Cognyte Software Ltd. (CGNT) Q4 2025 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Cognyte's Fourth Quarter and Fiscal Year End 2025 Earnings Conference Call. [Operator Instructions] Please note that today's conference maybe recorded. I would now like to hand the conference over to your speaker host, Dean Ridlon, Head of Investor Relations. Please go ahead.

Thank you, operator. Hello, everyone. I'm Dean Ridlon, Cognyte's Head of Investor Relations. Thank you for joining us today. I'm here with Elad Sharon, Cognyte's CEO; and David Abadi, Cognyte's 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 upcoming events, then the webcast link for 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, 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 and uncertainties could cause Cognyte’s actual results to differ materially from those indicated in these forward-looking statements, please see our annual report on Form 20-F for the fiscal year ended January 31, 2025 which we filed today, 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. Now, I would like to turn the call over to Elad.

Thank you, Dean. Welcome, everyone, to our fourth quarter conference call. We closed fiscal '25 strong delivering double-digit revenue growth and a significant year-over-year increase in profitability. Q4 came in ahead of our expectations. We grew revenue by 13% year-over-year to $94.5 million. Non-GAAP gross profit increased by 17% year-over-year. We generated more than $9 million of positive adjusted EBITDA for the quarter, representing 114% year-over-year growth and cash flow from operations was approximately $19 million. Looking at our full year results, revenue grew by approximately 12% year-over-year to $351 million. Our profitability grew significantly faster than revenue, Non-GAAP gross profit increased by approximately 15% year-over-year. We generated adjusted EBITDA of $29 million, more than three times what we delivered last fiscal year and we had very strong cash flow from operations of $47 million. These results highlight the significant value we deliver to our customers, our sound execution and the strength of our business model. With our expectations of continued global demand and the market evolving as expected, we believe our strategy of deepening customer relationships while expanding our footprint will drive continued growth. In Q4, we secured a series of significant deals across a diverse customer base. This included a deal worth over $10 million for technology upgrade and a multi-year support agreement with a long-standing law enforcement agency customer in EMEA. In addition, we signed five deals worth $5 million or more with customers in a variety of geographies. These deals include new solutions, expansions and renewal of a support agreement. Our customer base continues to grow. Over the full year, we added over 60 new customers across multiple regions, about twice as many as we signed last fiscal year. This momentum reinforced the significant market opportunity ahead. In the U.S., we continue to strengthen our position expanding our footprint in this key market. This quarter, we signed several new customers and secured follow-on deals with existing ones. These wins underscore the meaningful value our solutions deliver to our customers. We continue to actively pursue opportunities in the U.S. federal law enforcement market. While the sales cycle with these customers is longer than what we have experienced with state and local law enforcement agencies, we are pleased with the level of engagement we have with potential customers in this market segment. Looking ahead to fiscal '26, we are focused on driving growth through new advanced capabilities, deepening customer relationships and expanding our market reach. We believe these initiatives continue to position us to drive sustained profitable growth. For fiscal '26, we expect revenue to be approximately $392 million plus or minus 2%, representing about 12% year-over-year growth at the midpoint of the range. We continue to expect gross profit to grow faster than revenue. We also expect adjusted EBITDA for the year to be about $43 million at the midpoint of the revenue range, approximately 45% year-over-year growth, a result of the leverage we have in our model. We remain committed to long-term growth, increased profitability and operational excellence while strengthening our market leadership. We believe we are well-positioned to seize opportunities and drive lasting value for both our customers and shareholders. Next, I want to take this opportunity to thank Richard Nottenburg for his contributions and guidance during his tenure on the Cognyte Board. He played a key role in establishing Cognyte as an independent company with market-leading technology and a solid foundation for sustainable growth. And I would like to welcome Matthew O'Neill and Nurit Benjamini as the two newest members of our Board. Their appointments reflect our commitment to strengthen the Board of Directors with relevant industry and business experience. Matthew brings extensive domain expertise and security with a strong understanding of U.S. federal agency operations and protocols. He served until December '23 as the Deputy Special Agent in-charge of cyber operations at the United States Secret Service. He directed the agency's global cyber investigative strategies and oversaw efforts to dismantle transnational criminal networks. His insights will be instrumental as we continue to expand our market presence in the U.S. Nurit brings extensive experience in the software sector having had finance, operations, legal and strategic initiatives across multiple roles and domains. His expertise will be invaluable as we continue to scale and execute our growth strategy. We are excited to welcome both Matthew and Nurit to the Board as we remain focused on driving consistent long-term growth at Cognyte. Lastly, I invite you to our virtual Analyst and Investor Day on Tuesday, April 8 at 8 a.m. Eastern Time. We will provide a deeper look into the challenges our customers face and how our solutions and technology help them succeed. The event will feature insights into market dynamics and Cognyte's positioning. We will also share our long-term financial targets outlining how we plan to scale revenue and further drive profitability. We know that many of you are looking for deeper insights and the event is designed to provide exactly that. We are confident in Cognyte's future and we believe we are well-positioned for near-term and long-term success. This event will showcase the significant opportunities in our markets and I hope it leaves you as excited about our potential as I am. I hope to see you all there. Now, let me turn the call over to David to provide more details about our Q4 results and fiscal 2026 outlook. David?

