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Cognyte Software Ltd. (CGNT) CEO Elad Sharon on Q4 2022 Results – Earnings Call Transcript


Cognyte Software Ltd. (NASDAQ:CGNT) This fall 2022 Results Conference Call April 5, 2022 8:30 AM ET

Company Participants

Dean Ridlon – Head of Investor Relations

Elad Sharon – Chief Executive Officer

David Abadi – Chief Financial Officer

Conference Call Participants

Mike Cikos – Needham & Company

Peter Burkly – Evercore ISI

Brian Ruttenbur – Imperial Capital

Brad Reback – Stifel

Operator

Good day and thanks for standing by. Welcome to Cognyte’s Fourth Quarter and Fiscal Year 2022 Earnings Conference Call. At this time, all contributors are in listen-only mode. After the audio system’ presentation, there can be question-and-answer session. [Operator Instructions] Please be suggested that immediately’s convention is being recorded. [Operator Instructions]

I’d now like at hand the convention over to your speaker immediately, Dean Ridlon, Head of Investor Relations. Please go forward.

Dean Ridlon

Thank you, operator. Hello, everybody. I’m Dean Ridlon, Cognyte’s Head of Investor Relations. Thank you for becoming a member of us immediately. I’m right here with Elad Sharon, Cognyte’s CEO; and David Abadi, Cognyte’s CFO.

Before getting began, I want to point out that accompanying our name immediately is a presentation. If you want to view these slides in real-time in the course of the name, please go to the Investors part of our web site at cognyte.com, click on on the Investors tab, click on on the webcast hyperlink and choose immediately’s convention name.

I’d additionally like to attract your consideration to the truth that sure issues mentioned on this name could include forward-looking statements throughout the which means of the Private Securities Litigation Reform Act of 1995 and different provisions of the federal securities legal guidelines. These forward-looking statements are based mostly on administration’s present expectations and usually are not ensures of future efficiency. Actual outcomes might differ materially from these expressed in or implied by these forward-looking statements. The forward-looking statements are made as of the date of this name and, besides as required by regulation, Cognyte assumes no obligation to replace or revise them.

Investors are cautioned to not place undue reliance on these forward-looking statements. For a extra detailed dialogue of how these and different dangers and uncertainties might trigger Cognyte’s precise outcomes to vary materially from these indicated in these forward-looking statements, please see our annual report on Form 20-F for the fiscal yr ended January 31, 2021, filed with the SEC on April 29, 2021, and different filings we make with the SEC, together with our annual report on Form 20-F for the fiscal yr ended January 31, 2022, which we anticipate to file shortly.

The monetary measures mentioned immediately embrace non-GAAP measures. We imagine traders concentrate on non-GAAP monetary measures in evaluating outcomes between durations and amongst our peer firms that publish comparable non-GAAP measures. Please see immediately’s presentation slides, our earnings launch and the Investors part of our web site at cognyte.com for a reconciliation of non-GAAP monetary measures to GAAP measures. Non-GAAP monetary info shouldn’t be thought of in isolation from, as an alternative to, or superior to GAAP monetary info, however is included as a result of administration believes it supplies significant details about the monetary efficiency of our enterprise and is helpful to traders for informational and comparative functions. The non-GAAP monetary measures the Company makes use of have limitations and will differ from these utilized by different firms.

Now I’d like to show the decision over to Elad.

Elad Sharon

Thank you, Dean. Welcome, everybody, to our fourth quarter convention name. In This fall, income was $125 million, a few $7 million sequential enhance from Q3 and roughly $3.5 million under the midpoint of our steerage. Non-GAAP EPS was $0.16. Our outcomes mirror the continued provide chain points that we mentioned throughout our final earnings name, in addition to a decrease conversion of our pipeline than we anticipated on the time of our final convention name. I’ll focus on each points in additional element in a minute.

