Q1 2025 Cognyte Software Ltd Earnings Call

Participants

Dean Ridlon; Head of IR; Cognyte Software Ltd

Elad Sharon.; Chief Executive Officer, Director; Cognyte Software Ltd

David Abadi; Chief Financial Officer; Cognyte Software Ltd

Mike Cikos; Analyst; Needham & Company, LLC

Peter Levine; Analyst; Evercore ISI Institutional Equities

Shaul Eyal; Analyst; TD Cowen

Presentation

Operator

Good day ladies and gentlemen, thank you for standing by. Welcome to the Cognyte first quarter fiscal Year 2025 earnings conference call (Operator Instructions).
Please note that today's conference is being recorded. I would now like to hand the conference over to your host, Dean Ridlon, Head of Investor Relations. Please go ahead.

Dean Ridlon

Thank you, operator. Hello, everyone. I'm Dean Ridlon, Cognyte, Head of Investor Relations Thank you for joining us today. I'm here with a Elad Sharon Cognyte, CEO, and David Abadi, Cognyte CFO.
Before getting started, I would like to mention that accompanying our call today is a presentation. If you'd like to view these slides in real-time during the call, please visit the Investors section of our website at Cognyte.com.
Click on the Investors tab, click on the webcast link and select today's conference call. I would also like to draw your attention to the fact that certain matters discussed on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 in 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 forward looking statements are made as of the date of this call and except as required by law, Cognyte assumes no obligation to update or revise them.
Investors are cautioned not to place undue reliance on these forward-looking statements for a more detailed discussion of how these and other risks, uncertainties could cause Cognyte 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, 2024, and other filings we make with the SEC.
The financial measures discussed today include non-GAAP measures. We believe investors focus on non-GAAP financial measures in comparing results between periods and among our peer companies that publish similar non-GAAP measures.
Please see today's presentation slides, our earnings release and the Investors section of our website at Cognyte.com for a reconciliation of non-GAAP financial measures to GAAP measures, Non-GAAP financial information should not be considered in isolation from as a substitute for or superior to GAAP financial information, but is included because management believes it provides meaningful information about the financial performance of our business and is useful to investors for informational and comparative purposes.
The non-GAAP financial measures that the company uses have limitations and may differ from those used by other companies.
And now I would like to turn the call over to Elad.

Elad Sharon.