Thank you, Elad, and hello, everyone. We delivered strong fourth quarter and fiscal '25 financial results driven by market demand and solid execution. With our highly differentiated solutions, healthy demand, and the large and loyal customer base, we entered fiscal '26 with good momentum. Revenue for the full year was $350.6 million, an increase of approximately 12% year-over-year. Our total software revenue was $306.7 million, representing about 87% of total revenue aligned with our target mix. Recurring revenue for the full year was $186.6 million, representing 53% of total revenue. Our geographic revenue mix for the year was 55% from EMEA, 31% from APAC and 14% from the Americas. Mix in any given period is primarily impacted by the size of the deals and timing of revenue recognition. Our revenue from the Americas region declined modestly last year. Our revenue from the U.S. increased meaningfully. Non-GAAP gross margin for the year was 71% expanding by 180 basis-points year-over-year. Full year gross profit outpaced revenue growth reaching $249 million, an increase of about 15% year-over-year. We believe this improvement reflects the significant value customers place on our innovative technology, our competitive differentiation and our optimized cost structure. Revenue growth and our business model drove significant year-over-year improvements in profitability underscoring our ability to drive operational leverage. Non-GAAP operating income and adjusted EBITDA grew much faster than revenue. In fiscal 2025, we generated $15.7 million of non-GAAP operating income, almost five times higher than last year loss of $4.2 million and $29.1 million in adjusted EBITDA, more than three times higher than last year gain of $9 million resulting in non-GAAP EPS of $0.06. We ended the year with a strong balance sheet. Our short and long-term contract liabilities commonly referred to as deferred revenue remained robust at $130.3 million at the end of Q4 versus $123.1 million at the end of last fiscal year. Our cash position remains strong at $113.3 million, an increase of over $30 million since the end of last fiscal year, no debt. This cash growth was primarily fueled by strong annual cash flow from operations of about $47 million. During Q4, we began our stock repurchase program buying about 586,000 ordinary shares for an aggregate purchase price of approximately $5.3 million. As a reminder, last November, our Board of Directors approved a share repurchase program of up to $20 million in ordinary shares over 18 months. Now let me share with you more color on Q4 results. Q4 revenue grew by 12.9% year-over-year to $94.5 million. Software revenue was $37.4 million, an increase of $6 million year-over-year. Software services revenue was $45.9 million, an increase of $3.6 million over last year. Total software revenue which includes software and software services was $83.3 million, an increase of $9.6 million compared to last year, representing about 88% of total revenue. Recurring revenue remains the strength reaching $47.3 million or 50% of total revenue in Q4 compared to $42.9 million in the same period last year. Recurring revenue primarily from support contracts and some subscription offerings enhance visibility and support long-term growth. Professional services revenue was $11.2 million, an increase of $1.2 million over last year. Non-GAAP gross margin for the quarter was 71.5%. Our total software non-GAAP gross margin improved to 78.9% versus 77.4% last year, a year-over-year improvement of 150 basis points. Our professional services non-GAAP gross margin was 16.3% versus 6.8% last year. These improvements reflect the competitive differentiation of our solutions, ongoing deployment efficiency and better cost structure. Increase in non-GAAP operating income and adjusted EBITDA outpaced revenue growth reinforcing our strong financial model. In Q4, we generated $6 million in non-GAAP operating income, an increase of more than 500% versus last year and $9.3 million of adjusted EBITDA, an increase of 114% versus last year resulting in non-GAAP EPS of $0.03. During Q4, we generated $18.7 million in cash flow from operations and $14.4 million in free cash flow demonstrating the strength of our financial model and operational efficiency. We delivered better than expected collection and working capital efficiencies in the fourth quarter driving higher cash conversion than we are expecting in future periods. Let me walk you through our performance against some of our key performance indicators. RPO or remaining performance obligations represent contracted revenue to be recognized in future periods influenced by factors such as sales cycles, deployment timelines, contract length, renewal timing and seasonality. RPO fluctuations are not necessarily indicative of future revenue growth rate. Total RPO is sum of deferred revenue