During the quarter, we gained many giant offers, reflecting the power of our portfolio and the market wants for cutting-edge investigative analytics to deal with evolving safety threats. Also, we proceed to execute nicely on our software program technique. And in This fall, our non-GAAP gross margins elevated by 180 foundation factors year-over-year to 73%. I want to begin immediately with a overview of our This fall reserving exercise.

In This fall, we proceed to win giant offers from current prospects that exhibit the power of our prospects’ relationships and the way they give the impression of being to us to assist them handle evolving safety threats. The first is an roughly $10 million deal from regulation enforcement company that’s changing the homegrown resolution as a result of our expertise’s means to maintain as with evolving threats. This is an efficient instance of how our prospects are dealing with safety challenges which are consistently evolving and are available to us to modernize their investigative analytics expertise with an open analytics platform.

The second deal is for about $8 million in reference to the platform capability enlargement. This is an efficient instance of how our prospects look to us for the newest in investigating analytics capabilities to maintain tempo with the growing selection and quantity of information. The third deal was additionally for $8 million and we current an current buyer including one other resolution for our portfolio and displacing incumbent vendor.

This is an efficient instance of how our prospects are changing options from different distributors because of the confidence in our means to ship worth and our observe document in earlier deployments. These giant orders from current prospects spotlight our long-term relationships, the evolving wants of our buyer base and the arrogance our prospects have in our expertise. We proceed to win giant offers in This fall as in prior quarters; nonetheless, total This fall bookings got here in decrease than we anticipated on the time of our final earnings name.

While we nonetheless ended the yr with important RPO of $512 million, this RPO stage is $40 million decrease than the prior yr. We recognized two foremost points contributing to lower-than-expected This fall reserving, and I want to focus on these points and the way we’re addressing them. First is the availability chain points we mentioned throughout Q3 and that continued into This fall. As a reminder, on common, roughly 20% of our income comes from home equipment options that consist principally of software program, however embrace some heavier parts.

We are presently having issue sourcing some parts which have an effect on our means to well timed ship backlog orders and impression our income. In addition to income impression, we’ve began to see some prospects delayed putting new orders for different options till we ship the non-public orders. We are executing on a few initiatives that can handle these provide chain points. We are working with suppliers to construct up stock to attenuate the impression of the part shortages. The price of such stock is minimal, however it’s laborious to seek out suppliers with accessible inventory.

In addition, we’ve began the {hardware} redesign and anticipate to complete the redesign the Q3 of this yr. The new designs will, amongst different enhancements embrace parts which are extra available. The second subject is decrease pipeline conversion. We concluded that we have to strengthen our management workforce to drive higher conversion of our pipeline.

Looking again at This fall, we entered the quarter with a big pipeline and based mostly on analyzing the conference efficiency, we don’t imagine we’ve misplaced any key offers to competitors and don’t see important modifications within the aggressive setting. It’s additionally necessary to notice that almost all of This fall pipeline offers that we anticipated to shut had been from current prospects.

Our relationship with our prospects stays sturdy, and we hope to shut these offers sooner or later. Based on this evaluation, we initiated a search, and I’m comfortable to report that in Q1, we already employed a brand new Chief Revenue Officer. The new CRO brings to Cognyte in depth expertise in driving progress and main giant groups. We imagine the actions we’ve taken will assist mitigate the recognized points and assist our long-term progress technique.

Next, I want to focus on our visibility these days. In addition to the problems we simply mentioned, we imagine the battle in Ukraine could also be inflicting a pause for some authorities prospects all over the world, particularly in EMEA. While we don’t derive any income from Russia, it is unclear at this level what the impression can be on our enterprise this yr, and it might lead to kind of spending as prospects once we prioritize their safety price range.

At this time, our means to focus this yr with any stage of place is proscribed, and we aren’t offering steerage. We will proceed to watch the market and resume steerage as quickly as sensible. We are clearly upset that we aren’t ready to supply steerage. Near time period, we’ve taken particular steps to deal with the problems we recognized and we’re assured in our long-term progress alternative as a result of first, market fundamentals haven’t modified.