Thank you, Dean, and welcome everyone, to our first-quarter conference call. We delivered a strong start to our fiscal year as we continued to generate consistent and profitable financial results. Q1 revenue and gross profit both grew by double digits year-over-year.
We delivered Q1 revenue of $33 million, up approximately 13% year-over-year. Gross profit increased 17% year-over-year, growing faster than revenue consistent with our focus on margin expansion. We also generated $5 million of positive adjusted EBITDA in the quarter, along with about $21 million of positive cash from operations we remain focused on delivering sustainable and profitable growth.
We have an absolute record of delivering powerful investigative analytics solutions to hundreds of customers in more than 100 countries around the globe. Our customers view us as domain experts, and we have ongoing dialogues across our global customer base about their growing needs and how our solutions can help them.
We continue to innovate. And based on our technology leadership, we believe our advanced technology, including artificial intelligence, enables faster and more effective investigations across a wide variety of use cases by fusing data at scale, and it has important relationships with other hidden insights that would be nearly impossible to find otherwise.
These capabilities generate unique value for our customers and now generating increased interest in our solutions. We continue to expand our presence in North America, securing competitive deals and displacing incumbent providers. Our ongoing investments in sales and marketing include growing our demonstration and proof of concept capacity.
Our experience shows that when customers use our solutions in real-world settings, they recognize the high value. Our technology delivers further testament to our solutions, high value and customer satisfaction is evident in the repeat business from customers who signed deals in previous quarters and have returned to place follow-on orders. In addition, some of these customers are becoming valuable references and enhancing our brand with other agencies.
And now talking about other significant wins we had during the quarter, we won several noteworthy deals during the quarter, including three follow-on orders from existing national security and national intelligence customers.
While none of these wins were related and each obviously had its own unique characteristics over $5 million or more in value and were driven by customers who wanted more capacity and functionality to improve outcomes. These wins continue to demonstrate our strong position with our customers and our ability to drive significant repeat business.
Our investigative analytics solutions are sold to national security, national intelligence, law enforcement and other organizations to enable them to perform more effective investigations. We believe our customers recognize as a strategic, trusted partner providing innovative solutions that help them improve the speed, accuracy and success rate of their investigations and make timely and high-quality decisions.
The long-term relationships we have with our customers gives us insight into the challenges they're facing, which helps us optimize our technology roadmap. We regularly meet with our customers at their or our facilities, industry conferences and other events to maintain close relationships.
Recently, we participated in a key industry conference in Europe where we engage with many customers and prospects to discuss with them current and future needs and demonstrated our new capabilities customers continue to appreciate our market-leading position and innovative technology. We find frequent touch points with customers highly valuable and contribute to our growth.
In addition to our ongoing regular marketing initiatives, we occasionally perform more formal research, and we recently commissioned a survey of law enforcement agencies referred to in the industry as leaders such as police, financial intelligence units, border police and others.
We issued a press release about the survey last week and a summary of the results is available on our website. The aim of the survey was to validate some forward-looking assumptions regarding the challenges faced by the local stakeholders around data analytics as well as to learn more about their current priorities and future needs and plans for dealing with them here are a few of the key findings from the survey.
First, about 75% of layoffs utilize more than one solution for analyzing the data. This makes it harder for them to connect the dots between disparate data sources and uncover crucial insights for resolving cases.
Second, approximately half of the layoffs claims or their current solutions, lack of support non-structured data is one of the top challenges. This is a significant issue given that many of the data sources we need to analyze unstructured and include, among others, images, text and video.
Third, existing data analytic solutions rose for certain organizations, often limited and outdated, making it difficult for investigators and analysts to keep up with changes in data format and volumes. Therefore, it's no surprise that about 75% of flows of certain organizations indicated they are planning to expand upgrade on our existing data analytic solutions.
The findings also show there is correlation between the number of siloed solutions within the US and the plans to change them, the more solutions used by organizations, the higher the need for a comprehensive investigative analytics solution in an effort to streamline and optimize the investigation process.
Lastly, 99% of respondents consider area to be beneficial for our important data analysis and 85% believe that they are a critical or very important to the future of law enforcement investigations. The most important they are power capabilities include pattern recognition, image analysis and risk assessment.
The outcome of this research with law enforcement is consistent with what we hear from our national security and national intelligence customers and validates our market opportunity and roadmap that our solutions directly address customer needs around fusing and analyzing structured and unstructured data at scale to uncover hidden insights. We continue to leverage R&D, including implementing advanced capabilities to bring innovations to our customers, maintain our differentiation, generate demand and drive long-term growth.
Turning to our outlook for fiscal 25, given our momentum and good visibility, we are now expecting revenue to be approximately $344 million plus or minus 2%, representing about 10% total growth at the midpoint. Given the leverage in our financial model, we increased our adjusted EBITDA guidance, and we now expect it to be about $22 million at the midpoint of the revenue range, more than double what we generated in fiscal '24 David will provide more detailed guidance during his remarks.
To summarize, we started very strong, continue to deliver consistent financial performance and demonstrate the leverage we have in our model. Our visibility is stronger, and the market is healthy, and our customers continue to face significant Grand Canyon volume challenges and look to us for solutions that help them accelerate investigations, make decisions faster and mitigate the wide variety of threats.
We believe Cognyte is well established as market leader, domain expert and trusted partner. Our customers frequently tell us that our solutions significantly improve the results, enabling them to effectively perform their missions and make the world safer. Our long-term customer relationships continue to be a significant asset for us as they help drive repeat business. Given our momentum and good visibility, we increased our outlook for the year. We believe Cognyte is positioned for sustainable growth and continuing improvement in profitability.
Now let me turn the call over to David to provide more details about our Q1 results and updated fiscal '25 outlook. David?