of $130.3 million and backlog of $415.5 million. At the end of Q4, total RPO was $545.8 million, down by about $45 million versus last year. Total RPO which also includes multi-year support contracts is expected to continue to fluctuate due to renewal timing. Since the end of fiscal '25, our total RPO has been boosted by a significant support contract renewal with an annual value of over $20 million for three years. This long-term agreement underscores the longstanding customer confidence in Cognyte technology foresight, domain expertise and continued delivery of customer value. It is an example of how deal size, contract length and renewal timing can impact RPO. Short-term RPO at the end of Q4 increased to $335.3 million, which we believe provides solid visibility into revenue over the next 12 months. These healthy RPO levels reinforce our growth expectation and validate the strength and resilience of our business model. Q4 billings were $95 million consistent with last year and in line with our expectations. Our non-GAAP gross profit for the quarter was $67.6 million, an increase of $9.8 million or 17% year-over-year. Q4 non-GAAP operating expenses were $61.6 million in line with our expectations. The combination of revenue growth, improved margins and ongoing cost management drove a notable increase in profitability. During Q4, we generated $9.3 million of adjusted EBITDA and $6 million in non-GAAP operating income. We remain focused on driving further financial improvements and continuing to expand our margins. Turning to guidance. For fiscal '26, we expect full year revenue of approximately $392 million plus or minus 2%. This represents approximately 12% year-over-year growth at the midpoint of the revenue range. We expect total software revenue to be about $340 million, representing approximately 87% of total revenue and professional services revenue to represent about 13% of total revenue in line with our strategic goals. We believe that our strong short-term RPO of $335 million and favorable demand environment support this outlook. We expect Q1 revenue to be similar to the Q4 levels we are reporting today with sequential growth each quarter throughout the year in line with the seasonality of previous years. We expect non-GAAP gross margin to increase year-over-year to approximately 71.5% reflecting an improvement of 50 basis points. Gross margin may fluctuate between quarters based on our revenue mix. As a result of their improved gross margin, we expect gross profit to increase at a faster rate than revenue growth. For the full year, we expect our non-GAAP operating expenses to grow meaningfully slower than the revenue reaching approximately $250 million, an increase of about 7%. Operating expenses seasonality should remain in line with prior years with slight fluctuations throughout the year. We expect non-GAAP operating income to be about $30 million, nearly doubling year-over-year. We expect adjusted EBITDA to be about $43 million, representing 45% year-over-year growth. We expect our non-GAAP taxes to be about 40% or $13 million and non-controlling minority interest of about $5 million. As a result, we expect annual non-GAAP EPS to come in at $0.16 at the midpoint of the revenue range based on weighted average of approximately 76 million fully diluted shares in FYE26. Turning to cash flow. As I mentioned, in fiscal '25, our cash flow from operations benefited from very strong collections and working capital efficiencies. Although we don't expect to maintain the same pace of cash conversion this year, we expect to generate $45 million of cash flow from operation in fiscal '26. For the full year, we expect total CapEx of approximately $13 million. To summarize, we delivered a consistent execution driving strong results for fiscal 2025. We secured major deals from both existing and new customers, which we believe reflects the growing demand for and the value of our cutting-edge investigative analytics solutions. Our ongoing commitment to innovation and expansion of our advanced solutions including leveraging AI continues to enhance the value we provide for customers. We entered fiscal 2026 with positive momentum reflecting the health of our business. Our clear revenue visibility and our robust balance sheet including a solid cash position ensures financial flexibility. With this strong foundation, we believe we are well-positioned to capitalize on the opportunities in front of us and deliver profitable growth this year and beyond. Lastly, I would like once again to invite everyone to attend our virtual Analyst and Investor Day on Tuesday, April 8 at 8 a.m. Eastern Time. This event will provide deeper insight into our long-term growth strategy and expected future drivers of profitability. With that, I would like to hand the call over to the operator to open the lines for questions. Operator?

