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spk02: Today's conference is scheduled to begin shortly. Please continue to stand by, and thank you for your patience. Thank you. Thank you. Thank you.
spk03: Good day and thank you for standing by.
spk02: Welcome to Cognite's fourth quarter and fiscal year 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during a session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Dean Ridlon, Head of Investor Relations. Please go ahead.
spk06: Thank you, Operator. Hello, everyone. I'm Dean Ridlon, Cognite's Head of Investor Relations. Thank you for joining us today. I'm here with Elad Sharon, Cognite's CEO, and David Abadi, Cognite's CFO. Before getting started, I would like to mention that accompanying our call today is a presentation. If you would like to view these slides in real time during the call... please visit the Investors 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 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 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 January 31st, 2021, filed with the SEC on April 29th, 2021. And other filings we make with the SEC, including our annual report on Form 20F for the fiscal year ended January 31st, 2022, which we expect to file shortly. 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 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'd like to turn the call over to Elad. Elad.
spk05: Thank you, Dean. Welcome, everyone, to our fourth quarter conference call. In Q4, revenue was $125 million, about a $7 million sequential increase from Q3, and approximately $3.5 million below the midpoint of our guidance. Non-GAAP EPS was $0.16. Our results reflect the continued supply chain issues that we discussed during our last earnings call, as well as a lower conversion of our pipeline than we expected, at the time of our last conference call. I will discuss both issues in more detail in a minute. During the quarter, we won many large deals, reflecting the strength of our portfolio and the market needs for cutting-edge investigative analytics to address evolving security threats. Also, we continue to edit it well on our software strategy, and in Q4, our non-GAAP gross margins increased by 180 basis points year-over-year to 73%. I would like to start today with a review of our Q4 booking activity. In Q4, we continue to win large deals from existing customers that demonstrate the strength of our customers' relationships and how they look to us to help them address evolving security threats. The first is an approximately $10 million deal from a law enforcement agency that is replacing a homegrown solution due to our technology's ability to keep pace with evolving threats. This is a good example of how our customers are facing security challenges that are constantly evolving and come to us to modernize their investigative analytics technology with an open analytics platform. The second deal is for approximately $8 million in connection with the platform capacity expansion. This is a good example of how our customers look to us for the latest in investigative analytics capabilities to keep pace with the increasing variety and volume of data. The third deal was also for $8 million and represents an existing customer adding another solution for our portfolio and displacing incumbent vendor. This is a good example of how our customers are replacing solutions from other vendors due to the confidence and our ability to deliver value and our track record in previous deployments. These large orders from existing customers highlight our long-term relationships, the evolving needs of our customer base, and the confidence our customers have in our technology. We continue to win large deals in Q4 as in prior quarters. However, overall Q4 booking came in lower than we expected at the time of our last earnings call. While we still ended the year with significant RPO of $512 million, this RPO level is $40 million lower than the prior year. We identified two main issues contributing to lower-than-expected Q4 bookings, and I would like to discuss these issues and how we are addressing them. First is the supply chain issues we discussed during Q3 and that continued into Q4. As a reminder, on average, approximately 20% of our revenue comes from appliances solutions that consist mostly of software but include some hardware components. We are currently having difficulty sourcing some components which affect our ability to timely deliver backlog orders and impact our revenue. In addition to revenue impact, we have started to see some customers delaying placing new orders for other solutions until we deliver their prior orders. We are executing on a couple of initiatives that will address these supply chain issues. We are working with suppliers to build up inventory to minimize the impact of the component shortages. The cost of such inventory is minimal, but it is hard to find suppliers with available stock. In addition, we have started the hardware redesign and expect to finish the redesign by Q3 of this year. The new design will, among other improvements, include components that are more readily available. The second issue is