David Abadi

Thank you, Elad, and hello, everyone. How momentum has continued and our first quarter financial results came in ahead of our expectations. Reflecting solid execution. Our balance sheet remains strong with $107 million of cash, up $24 million from year end and no debt.
The increase in our cash balance was primarily due to $21.5 million of cash flow from operation we generated during the quarter. We've continued to execute and drive revenue growth. Q1 revenue was $82.7 million, an increase of approximately 13% year-over-year. The vast majority of the revenue growth was driven by a $9.2 million increase in software revenue.
Recurring revenue is a contributor to visibility and long-term growth and represents many support contract revenue and some subscription offerings. We continue to grow our current revenue quarter over quarter. And in Q1, we generated $45.8 million or 55% of total revenue.
We expect to continue to deliver long-term growth in recurring revenue. That said, support console revenue may fluctuate between quarters due to some customer de-scoping support on their older solution so they can free up budget to invest in upgrades and respond to evolving need and technology changes. We delivered revenue growth and were able to drive gross profit growth even faster.
Gross margin for the quarter was 71.1%. Our gross profit for the quarter was $58.8 million, an increase of $8.6 million or 17% year-over-year. The margin expansion and the resulting cash generation demonstrate the leverage we have built into our business model. This leverage is largely driven by higher software revenue and the improved cost structure of our professional services organization.
Our strong gross margin reflects the value our customer recognized in our innovative technology and our competitive differentiation. The leverage we have in our model has us generate meaningful improvement in profitability year-over-year.
Let me now share with you how we performed against each of our major KPI, RPO or remaining performance obligations represent contracted revenue that is expected to be recognized as revenue in future periods. As a reminder, a few factors primarily impact RPO in a given period, sales cycle, deployment cycles, lengths of contracts, renewal timing and seasonality.
Total RPO was $566.3 million at the end of Q1. The decrease from last quarter is related to the reason I just discussed. Short-term RPO at the end of Q1 increased to $312.4 million, providing solid visibility into revenue over the next 12-months. We believe these levels of RPO are healthy and support our growth.
Turning to revenue Q1 revenue grew by 12.7% year over year and was $82.7 million. Our software revenue in Q1 grew by 13.9% year over year and was $75.8 million. Our recurring revenue was $45.8 million. The vast majority of our revenue was from repeat business in Q1, similar to previous period. A testament to the high value our customers generate from our solutions and their high confidence level in us for helping them succeed in the critical missions.
Gross margin continued to improve and in Q1 was 71.1%, an increase of 270 basis points year over year. Our gross profit continues to grow meaningfully faster than revenue. Q1 gross profit was up 70% year over year. The combination of revenue growth, better margins and effective cost structure drove improved profitability.
During Q1, we delivered $5 billion of adjusted EBITDA and non-GAAP operating income of $1.8 million. Q1 like in recent quarter was another quarter in which we demonstrated the leverage we have in our model and our financial strengths, we have been focused on executing our goal to improve our financials and continue to drive margin expansion.
Turning to guidance, given Q1 dynamics, our momentum and visibility, we are sharing an increased outlook for the year. For fiscal '25. We now expect full year revenue to be approximately $344 million plus or minus 2%, $4 million higher than our previous expectations.
This outlook represents approximately 10% year-over-year growth at the midpoint of the revenue range. We believe that our strong short-term RPO of $212.4 million and the demand environment support this outlook, we also believe that the seasonality of revenue will be similar to historical patterns.
We expect Q2 revenue to be slightly above the Q1 level and increased sequentially each quarter throughout the year because of the leverage we have in our model, we increased our adjusted EBITDA guidance by approximately $3 million from the outlook provided during our last earnings call, and we now expect it to be about $22 million and the midpoint of the revenue range compared to $9 million last year in the recent reporting period, our non-GAAP tax expenses significantly fluctuated between quarters, which impacted our non-GAAP EPS results.
In Q1, we adopted a more common methodology that uses GAAP expected effective tax rate and applied it to the non-GAAP results. This methodology will increase the correlation on a quarterly basis between non-GAAP pretax income and non-GAAP income.
We continue to expect cash tax payment to be about $10 million and expect annual non-GAAP tax expenses to be also about $10 million. Full disclosure note, including the impact to the comparative period is provided in our press release issue today. As a result of our increased outlook, we now expect annual non-GAAP EPS loss to come in at $0.07 at the midpoint of the revenue range. As a result of our strong collection in Q1 and improved outlook, we are increasing our forecast for this year, and we now expect to generate about $37 million of cash from operation.
To summarize, we have been executing consistently well and producing strong results. We continue to add capabilities and increased the value of our advanced solution deliver to new and existing customers. By leveraging the latest technologies, including AI, we increased our revenue and profitability outlook for the current year and expect fiscal '25 to be a year of continued growth, significant profitability improvement.
With strong cash flow from operations. We believe we are well positioned for sustainable growth and have leverage in our model so we can generate additional improvement in profitability and cash flow in future years.
With that, I would like to hand the call over to the operator to open the line for questions. Thank you, operator.