[Operator Instructions] And our first question comes from Mike Cikos with Needham. Your line is open.

Great. Thanks for taking the questions here, guys. Congrats on the quarter. I wanted to cycle back to the demand trends. I know that you broke out the EMEA versus APJ Americas and U.S. business. But can you help us think about what you guys are seeing in the U.S. market specifically just given the current policy uncertainty that's currently in the headlines?

Yes. Thank you, Mike. So we continue to believe that U.S. presents a good opportunity for us. We increased investments over the years to improve the market reach. We started with state and local law enforcement agencies. We were able to acquire new customers and also get some few follow-on orders already. And we continue the efforts also to penetrate to the federal agencies. We do have a very good engagement with some federal agencies already including proof of concept and demonstration with some of them. Result was very good and we get very positive feedback. So in terms of the product market fit and the superiority of our technology and the very strong results of the demonstration, I think we are in a very good position to continue and expand our presence in the U.S. In terms of the results, we did see increase in the U.S. or both in the U.S. last year year-over-year. We expect this growth to continue and be faster than the rest of the territories and we continue to see this opportunity as a growth initiative for us also for the next few years. Given the current situation, we don't really think, given that we just started in a penetration mode, I don't think the unrest in the U.S. will impact our efforts. I do believe that what we feel as very healthy market dynamics, strong need and our position in the U.S. will take us to where we want to be. And we continue to invest for this year to continue and expand our presence in the U.S. in state and local as well as federal.

Got it. Thanks for that. Maybe if I could just try another one on that, but based on what you're seeing or hearing from your sales team, are sales cycles extending or is there a potential that it's almost like - it's there a potential impact to that sales cycle potentially because of attrition with the folks that you guys are working with?

Yes. So first of all, to begin with, the sales cycle in the U.S. is longer than what we see now the territories because we are in penetration mode. So it took for us some time to get the brand awareness to access the market, to have the customers take our solutions and try it. So to begin with the long -- the sales cycles in the U.S. are longer. I cannot predict what will be the situation in the U.S. given what's going on there right now. But because we just started and the market is very large compared to what we generate from the U.S., I don't think it will be a negative impact on us. But it's hard to predict. Regardless, we continue the efforts full gear. We do not blink. We will continue to invest. We will continue to hire more sales people over time. We'll continue to increase our demonstration and POC capacity over time. We are also presenting and participating in relevant conferences in the U.S. that are relevant for our industry. So I do believe that the U.S. will be a growth engine for us for the long-term, but also expect it to grow in fiscal '26.

Got it. And maybe just for David, just a quick question on billings in the quarter. Can you help us think about, I guess, what drove that decline on a year-over-year basis in the billings? And then secondly, as we think about next year, why is the cash flow from operations expected to decline as well? Thank you.

So billing for Q4 was $95 million. And if you may recall, the billing in Q3 was $103 million or $105 million, if I recall correctly, much higher than the revenue. If you look in an annual basis, you can see that overall billing was strong. We continue to build our customer as planned. As part of our overall quality of the revenue and you can see in the way that we actually deliver our results, the pace of billing is, I would say, been a good place. Also $95 million -- on $94.5 million, it's a good billing indicator. So we are actually pleased with the billing figures. And also if you may recall on Q3, we were speaking about that Q3 was abnormal and was extremely higher because we were able to build faster. As for the cash flow from operation, so actually cash flow from operation was very strong this year. We ended the year with $47 million of cash flow from operation, which mainly was driven from efficiencies related to our working capital and cash collection that was much faster than we planned. So we end the year with a very strong balance sheet and the cash from ops. Looking into next year, we are forecasting $45 million of cash from operation, while we -- our profit is -- our operating income is $30 million. So actually, we expect that even next year, we will have some benefit from working capital and collections. So overall, cash generation is very strong.

Terrific. I'll turn it over to my colleagues. Thank you.

And the next question comes from Peter Levine with Evercore. Your line is open.

Thank you, guys for taking my questions. Maybe to piggyback off of Mike's prior question U.S. demand. With the administration, obviously, they're pushing immigration, their fight against the cartel and how they're classifying them now as a terrorist organization. Can you maybe just help us understand like what are the U.S. demand drivers? Is it different than what you're seeing internationally? Maybe I'll start there.

Yes. So there is commonality in the demand globally which is related to, I would say, the criminal activities that are ongoing criminal activities, organized crime, terror kidnapping, child kidnapping, border controls. Many customers around the globe are facing the same thing. In certain areas some use cases are more -- putting more pressure on the agencies than the others. In the U.S. now, what we hear is that border control is becoming more important, but it's not only border control. Because if you look at the day-to-day work of law enforcement agencies, they still have to deal with organized crime. They still have to deal with funding of criminal activities. They still have to deal with local crimes. So this is something that is an ongoing and will continue forever. In addition to that, we do hear that maybe requirements or demand related to border control should increase over time in the U.S. So we haven't seen this converted into demand yet, but maybe this will happen. But generally speaking, the demand in the U.S. in terms of the use cases that they have to deal with is similar to the rest of the world.

Okay. And then, if you think about -- again, you talked about sales cycles, what investments are you making? What are you changing to the go-to-market to kind of accelerate those sales cycles? I know it's a newer market for you. But are there any priorities this year that you're kind of focused in on to shorten that sales cycle? Is it partnering -- building out an ecosystem of partners to kind of leverage the sales? Just help us understand like what are you doing to kind of double down in the U.S. market?