lower pipeline conversion. We concluded that we need to strengthen our leadership team to drive better conversion of our pipelines. Looking back at Q4, we entered the quarter with a large pipeline, and based on analyzing the conversion performance, we do not believe we have lost any key deals to competition and do not see significant changes in the competitive environment. It's also important to note that most of Q4 pipeline deals that we expected to close were from existing customers. Our relationship with our customers remains strong, and we hope to close these deals in the future. Based on this analysis, we initiated a search, and I'm happy to report that in Q1, we already hired a new chief revenue officer. The new CRO brings to Cognite extensive experience in driving growth and leading large teams. We believe the actions we have taken will help mitigate the identified issues and support our long-term growth strategy. Next, I would like to discuss our visibility at the present time. In addition to the issues we just discussed, we believe the conflict in Ukraine may be causing a pause for some government customers around the world, especially in EMEA. While we do not derive any revenue from Russia, it's unclear at this point what the impact will be on our business this year, and it could result in more or less spending as customers may reprioritize their security budgets. At this time, our ability to focus this year with any level of position is limited, and we are not providing guidance. We will continue to monitor the market and review guidance as soon as practical. We are clearly disappointed that we are not in a position to provide guidance. New term, we have taken specific steps to address the issues we identified and we are confident in our long-term growth opportunity. Due to first, market fundamentals have not changed. The market is large and growing, security threats are increasing, and governments are seeking innovative solutions to address these threats. Second, we are a market leader with a long history of growth and innovation. Third, we have deep relationships with our customers around the world. And fourth, we have successfully migrated our business to a software model which drives gross margin well above 70%. Now, let me turn the call over to David to provide a bit more color about our results.
spk04: David? Thank you, Elad, and hello, everyone. Our discussion today will include non-GAAP financial measures. Reconciliation 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. Non-GAAP revenue for Q4 came in at $125.3 million, up slightly from the previous year, but below our expectations. due to the issues we experienced in the quarter that Elad discussed earlier. Our software strategy continued to have positive impact on our results. Our non-GAAP growth margin increased 180 basis points. Over the previous year, a non-GAAP growth profit came in at $91 million. We were able to drive non-GAAP operating income of $15.7 million. adjusted EBITDA of $20.3 million, and non-GAAP diluted EPS came in at 16 cents. I would like to mention that our EPS loss on a GAAP basis reflects a valuation allowance we took on our deferred tax asset in the amount of $12.7 million. This valuation allowance was triggered by the expected realization timing of our deferred tax asset. Cash used in operation in Q4 was approximately $7 million, mainly due to our booking activity, timing of collection, and lower advance payments. Now, let me turn to our full year results. Our full year results reflect the execution of our SOFIA strategy. Total non-GAAP revenue increased 6.4% year-over-year to $475.6 million. Non-GAAP software revenue grew faster than our total revenue at 8.5% year-over-year. Our growth margin increased 200 basis points over the previous year. And our Non-GAAP software growth profit grew 12.4% on the 8.5% software revenue growth. From a mixed perspective, Non-GAAP recurring revenue was 49% of total revenue, or $232.5 million, an increase of 3.2% year over year. And non-GAAP repeat revenue from existing customer was about 95% from total revenue, a similar level to last year. Regarding RPO, we ended the year with $511.6 million, down $40.1 million year over year. Our short-term RPO was $300.2 million, down $53 million year-over-year. Adjusted EBITDA for the year was $82.1 million. Non-GAAP diluted EPS was $0.74. Turning to the balance sheet, we ended the year with $163 million. million of cash, cash equivalent, and short-term investments. This balance includes $100 million we drew from our existing credit facility, which we put in place at the time of the spin-off for working capital and potential M&A. As we look ahead to FY23, let me summarize where we stand today. We believe the recent issues we are facing are short-term in nature. The fundamentals of our business are solid, the long-term opportunity remains intact, and we are well positioned to capture the go opportunity in front of us. With that, I would like to end the call over to the operator to open the line for questions. Operator?
spk02: As a reminder, as a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Mike Sikas with Needham & Company. Your line is open.