Question and Answer Session

Operator

Thank you. (Operator Instructions).
Mike Cikos with Needham.

Mike Cikos

Great. Thanks for taking the question, guys, and great quarter here. As far as the execution, I wanted to come back to some of the prepared remarks. I think David might have been you who is talking about the recurring revenue contribution really appreciate the 55% of total revenue statistic, which I think is new for investors. Can you just help give us a better sense as far as the sources for the recurring revenues? And then I know that we have 55% of total revenue today. Can you help us think about how that 55% was maybe a year ago or a quarter ago? Just so we have something to compare it to for maybe a bit more of an apples to apples comparison?

David Abadi

I think you make a recurring revenue is important, a contributor for our growth and in the main pillar to generate this revenue or support contract and some offering of subscription. And the majority, I would say, even the vast majority of the of this revenue is coming from support contracts, which our customer renew on a regular basis.
If you look about the numbers, actually, we shared the data that we presented, and the numbers are increasing from nine for Q3 from $42 million in Q1 last year to $45.8 million this quarter. So you have the trend quarter over quarter and were execution growth and down in the long-term we think that will continue to grow. It's a provider, good visibility and it's another indication of the repeat business from existing customers.

Mike Cikos

Got it. Thank you for that. I wanted to just highlight two other pieces here. So first, the CRPO remains strong for the organization, right? And I think that's if I'm reading the tea leaves here, that's probably what gives you the confidence to be taking up the full year guidance. And I guess the question that I have is more around the RPO and the sequential decline we saw. So first, the sequential decline. Can you remind us, is that more of a no, and based on seasonality for the business? And then the second piece on RPO. So first, is it tied to seasonality.
And then second, with RPO, are you seeing customers maybe increasingly shift towards <unk> shorter term contract durations that in any way come into play?
When we think about that RPO metric?

Elad Sharon.

Yeah, hi, Mike. This is Elad. So as David mentioned in the call, the RPO is a proxy for backlog and the factors that impact RPO, I primarily sell cycle deployment cycles, less of contract renewal timing and seasonality and RPO may fluctuate due to those reasons.
And you have seen similar behavior in the past, still far beyond going up and down in Q1, it was mainly related to three out of the five factors. It was related to renewal timing, sales cycle and seasonality, and yet both of appeals, the short and the total RPO are very strong.
And in addition, given what we hear from customers on the evolving challenges, you know, the demand is very solid. The market is healthy and it's RPO may flex may be fluctuated from quarter to quarter, but the overall market conditions are very healthy, and we believe we can continue and grow the business in a healthy manner.

Mike Cikos

That's great. Really appreciate the color from both of you today. Thank you. I'll turn it over to my colleagues.

Elad Sharon.

Thanks.

Operator

Peter Levine with Evercore ISI.

Peter Levine

If you just take my questions, you've already made a comment earlier on in your script around investments in North America. Maybe just help us understand who you're replacing, what is the go to market? Is it any different in North America than it would be in other markets that you compete. And just kind of give us an understanding of the investments you're making today in North America, the replacements and are the sales cycle buying process is any different?

Elad Sharon.

Yes, should be there. So we continue to invest in that to extent presence in North America, these massive the incremental investments this year are primarily related to the cell sites, which means the sales force capacity for demos and POCs and marketing. And we see a lot of interest in our products. We continue to win competitive deals. We are placing incumbents customers that already use our solutions operationally of generating high value.
And we were able first of all to get very good feedback second because some customers became a very good reference for us. And also we got already follow-on orders this quarter in Q1. Actually, we got a new seven deals from North America and two of them were new customers, the others were follow-on orders. So overall, we continue and are making good progress.
In terms of the go to market, it's a little bit different in North America. We are focusing on two different markets as a state and local and federal for the state and local. We approach directly with our own sales force for the federal side, we approach with an established partner. The deals we won so far, and we started first was we state and local later on. We initiated the go-to-market for the first.
Well, first of all, it takes we expect it to take a little bit longer in terms of cell cycle, given that we are a newcomer into this market and almost in each and every deal we have to take incumbents and we have a longer sell cycle compared to other territories when we have follow-on orders and it may take about four to five quarters to acquire a new customer and follow-on orders came so far after a two to three quarters. So when we acquire a new customer, actually the follow-on orders come much faster. It's a journey and we continue to make progress.