Yes. So the efforts in the U.S. market in terms of sales are disproportional to the rest of the world given that we are in a penetration mode. The amount of effort and investments we put on sales and marketing are higher than in average. For example, we hired local sales team that are -- some of them are coming from those agencies. So they have the relationship and they know the needs. This is one example. Second example is that we participate more in local conferences that are actually focused for the requirements, specific requirements of the local agencies. Another area is marketing. The marketing efforts is much higher in the U.S. than in the rest of the world. We had recently a Board member, Matthew O'Neill that came from the U.S. Secret Service to help us understand the federal market even further. We do expand our partner network in the U.S. So we actually focus on both the go-to-market strategies direct, but also indirect with partners. We are looking for contract vehicles that can help us accelerate the sales cycle. So the efforts and the investments we do in the U.S. are significantly higher than in other territories and also the requirements there and the size of the market are much higher. So we take all of it into consideration in our planning and that's the reason we invest more. We are highly focused on this market and I believe it will pay for us. I mean, I expect the U.S. to continue and grow faster than the rest of the world.

Okay. And if I could squeeze one last one for David. I know we'll have to wait until Tuesday, but can you maybe just give us an example or maybe just help us understand like in terms of modeling, what should we expect? Are we getting a long-term model, a near-term model? Obviously, 12% growth for next year. So really I don't know if I should wait for Tuesday, but the durability of double-digit growth is that sustainable longer-term post fiscal '26?

Peter, if I will share with you the target for the three years probably I will lose all the audience for the Investor Day. So I need to -- you will need to wait for next Tuesday, but in general, the fundamental of the business are very healthy. You can see it in the last say the nine quarters in a row, we were able to drive much better profitability. Gross margin is growing, gross profit is growing even faster than top line growth. In last year, we were able to grow our gross profit 15% while the top line was growing 12%. So in any, I would say, parameter that you look for profitability, you can see the benefit on the model. So gross profit, gross margin is one thing. You can see the R&D to revenue ratio is declining and we believe this trend will continue with us. Obviously, we're investing in sales in the market. I was speaking about the U.S. market required investment. We are investing, but we are always investing in our thoughts about top line growth with increasing profitability. The balance of the two of them actually you can see next year, we guided for 12% top line growth and EBITDA growth of 45% on 12% growth. So I think that the model itself, the way that we are investing and the way that we're deciding align with this understanding. Obviously, there is room for improvement over the time in the next week in the Investor Day. I need some work there. So I will give you the target for the 2028.

Perfect. Thank you very much for that.

[Operator Instructions] And the next question comes from Shaw Yale with TD Cowen. Your line is open.

Thank you. Hi. Good Morning. Good afternoon. Elad, I think we're all hearing the excitement and the growing focus on the U.S. market. But maybe can you talk to us about some of the market dynamics you're seeing outside of the U.S. right now? Thank you.

Hi, Shaw. thank you. So the demand drivers globally remains healthy. We see the data that continues to grow in volumes and diversity and actually customers have to convert it into insight. So they need much stronger technology tools in order to do that. We do see that adversaries are more sophisticated. They also use advanced technology in order to evade detection. So they use cryptocurrency that are anonymized. They don't talk to each other in usual means. So actually, it's very difficult to put our hands on them and we have to remember that it's becoming more and more global. The technology is evolving, AI is an example. So if you look at technology and AI, it presents to our customers opportunity and risk, a risk because also the bad guys are using it, but opportunity because they can use AI for two main advantages. One is to uncover even more hidden insights out of the same datasets customers have today, but also use Gen AI in order to improve dramatically the efficiency of the investigator and users. So the demand drivers remain very strong. Our customers derive significant value from our technology. We get very positive feedback. We are in this market three decades. Some of the customers are with us almost three decades. Some of them share with us impressive success stories on being able to save lives, being able to prevent significant financial damage to the countries and nations. And I believe that the combination of the healthy demand drivers and what we see in the market, what we hear from our customers and the value our technology generates for them, this one will create the growth also going forward. And I believe we're well-positioned for continued growth.

I show no further questions in the queue at this time. I would now like to turn the call back over to Dean for closing remarks.

Thank you, Michelle, and thank you, everyone, for joining us on today's call. In addition to next week's Analyst and Investor Day, Elad, David and I will be in New York in May to meet with investors and hope to see some of you then. In the meantime, please feel free to reach out to me should you have any questions and we look forward to speaking with you again next quarter.

This concludes today's conference call. Thank you so much for participating. You may now disconnect.