spk10: Hey, guys. Thanks for taking the questions here. I did want to circle up on the guidance, and really I'm thinking through. I know that you guys have been talking to visibility of the business and the amount of business coming from existing customers year in and year out and trying to juxtapose that to the, I guess, the lack of visibility that we're talking to today. I guess what has changed in the recent three months that really hinders you guys from giving us any guidance in the out year or even if we're talking about just a quarter? I would think most of that business is is well thought about as you guys have these existing relationships with your customers.
spk05: Thanks Mike. So actually let me remind you that there are three issues that we discussed earlier in the call. The shortage of components and live pipeline conversion and also the recent geopolitical developments that are unrelated to Q4 that are recent developments that combined impact visibility. we are taking proactive actions to improve our visibility and capture the long-term growth, but I want to give you more color about each one of those. So let's start with the shortage of components. We discussed it early in Q3 call. We saw that some of the components related to the appliances solutions are not available, and we took two action items. The first one is to increase inventory. Actually, we were able to do some of it, but it seems that It's difficult to find more stock, and we initiated a redesign of the hardware, so this is a temporary disruption that we expect to resolve later in the year. And this also, by the way, influenced new bookings from customers that are waiting for those orders to be fulfilled. When it comes to the conversion of the pipeline, it's important to say that we see no change in the competitive landscape. We didn't lose any customers, and in the examples I gave earlier in the call, we can see that customers come to us again and again, also with large deals. Analyzing the pipeline conversion, we do see a longer sell cycle. that is resulting in the lower than expected bookings in Q4. Actually, the decline in the RPO and the bookings weakness is mainly related to Q4. We did take a few steps. One of them is related to leadership. And also, we had early this year the global sales kickoff back in February. And we focused mainly on how we improve pipeline conversion. We didn't execute well and we are going to improve it. We did take some steps, including adjustment of the commission plan to incentivize faster deal closure. We are scrutinizing the pipeline and reprioritizing resources based on opportunities. And also now when the job restrictions have lifted, our team is with foot on the ground closer to customers, which is very important in our industry. On top of those, there is the recent geopolitical situation in Ukraine. As I mentioned in the call, we do not generate any revenue from Russia. However, we do expect that it will create disruption for sure for the short term, and for the longer term, it could create headwinds or tailwinds. Both directions are possible, and we are monitoring the situation. So overall, if you look at the visibility, taking all of them together and combined, this creates actually uncertainty. And because of that, we are not able to provide meaningful guidance. The range actually is too large, and giving guidance at this point of time is not, is impossible. Having said that, all those disruptions we believe are temporary in nature. I discussed the solutions for each one of them, and we believe that the long-term opportunity remains intact. I hope this answers.
spk10: Yeah, and if I just step into two of those real quickly, I know we spoke about the inventory last quarter. and the supply chain constraints continuing to be a headwind. But if I look at the balance sheet, your inventory balances are still lower even sequentially. Can you just give us an update? I guess, are we really waiting for the redesign to be completed in Q3 for that supply chain to normalize at this point?
spk05: Yes, actually the inventory is similar than what it was before, and the price of those components is quite marginal. The revenue impact is mainly for the software portion of this solution, so it's unrelated really to the inventory. Inventory is quite a marginal cost, so we don't expect the inventory to go up dramatically. It's small numbers.
spk10: Okay. And I guess if the question becomes you can't recognize that software revenue until you have the inventory and then can ship the appliance to your customer. And then I guess the knock-on effect from that is that your customers are not putting in new orders until they can get their prior orders delivered. So it's like a One follows the other. Is that the way to be thinking about this and what customer behavior is right now?
spk05: Yeah, that's correct. Some of the customers are waiting for the previous orders to be fulfilled. In order for them to generate value from the solution and for us to recognize revenue, we need to install our software on the appliance. Once the appliance is not available, we cannot do it. We cannot deliver and deploy, and the customers cannot generate value. And for that reason, some of the customers are holding new orders until they get the previous one. But we have a very good relationship with customers, so it's under control. We're managing it, we discuss it with the customers, and we maintain a good relationship with them. We believe it's a timing issue, and once it's resolved, the business will be back on track.
