Cognyte Software Ltd.

Welcome to the Cognite first quarter FYE23 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 0 and 1 on your touchtone phone. As a reminder, this conference call is being recorded. And now I'll turn the call over to Dean Redland.

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 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, 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, 2022, 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 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.

Thank you, Dean. Welcome, everyone, to our first quarter conference call. Our Q1 results reflect the challenges we discussed during our last earnings call. We are clearly disappointed in our result, but we believe the challenges we are facing are temporary in nature and are taking steps to navigate the current environment, improve our execution and cost structure, and emerge stronger once conditions improve. Our Q1 on gap revenue came in at $87 million, a significant decline year over year. Later on, David will provide further details on our revenue and the impact it created on gross margin and overall profitability. Today, I would like to provide an update on what we saw in the market during Q1 and how we're responding. Let me start with a review of Q1 booking activity. In Q1, we continue to win large deals from existing customers that demonstrate the need for technology, the strength of our customer relationships, and how customers look to us to help them address evolving security threats. First is an over $15 million deal from a national security agency to expand its existing platform. Our customer is dealing with an increase in data volume, which is why they turn to us to expand the platform. This is a good example of how we help customers scale their solutions to address evolving security threats. The second order is from a law enforcement agency for over $5 million of our solutions to combat drug trafficking and criminal activity. This is a follow-on order after the customer was pleased with the operational results of a previous deployment of our solutions last year. The third order is also over $5 million for a national intelligence unit that purchased additional solutions to address terrorist activity along the borders. These large orders highlight the confidence our customers have in our technology and our ability to deploy large complex solutions. In terms of the overall Q1 booking activity, I believe it is useful to look at the sequential trend in our revenue performance obligations, or RPO, from Q4 to Q1. Just to remind you, RPO represents contracted revenue that has not yet been recognized. We finished last year with a total RPO of $512 million, and we finished Q1 of this year with an RPO that is a few million dollars higher. We use RPO as a proxy for a total backlog that is available for deployment over time. A sequential increase in backlog, even if small, is important to note given the year-over-year decline in revenue. Regarding backlog, as you know, we usually enter the quarter with the majority of our expected revenue already booked and included in RPO. This typically provides us good near-term visibility. However, in Q1, supply chain challenges presented uncertainties to our ability to deliver on our quarterly expectations. Let me share an example to help explain this point. We had a multimillion-dollar ordering backlog that we expected to deploy in Q1. In this case, our customer ordered software from Cognite and separately ordered hardware from another vendor to run our software. During Q1, this customer informed us that their hardware delivery was delayed. The customer requested to reschedule the deployment of the Cognite software until after the hardware had arrived. The impact of this customer delay was that Cognite could not deliver the software and recognize the revenue in Q1 per the original schedule. In addition to supply chains that continue to cause delays, I would like to provide more details on the other issues we discussed last quarter. a slow conversion for our pipeline to actual orders. We believe the reasons we experienced slower pipeline conversion are related to combinations of the following two factors. First is internal execution, and second is customer delays in placing orders that could be related to the impact of the overall macroeconomic and geopolitical environment. As we discussed on our last call, Five months ago, we hired a new CRO to improve our internal execution. Some of the actions we've already taken include focusing our sales teams on territories where we see the highest potential, identifying the most pressing customer pain points and using a more consultative sales approach, and increasing the frequency of pipeline inspection coupled with stronger collaboration between our sales and product teams. Over the last few months, our CRO and his team have met many individual customers to better understand the reasons behind the slow pipeline conversion. While it's too early to reach conclusions from these customer interviews, I would like to share some anecdotal examples which I hope you will find useful. The first example is a government agency which told us that their agency's budget for the year has decreased. And as a result, they began a process to adjust their operating plans. We believe the delays we experienced with this customer are the result of their process to reconsider their project priorities. Second example is another government agency with which we completed the sales process in Q4 last year for a multi-million dollar order. In this case, we expected the order to be placed during Q1, but the order has not landed yet. It's not clear what are the reasons for the delay. Advanced on discussions with the customer, we continue to expect the order. Third example is related to Europe, where we had a healthy Q1 pipeline and we experienced very low conversion of the pipeline across Europe. This may or may not be related to the crisis in Ukraine and how other countries in Europe react to it. It is important to note two additional observations we concluded from our conversation with customers and analyzing Q1 pipeline conversion data. First, we believe we have not lost key deals due to competition and that we maintain our differentiated product position. Second, we believe our relationships with our customers remain strong and that the slow pipeline conversion was not caused by customer dissatisfaction with Cognite solutions or services. Given the supply chain and slow pipeline conversion, our ability to forecast this year with sufficient position is still limited. We are encouraged that the Q1 booking activity resulted in maintaining total IPO no to $500 million, but we are still facing a broad range of potential outcomes going forward and are unable to provide guidance at this time. We believe the issues that we and our customers are facing are temporary in nature and we will continue to monitor the environment and resume guidance as soon as practical. Given the disappointing Q1 results, we have taken specific steps to reduce our cost structure. Our current headcount is around 1,900, approximately 5% lower than our headcount at the beginning of the year. We are also taking steps to focus on improving pipeline conversion by helping customers wherever we can to address the top priorities they have in the current environment. I would like to conclude my prepared remarks with a summary of the key drivers for our long-term opportunity. First, security threats are pervasive and governments continue to seek innovative solutions to address these threats. Second, we are a market leader in investigative analytics with a long history of growth and innovation. We have developed deep relationships with our customers around the world and have a strong track record and reputation in the security market. Now, let me turn the call over to David to provide more color about our Q1 results. David?