The market is essentially rising, safety threats are growing and governments are searching for revolutionary options to deal with these threats. Second, we’re a market chief with a protracted historical past of progress and innovation. Third, we’ve deep relationships with our prospects all over the world. And fourth, we’ve efficiently migrated our enterprise to a software program mannequin, which drives gross margin nicely above 70%.

Now, let me flip the decision over to David to supply a bit extra coloration about our outcomes. David?

David Abadi

Thank you, Elad, and whats up, everybody. Our dialogue immediately will embrace non-GAAP monetary measures, reconciliation between our GAAP and non-GAAP monetary measures is offered, as Dean talked about, in our earnings launch and within the Investors part of our web site.

Non-GAAP income for This fall got here in at $125.3 million, up barely from the earlier yr, however under our expectations because of the points we skilled within the quarter that Elad mentioned earlier. Our software program technique continued to have optimistic impression on our outcomes. Our non-GAAP gross margin elevated 180 foundation factors. Over the earlier yr, a non-GAAP gross revenue got here in at $91 million.

We had been in a position to drive non-GAAP working earnings of $15.7 million, adjusted EBITDA of $20.3 million and non-GAAP diluted EPS got here in at $0.16. I want to point out that our EPS loss on a GAAP foundation displays a valuation allowance we took on our deferred tax asset within the quantity of $12.7 million. This valuation allowance was triggered by the anticipated realization timing of our deferred tax asset. Cash utilized in operations in This fall was roughly $7 million, primarily as a result of our reserving exercise, timing of assortment and decrease superior funds.

Now let me flip to our full yr outcomes. Our full yr outcome displays the execution of our software program technique. Total non-GAAP income elevated 6.4% year-over-year to $475.6 million. Non-GAAP software program income grew sooner than our complete income at 8.5% year-over-year. Our gross margin elevated 200 foundation factors over the earlier yr and our non-GAAP software program gross revenue grew 12.4% on the 8.5% software program income progress.

From a combination perspective, non-GAAP recurring income was 49% of complete income or $232.5 million, a rise of three.2% year-over-year. And non-GAAP repeat income from current prospects was about 95% from complete income at comparable stage to final yr.

Regarding RPO, we ended the yr 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 yr was $82.1 million. Non-GAAP diluted EPS was $0.74.

Turning to the steadiness sheet. We ended the yr with $163 million of money, money equivalents and short-term investments. This steadiness contains $100 million withdrew from our current credit score facility which we put in place on the time of the spin-off for working capital and potential M&A.

As we sit up for FY ’23, let me summarize the place we stand immediately. We imagine the latest points we face are short-term in nature. The fundamentals of our enterprise are stable, the long-term alternative stays intact, and we’re nicely positioned to seize the chance in entrance of us.

With that, I want to hand the decision over to the operator to open the road for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first query comes from Mike Cikos with Needham & Company. Your line is open.

Mike Cikos

I did wish to circle up on the steerage. And actually, I’m pondering by means of — I do know that you simply guys have been speaking to visibility of the enterprise and the quantity of enterprise coming from current prospects year-in and year-out, and attempting to juxtapose that to the, I suppose, the dearth of visibility that we’re speaking to immediately. I suppose what has modified within the latest three months that basically hinders you guys from giving us any steerage within the out yr or even when we’re speaking about simply the quarter, I’d assume most of that enterprise is nicely considered as you guys have these current relationships together with your prospects?

Elad Sharon

Yes. Thanks Mike. So really, let me remind you that there are three points that we mentioned earlier within the name, the scarcity of parts and dwell pipeline conversion. And additionally the geopolitical developments which are unrelated to This fall {that a} latest improvement that mixed impression visibility. We are taking proactive actions to enhance our visibility and seize the on-term progress, however I wish to provide you with extra coloration about every a kind of.

So let’s begin with the scarcity of parts. We mentioned it early in Q3 name. We noticed that among the parts associated to the equipment options usually are not accessible. And we took two motion objects. The first one is to extend stock. Actually, we had been in a position to do a few of it, however evidently — it is tough to seek out extra inventory, and we initiated the redesign of the {hardware}.