spk10: Okay. Thanks. I'll turn it over to my colleagues. Thank you.
spk02: Thank you. Our next question from Kirk Matern with Evercore ISI. Your line is open.
spk09: Hi, guys. This is actually Peter Berkley. I'm for Kirk. I appreciate you taking the questions here. So I guess I kind of want to double click on the conversion issues a little bit further. And I appreciate, you know, you calling out the longer sales cycles you're seeing and maybe some leadership changes you've made. But I'm just curious, are those deals that are sort of you know, getting pushed out a quarter and you'd expect to close next quarter, or are these more projects that are sort of getting delayed indefinitely?
spk02: Please remain on your line. Your conference call will resume momentarily.
spk05: Okay.
spk02: The conference call has now resumed.
spk05: Hi, Kirk. We had a communication issue. I'd appreciate it if you could repeat the question.
spk09: Sure, yeah, no problem. This is actually Peter Berkeley out for Kirk. I appreciate you guys taking the question here. So I just, I kind of wanted to dive in a little bit further into the conversion issues you called out. You know, and I appreciate you calling out the, you know, longer sales cycles and, you know, the leadership changes you're making. But I'm just curious, are these deals that are getting pushed out, you know, a quarter and you'd expect to close next quarter? Or is this more, you know, projects that are getting delayed more indefinitely?
spk05: Yes, so we don't think we lost any deal. The pipeline is solid. It's about timing of the execution and closing deals. I do believe that over time we were able to close the deals and get the deals with us. We are taking – actually, we didn't execute good enough. We'll have to improve the execution of the self-execution, and that's what we do, including refreshing processes, including refreshing the executive leadership, and other actions we take in order to accelerate sales.
spk09: Got it. That's all for color. And then maybe just one other quick one, if I could sneak in. Just as it relates to the geopolitical conflict in Ukraine, I just kind of want to make sure I'm understanding this correctly. So it sounds like it's more, at this stage for you guys, it's more uncertainty it's creating, you know, and not really, you know, whether it could potentially be a tailwind or it could potentially be a headwind moving forward. You know, obviously as security becomes kind of more front and center versus the tradeoff of, you know, potentially less spending or what have you. So am I kind of thinking about that correctly?
spk05: Yeah, so actually, first of all, I do hope that the situation with Ukraine will resolve soon. Yeah, actually, you captured it quite well. It could have a potential impact on our business, obviously, mainly in EMEA. It's a volatile situation. Customers, government customers, some of them are yet confused. It's recent development. They may reconsider budgets and priorities, and for us it can be headwind or tailwind. It's too early to say what the impact will be. Having said that, historically, after conflict, it's driving more demand for security, but for the short term, we expect disruptions.
spk09: Helpful. Thank you. Appreciate it.
spk05: Thank you.
spk02: Our next question comes from Brian with Imperial Capital. Your line is open.
spk08: Yes, thank you very much. So one of the comments that you guys made was on the market growing, and you expect to kind of grow with the market. So I'm just trying to get from maybe a long-term perspective beyond 23, looking at 24, 25. The market's growing, what, in the mid-single digits? Is that the right number?
spk05: So we believe that in regular days, the market is growing double-digit. Maybe I'll give some color about the long-term opportunity. When looking at the market, we see that market fundamentals have not changed. We discussed it before. The security threats are increasing. Data is growing in volume and diversity, and for that reason, the demand for investigative analytics solutions is healthy and expected to grow over time. We also don't see change in the competitive environment And if you look at Cognize with us, with other customers, with advanced technology and innovation, and the repeat business coming from existing customers, I think it's a good vote of confidence of customers in our technology and innovation. They recognize the value our solutions deliver. We also have good customer relationship and large global customer base, so we believe that the long-term opportunity is there. In addition to that, as you may know, our presence in the U.S. was minimal, and we launched an initiative to expand our presence in the U.S. So just to summarize, I do see that the long-term opportunity is there. The market is a healthy market. The security threats are growing. This will generate and drive demand over time, and for that reason, we believe that the long-term opportunity is there, and for that reason, we continue to innovate and deliver value to the market.
