategic M&As, this is something that we look in the longer term, not for the shorter term.

Great, thank you very much.

Thank you.

And we have a question from Mike Secote from Needham and Company.

Hey guys, thanks for getting me back on. I did have just a couple more questions. The first, coming back to those component shortages, are any of these components sole sourced?

I would take it there, Mike. So actually, not the sole source, but we do have like, I would say like very common components that we are looking, and this is the reason that we are like, when we look at the challenge, we think that it's something that we can work on it. It could be like, you know, a DC converter or something like that, and you see two things that's happening. The time may change versus like in the past, could be like, you know, a few months, or two months, or a few weeks, versus now that it's becoming like a few months, or the price is going down. So overall, again, because our software in the end is working on , but in the certain cases, it's only specific cases that they require that. from a magnitude or from a challenge to provide it, I think that it's something that's relatively manageable.

Yeah, just to elaborate on this, Mike, most of our software is running on off-the-shelf, you know, code hardware. Some of it is running on certain appliances, and for those certain appliances, we have a few components that we face shortages. So it's something that is limited. It's not something that is... and reflect major portion of our business. I hope this helps.

It does. It does. And if I'm looking at the gross profit guidance for the year of 10% year to year, it actually implies that Q4 gross margins declined from Q3. And I'm wondering that sequential decline that's embedded in your guidance, Is that based on increasing costs for these components, or why would we be... Can you help us think about why we would be seeing the gross margins decline from Q3 to Q4?

First, Michael, it's David. In general, there is a slight decline. We're providing a high-level gross profit target, and as we shared, we're looking at a 10% gross profit. It mainly depends on the overall mix and best of that and our estimation where we're going to land. Obviously, you can see that over the first nine months of the year, we were delivering strong gross margin quarter over quarter, and we are very pleased from where we are from that perspective.

Great. And then just one other question. I know we're all thinking about fiscal 23 and fiscal 24. Maybe not specific guidance, but given that you guys have nearly a year under your belt now as an independent company, and we've referenced those three-year targets that you guys did put out at the time of the spin, is Cognite willing to reiterate or back? the fact that it still expects to attain those targets that were initially laid out at the time of the spin?

Again, in general you lay out the way that we see how everything is going to evolve. Obviously, as part of our annual processes, we look at everything from scratch and adjust the plan as required. We will share the detailed plan in Q4. And as you know, with Navix, you can see that things also change over the year. And we have a strong gross margin, which impacts our ability to continue to successfully invest in the business. So overall, the guidance will take place in Q4. OK.

Thank you.

Thank you, Mike.

And we have a question from Luis de Palma from William Blair.

Good afternoon.

Hi, Luis. Good afternoon. Good morning.

Thanks. What percentage of revenue during the quarter was recurring? And separately, what percentage of revenue in general overall is through those hardware appliance that you referenced, the component shortages.

Okay. So, Luis, David, thanks for the question. Our overall recurring revenue is around 50% of the total revenue. And if you look at the overall revenue debt element that may be delivered on the appliances is 20% of the total revenue. But if you want to look at the shortage of the revenue, it's a much smaller portion. We are not splitting the revenue, you know, per product, so it's not something that we can quantify it. But I do want to put kind of like a limitation of where we are with the shortage. So the majority of the revenue is software and the deployment costs. and this is something relevant for most of our solutions. In certain cases, we have software that is deployed on certain appliances, and within this group of products, we have certain things that we consider a shortage. It's not all over. It's very specific products, and on that We are monitoring it and increasing inventory level to ensure that we will not have to deal with the high level of shortage. But again, in the big picture, you can see level of inventory that we are working on is relatively low. The level of COGS within our solution is very small, and the cases that we are using appliances which we are facing shortages is also very limited. Great.

And related to the recurring revenue, I believe it has been a goal for the company to increase the percentage of recurring revenue, but I think over the past nine months, you know, the level has flatlined at that 50%. Is that true, or has there been any increase over the first nine months of the year in the recurring revenue percentage?

Back in January, when we shared our outlook for the upcoming year, we shared that we believe that the 50% of recurring revenue represents correctly where we are and the way we are offering. We shared some plans to add more overtime subscription revenue, which will have a positive impact, but this is not something that will impact on the short term. It's more a long-term initiative.

Okay. Thanks. And my last question, for the $10 million in guidance reduction, do you have specific visibility in terms of when you will recognize those deals that have been pushed back Or is it your expectation that that $10 million is gone forever and those deals were canceled?

Yes, so I'll take this one. No, it's not canceled. It's only a matter of deployment timing. One is related, again, to the pandemic, so it's hard to tell when exactly we can land in specific countries that we have to deploy. But the deals are there, and the customer needs the solutions. We provide a lot of value to our customers, and security challenges are only becoming more complex. So the need is there. It's not that the need has disappeared. And for that reason, it's only a matter of timing. In terms of how the shortage, as David mentioned, This is something that is specific to certain areas within the appliances that we need in order to deploy our software and deliver it. This is something that we believe, I can't say if it's a few weeks or a couple of months, but this is something that we believe. we'll be able to overcome. What we do proactively is again trying to approach our vendors in order for them to help us to increase the inventory. This is one. And second, by the way, we use our purchasing people to help them put our hands on the missing parts. So we do whatever needs to be done in order to resolve this matter. But again, customers are waiting, they need the solutions, and this is something that we'll deploy as soon as the ecosystem and the conditions will allow us. I hope this gives you the answer.

Okay, so did you say that you don't have visibility in terms of when you will receive the proper components to deliver that $10 million in revenue?

So, again, it's David. We are monitoring the relevant components that we are missing on, I would say, almost a daily basis just to see the timeline of certain things that we will get in the next few weeks. But overall, we need to increase our level of inventory because this is what we think is the right thing to do. As Elad mentioned, to predict now that it's a two-weeks issue or a four-weeks issue, but we believe that it's a very short-term one. So I don't think that it's going to stay with us for a long period. We do think that it's something that is currently under control, and there is a specific impact on specific solutions that we are selling.

And by the way, just to make sure we're all on the same page, It's not that the entire 10 million are related to the shortage, right? It's also related to flight restrictions, et cetera. So just to make sure that we understand the facts.

But ultimately, you said that it's all timing-related, right? Like there haven't been any cancellations?

Correct. No cancellations.

Great. Thanks. That's it for me.

Thank you all.

And we have no further questions at this time.

Thank you all.

And thank you, ladies and gentlemen. This concludes today's call. Thank you for participating. And you may now disconnect.