So, this can be a non permanent disruption that we anticipate to resolve later within the yr. And it is also, by the way in which, affect new bookings from prospects which are ready for these orders to be fulfilled. When it involves the conversion of the pipeline, it is necessary to say that we see no change within the aggressive panorama. We did not lose any prospects. And within the examples I gave earlier within the name, we will see that prospects come to us many times additionally with giant offers.

Analyzing the pub conversion, we do see an extended gross sales cycle that’s ensuing within the lower-than-expected bookings in This fall. Actually, the decline in RPO and the bookings weak point is principally associated to This fall. We did take just a few steps. One of them is said to management. And additionally we had early this yr, the worldwide gross sales kickoff in — again in February, and we targeted primarily on how we enhance pipeline conversion.

We did not execute nicely, and we’re going to enhance it. We must take some steps, together with adjustment of the fee plan to incentivize sooner deal closure. We are scrutinizing the pipeline and reprioritizing sources based mostly on alternatives. And additionally now when the journey restrictions have lifted, our workforce is we foot on the bottom, nearer to prospects, which is essential in our trade.

On prime of these, there may be the latest geopolitical scenario in Ukraine. As I discussed within the name, we don’t generate any income from Russia; nonetheless, we do anticipate that it’ll create disruption for positive for the quick time period. And for the long term, it might create headwinds or tailwinds, each instructions are doable, and we’re monitoring the scenario. So total, should you have a look at the visibility, taking all of them collectively and mixed, this creates really uncertainty.

And due to that, we aren’t in a position to present significant steerage. The vary really is just too giant and giving steerage at this level of time is inconceivable. Having stated that, all these disruptions, we imagine are non permanent in nature. I mentioned the options for every one among them, and we imagine that the long-term alternative stays intact. I hope this solutions.

Mike Cikos

Yes. And if I simply step in to 2 of these actual rapidly. I do know we spoke concerning the stock final quarter and the availability chain constraints being — persevering with to be a headwind. But if I have a look at the steadiness sheet, your stock balances are nonetheless decrease even sequentially. Can you simply give us an replace, I suppose, are we actually ready for the redesign to be accomplished in Q3 for that provide chain to normalize at this level?

Elad Sharon

Yes. So really, the stock is comparable than what it was earlier than and the value of these parts is sort of marginal. The income impression is principally for the software program portion of this resolution. So, it is unrelated actually to the stock. Inventory is sort of a marginal price. So, we do not anticipate the stock to go up dramatically. It’s small numbers.

Mike Cikos

Okay. Okay. And I suppose simply — the query turns into, you’ll be able to’t acknowledge that software program income till, you have got the stock after which are you able to shift the equipment to your buyer? And then I suppose the knock-on impact from that’s that your prospects usually are not placing in new orders till they will get their prior orders delivered. So, it is like one follows the opposite. Is that the way in which to be serious about this and what buyer habits is true now?

Elad Sharon

Yes, that is right. Some of the shoppers are ready for the earlier orders to be fulfilled to ensure that them to generate worth from the answer and for us to acknowledge income. We want to put in our software program on the equipment. Once the equipment just isn’t accessible, we can’t do it, we can’t ship and deploy and the shoppers can’t generate worth.

And for that purpose, among the prospects are holding new orders till they get the earlier ones. But we’ve an excellent relationship with prospects. So, it is below management. We’re managing it. We focus on it with the shoppers and we preserve a great relationship with them. We imagine it is a timing subject. And as soon as it resolves the enterprise can be again on observe.

Operator

Thank you. Our subsequent query comes from Kirk Materne with Evercore ISI. Your line is open.

Peter Burkly

This is definitely Peter Burkly on for Kirk. I respect you taking the questions right here. So I suppose I form of wish to double-click on the conversion points a bit bit additional. And I respect you calling out the longer gross sales cycles you are seeing and possibly some management modifications you have made. But I’m simply curious, are these offers which are form of getting pushed out 1 / 4 and also you’d anticipate to shut subsequent quarter or are these extra initiatives which are form of getting delayed indefinitely?