spk08: That's good. Thank you very much for the additional color. So maybe on the reason for you taking out the $100 million revolver, I think you drew that down in the period. and maybe as an additional question on the reason for that, now you're sitting on a whole lot of cash, do you anticipate being cash flow positive in fiscal 2023?
spk05: Yes, so at the time of the spin-off, we put in place a credit facility, and the reason for that was for working capital as well as M&A. Since the spin, we have drawn and repaid from the revolver several times, And in Q4, we decided to draw the entire revolver. And of course, you can easily return it if you want. And the question about the cash flow, yeah, we expect positive cash flow next year.
spk08: Great. Thank you very much. Thank you. Thank you.
spk02: Thank you. As a reminder, to ask a question at this time, please press star, then 1 on your touchtone telephone. Our next question comes from Brad Reback with Stifel. Your line is open.
spk07: Great. Thanks very much. I think during the prepared remarks, you talked about lower advanced payments for one of the reasons cash flow has declined so precipitously year over year. Can you go into a little more detail on that and what you think happens on that front in fiscal 23? Thanks.
spk05: Yes, so the main reason for that is the transition to a software model. And when we transition to a software model, we actually see less advances and also less perception of completion and recognition. And this is the main reason for that.
spk07: But hasn't that transition been going on for the last three years?
spk04: It's David. The transition is taking place for a few years, but obviously we had some projects from the past that we will continue to fulfill. And if you look over the last few quarters, you will see that we have less and less advances from customers. When you're working on a project model, it's very typical to get some advances in the beginning of the project. Once you move into a software model, It's less, I would say, the business practice. Obviously, we are still looking for advances from our customer, but this is something that it's more difficult, like, to convince the customer, given the fact that it's all about software.
spk07: Got it. Thanks very much. Thank you.
spk02: Our next question is a follow-up from Mike Sikis with Needleman Company. Your line is open.
spk10: Hey, guys, I just did want to circle up. I know that we're talking about the longer sales cycles today. Can you give us a sense how much longer are sales cycles today? Are we talking about another month to that sales cycle, or is it still elongating in the current environment?
spk05: No, it's not a dramatic increase. It's a slight increase, but we want to address it now and make sure that the pipeline conversion, we have a healthy pipeline. We want to make sure that the pipeline conversion is faster and that we can get a deal with us. And for that reason, we took the action items I mentioned before related to our execution of sales.
spk10: Okay, and can you remind us of that one more time? I know that you have the new chief revenue officer who you hired, but what other processes have you put in place to ensure that pipeline is converting at a more normalized level?
spk05: Yeah, so we have the new CR, which I mentioned before. We had the global sales kickoff back in February. This is an annual event that we have. This series was finally physical after two years of COVID. The focus of this event was specifically on how we convert pipeline faster. We also adjusted the commission plan of the sales team to incentivize faster deal closure. We are going through the pipeline and scrutinizing the pipeline in a way that we want to reprioritize our resources where the opportunities are, so actually to work more efficiently and effectively on the pipeline. And another thing we do is we push for more and more travels to see the customers face-to-face. It was actually impossible previously in certain territories and countries, and now when the travel restrictions have been lifted, We're able to be closer to customers, and that's very important. In our industry, in the security industry, face-to-face meetings are vital. So altogether, I think we took a few action items related to executive leadership, processes, focus, as well as being closer to customers. I hope this answers my question.
spk10: Yes. Thank you. Thank you. Thank you.
spk02: Thank you. This concludes the question and answer session. I'd now like to turn the call back over to Dean Ridlund for closing remarks.
spk06: 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.
spk02: This concludes today's conference call. Thank you for participating.
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