Peter Levine

I don't know if you could down maybe a two-part question is can you share with us what your net retention rates look like? And then second, on the desktop analytics side, in terms of a I guess, help us understand how are you monetizing? Is it more? Is it an upsell?
Is it a retention tool. Just kind of walk us through with the new AI innovations that you're coming out with, how you're pricing that? And then second, if you could share with us net retention rates still above net retention.

David Abadi

It's this KPI is the more relevant for our subscription model and tough companies. We sell our solutions primarily in perpetual license and support contracts in terms of AI. is the incremental demand factor for our customers. And there are a few reasons for the first one is that the AI is used by the bad actors as well. The better hygiene, the creates records entities, and it's a more complicated and difficult to find them.
So, our customers have increasing challenges in this respect in terms of our customers' benefits, AI. is a contributor for accelerating investigations and make it more successful. And there are two dimensions, or I know areas where a handful of customers. The first one is Gen-Ai. I helped customers to utilize the system in a more efficient way.
They don't have to rely on technical experts and data data scientists. Actually every user can ask a simple question in natural language and get much faster and high-quality answers. So the benefit here is efficiency and quality. And the second area where I can help you with a stronger analytics center. For example, if a customer says to uncover hidden inside Ceridian relations, AI makes it much faster and actually can uncover more hidden insights and actually increase the value of the of the of the customer. So AR is an incremental demand generator, and I expect it to continue and be that way along the way.

Peter Levine

Thank you, guys for taking my questions.

Elad Sharon.

Thank you.

Operator

Shaul Eyal with TD Cowen.

Shaul Eyal

Hi, good afternoon, guys, and congrats on execution and improved Bridgewell a lot. We've seen the majority of companies under coverage, though that are slightly more cyber security focused really reporting healthy on government and federal related verticals. We felt and I'm translating that to your improved results in that lift. We're seeing a little bit of the spending coming ahead of the seasonally strong September federal quarter. So just maybe help us understand how it how is it that you're seeing the market and what has been driving? What seems to be an across-the-board healthy federal spending thus far?

Elad Sharon.

Thanks, Joe. So, first of all, I'll start and say that our engagement with the customers is very high, and we get insight into their evolving needs an ongoing basis about the demand drivers. There are a few of them. The first one is that the investigation has become more difficult and more complex for our customers as the bad guys always also using technology better, Heidi, creating fake identities, hiding their relationships and their folks and holding their ideas and plans.
So, this becomes more difficult to have on them and to neutralize threats before they unfold. This is second, in order for customers to be very effective, they have to deal with more data volumes and diversity. So actually, they have to analyze more and more and more data. And this requires first, of course, strong Fusion capabilities. And the second is more analysis and AI capabilities in order for them to convert it into insights quickly. And this continues and grow dramatically.
And then the next driver is related to technology disruption. It's above the assumptions or both ways if you have it, you're winning. If you don't have it, you might close and the construction and one example is Israel. And as I mentioned earlier, AI helps with the efficiency agenda and also it the sophisticated machine learning engines.
So those demand drivers reflected in many engagements we have with our customers. One example is in process at the conference in Europe that were I discussed earlier on the call, we had the customers talking about those exactly those demand drivers.
And we're also actually demonstrated our copilot capability and a driven generic capability in copilot. We also heard it in the survey results also mentioned it earlier in the call, and we hear it also from other customers, not only law-enforcement, we hear from national security and intelligence customers that we have that we are engaging and having them as our customers for many, many years.
So overall, we feel the same that the market is healthy. Demand drivers are solid and the need for technology is going to continue and grow over time. We continue to make investments, of course, to add to keep pace and to maintain leadership and to expand presence in certain territories, including the US. And we feel good about the growth opportunity ahead of us.

Shaul Eyal

Thank you very much again.

Operator

Thank you and I'm showing no further questions. And I'd like to hand the conference have Dean Ridlon for any further remarks.

Dean Ridlon

Thank you, Michelle, and thank you, everyone, for joining us on today's call. Should you have any questions, please feel to reach out to me, and we look forward to speaking with you again next quarter. Thank you very much.
That concludes today's conference call. And thank you for participating. You may now disconnect.