Operator

[Operator Instructions] The convention name has now resumed.

Elad Sharon

We had the communication subject. I’d respect should you might repeat the query.

Peter Burkly

Sure. No downside. This is definitely Peter Burkly on for Kirk. I respect you guys taking the query right here. So I simply — I form of wished to dive a bit bit additional into the conversion subject to be referred to as out. And I respect you calling out the longer gross sales cycle and management modifications you make. But I’m simply curious, are these offers which are getting pushed out 1 / 4 and also you’d anticipate to shut subsequent quarter? Or is that this extra initiatives which are getting delayed extra indefinitely?

Elad Sharon

Yes. So, we do not assume we misplaced any deal. The pipeline is stable. It’s about timing of the execution and shutting offers. I do imagine that over time, we in a position to shut the offers and get the offers with us. We are taking — really, we did not execute adequate. We’ll have to enhance the execution of the gross sales execution, and that is what we do together with refreshing processes, together with refreshing the chief management and different actions we take with a purpose to speed up gross sales.

Peter Burkly

Got it. That’s useful coloration. And then possibly only one different fast one, if I might sneak in. Just because it pertains to the geopolitical comps in Ukraine, I simply form of wish to be sure that I’m understanding this accurately. So it sounds prefer it’s extra at this stage for you guys it is extra uncertainty is creating and not likely whether or not it might probably be a tailwind or it may very well be a headwind shifting ahead? Obviously, as safety turns into form of extra entrance and middle versus the trade-off of probably much less spending or what have you ever? So am I form of serious about that accurately?

Elad Sharon

Yes. So really, to begin with, I do hope that the scenario with Ukraine will resolve quickly. Yes, really, you come to it fairly nicely. It may very well be a possible impression on our enterprise. Obviously, primarily EMEA, it is a risky scenario, prospects, authorities prospects, a few of them are but confused its latest improvement they could rethink budgets and priorities. For us, it may be a headwind or a tailwind. It’s too early to say what the impression can be. Having stated that, traditionally, after battle, it is driving extra demand for safety, however for the quick time period, we anticipate disruptions.

Operator

Our subsequent query comes from Brian Ruttenbur with Imperial Capital. Your line is open.

Brian Ruttenbur

So one of many feedback that you simply guys made was available on the market rising and also you anticipate to form of develop with the market. So, I’m simply attempting to get from possibly a long-term perspective past ’23, ’24, ’25 the market’s rising, what, within the mid-single digits? Is that the precise quantity?

Elad Sharon

So we imagine that in common days, the market is rising double digit. Maybe I’ll give some coloration concerning the long-term alternative. We’re wanting on the market. We see that market fundamentals haven’t modified. We mentioned it earlier than, the safety threats are growing. Data is rising in quantity and variety. And for that purpose, the demand for investigative analytics options is wholesome and anticipated to develop over time. We additionally do not see a change within the aggressive setting.

And should you have a look at acknowledge the tariffs with product prospects, with superior expertise and innovation and the repeat enterprise coming from current prospects, I feel it is a good vote of confidence of shoppers now expertise and innovation. They acknowledge the worth of options ship. We even have good buyer relationship, a big international buyer base. So, we imagine that the long-term alternative is there.

In addition to that, as you might know, our presence within the U.S. was minimal, and we launched an initiative to develop our presence within the U.S. So simply to summarize, I do see that the long-term alternative is there. The market is a wholesome market. The safety threats are rising — this may generate and drive demand over time. And for that purpose, we imagine that the long-term alternative is there. And for that purpose, we proceed to innovate and ship worth to the market.

Brian Ruttenbur

That’s good. Thank you very a lot for the extra coloration. So possibly on the rationale for you taking out the $100 million revolver, I feel you drew that down within the interval and possibly as an extra query on the rationale for that, now you are sitting on a complete lot of money. Do you anticipate being money circulate optimistic in fiscal 2023?

Elad Sharon

Yes. So on the time of the spin-off, we put in place a credit score facility, and the rationale for that was for working capital in addition to M&A. Since the spin, we’ve drawn a brand new pad from the revolver a number of instances, and in This fall, we determined to attract the whole revolver. And after all, we will simply return it in order for you. And the query about money circulate, sure, we anticipate optimistic money circulate subsequent yr.

Operator

[Operator Instructions] Our subsequent query comes from Brad Reback with Stifel. Your line is open.

Brad Reback

I feel in the course of the ready remarks, you talked about decrease superior funds for one of many causes money circulate has declined so precipitously year-over-year. Can you go into a bit extra element on that? And what you assume occurs on that entrance in fiscal ’23?

Elad Sharon

Yes. So the principle purpose for that’s the transition to a software program mannequin. And once we transition to software program mannequin, we really see much less advances and likewise much less notion of completion income recognition. And that is the principle purpose for that.

Brad Reback

But hasn’t that transition been occurring for the final three years?

David Abadi

It’s David. The transition is happening for just a few years, however clearly, we had some initiatives from the previous that we’ll proceed to satisfy. And should you can look during the last the few quarters, you will note that we’ve much less and fewer advances from prospects. When you are engaged on a challenge mannequin, it is very typical to get some advances to start with of the challenge. Once we transfer right into a software program mannequin, it is much less, I’d say, the enterprise observe. Obviously, we’re nonetheless on the lookout for advances from our prospects, however that is one thing that it is tougher wish to persuade the client given the truth that it is all about software program.

Operator

Our subsequent query is a follow-up from Mike Cikos with Needham & Company. Your line is open.

Mike Cikos

I simply did wish to circle up. I do know that we’re speaking concerning the longer gross sales cycles immediately. Can you give us a way how for much longer are gross sales cycles immediately? Are we speaking about one other month to that gross sales cycle or is it nonetheless elongating within the present setting?

Elad Sharon

No, it is not a dramatic enhance, the slight enhance, however we wish to handle it now and ensure that the pipeline conversion, we’ve a wholesome pipeline. We wish to ensure that the pipeline conversion is quicker and that we will get the offers with us. And for that purpose, we took the motion objects I’ve talked about earlier than associated to our execution of gross sales.

Mike Cikos

Okay. And are you able to remind us of that yet another time? I do know that you’ve got the brand new Chief Revenue Officer who you employed, however what different processes have you ever put in place to make sure that pipeline is changing at a extra normalized stage?

Elad Sharon

Yes. So, we’ve the brand new CRO, which I discussed earlier than. We had a worldwide gross sales kickoff again in February. This is an annual occasion that we’ve. This yr, it was lastly bodily after two years of COVID. The focus of this occasion was particularly on how we convert pipeline sooner. We additionally adjusted the fee plan of the gross sales workforce to incentivize sooner closure. We are going by means of the pipeline and scrutinizing the pipeline in a means that we wish to reprioritize our sources the place the alternatives are, so really to work extra effectively and successfully on the pipeline.

And one other factor we do is we push for an increasing number of journey to see the shoppers nose to nose. It was really inconceivable beforehand in sure territories and international locations. And now, when the journey restrictions have been lifted, we’re in a position to be nearer to prospects and that is essential. In our trade, within the safety trade, face-to-face conferences are important. So altogether, I feel we took just a few motion objects associated to government management, processes focus in addition to being nearer to prospects. I hope this solutions me.

Operator

Thank you. This concludes question-and-answer session. I’d now like to show the decision again over to Dean Ridlon for closing remarks.

Dean Ridlon

Thank you, operator, and thanks, everybody, for becoming a member of us on immediately’s name. Should you have got any further questions, please be happy to achieve out to me. And we stay up for talking with you once more subsequent quarter.

Thank you.

Operator

This concludes immediately’s convention name. Thank you for collaborating. You could now disconnect.



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