nyte Software .(CGNT) - 2022 Q3 - Quarterly Report

Executive Summary & Business Overview Company Introduction Cognyte Software Ltd. is a global leader in investigative analytics software, empowering governments and enterprises with actionable intelligence to accelerate and improve the effectiveness of investigations against national security threats, personal safety risks, and criminal activities - Cognyte Software Ltd. is a global leader in investigative analytics software that empowers governments and enterprises with Actionable Intelligence for a Safer World™[15] - The company's open software helps customers accelerate and conduct investigations, deriving insights to identify, neutralize, and tackle threats to national security, personal safety, and various forms of criminal activity[15] Q3 & YTD FYE23 Financial Highlights Cognyte reported Q3 FYE23 non-GAAP revenue of $71.5 million and a non-GAAP diluted EPS of $(0.25); for the nine months ended October 31, 2022 (YTD FYE23), non-GAAP revenue reached $239.5 million, with a non-GAAP diluted EPS of $(1.08) Q3 FYE23 Financial Highlights | Metric | GAAP | Non-GAAP | | :----- | :--- | :------- | | Revenue | $71.3 million | $71.5 million | | Gross Margin | 62.0% | 63.4% | | Diluted EPS | $(0.41) | $(0.25) | YTD FYE23 Financial Highlights | Metric | GAAP | Non-GAAP | | :----- | :--- | :------- | | Revenue | $238.8 million | $239.5 million | | Gross Margin | 61.7% | 63.0% | | Diluted EPS | $(1.29) | $(1.08) | Management Commentary Despite a sequential revenue decline in Q3 FYE23 due to slow backlog conversion, the CEO anticipates a turning point with sequential revenue growth in Q4 FYE23 and targets approximately 5% revenue growth for FYE24; the company also completed the divestiture of Situational Intelligence solutions and aims for breakeven cash flow from operations for Q4 and full FYE24 - CEO Elad Sharon expects sequential revenue growth to resume in Q4 FYE23, which is believed to be a turning point[4] - The company is targeting revenue to grow by approximately 5% for fiscal year 2024 compared to the current year[4] - Successfully completed the divestiture of Situational Intelligence solutions on December 1, 2022, as part of efforts to simplify and improve company focus during challenging macro-economic conditions[5] - CFO David Abadi stated the company is targeting about breakeven cash flow from operations in the current quarter and for the full year ending January 31, 2024, based on revenue growth outlook and cost structure improvements[6] Financial Outlook Cognyte projects non-GAAP revenue for Q4 FYE23 to be between $65 million and $74 million, including approximately $2 million from Situational Intelligence solutions; for FYE24, GAAP revenue is expected to grow by approximately 5% from FYE23 revenue, excluding Situational Intelligence solutions Q4 FYE23 Non-GAAP Revenue Outlook | Metric | Range | | :----- | :---- | | Revenue | $65 to $74 million | - The Q4 FYE23 non-GAAP revenue outlook includes approximately $2 million of revenue from one month of Situational Intelligence solutions[8] - For FYE24, GAAP revenue is targeted to grow by approximately 5% from FYE23 revenue, excluding Situational Intelligence solutions[10] GAAP Financial Statements Condensed Consolidated Statements of Operations For the nine months ended October 31, 2022, Cognyte reported a significant decline in total GAAP revenue to $238.8 million from $349.1 million in the prior year, resulting in a net loss of $(83.9) million and a diluted EPS of $(1.29), a reversal from net income in the previous year Condensed Consolidated Statements of Operations (GAAP) - Nine Months Ended October 31 (in thousands) | Metric | 2022 | 2021 | Change (YoY) | | :-------------------- | :--- | :--- | :----------- | | Total revenue | $238,801 | $349,085 | -31.6% | | Gross profit | $147,279 | $251,864 | -41.5% | | Operating (loss) income | $(82,402) | $6,571 | N/A (loss from income) | | Net (loss) income | $(83,900) | $1,267 | N/A (loss from income) | | Diluted EPS | $(1.29) | $(0.04) | N/A (loss from income) | Condensed Consolidated Statements of Operations (GAAP) - Three Months Ended October 31 (in thousands) | Metric | 2022 | 2021 | Change (YoY) | | :-------------------- | :--- | :--- | :----------- | | Total revenue | $71,254 | $118,360 | -39.8% | | Gross profit | $44,207 | $86,076 | -48.6% | | Operating (loss) income | $(26,001) | $7,239 | N/A (loss from income) | | Net (loss) income | $(26,805) | $3,508 | N/A (loss from income) | | Diluted EPS | $(0.41) | $0.03 | N/A (loss from income) | Condensed Consolidated Balance Sheets As of October 31, 2022, Cognyte's total assets decreased to $507.3 million from $664.6 million at January 31, 2022, primarily driven by reductions in cash and cash equivalents, accounts receivable, and goodwill; total liabilities also decreased by $86.2 million over the same period Condensed Consolidated Balance Sheets (GAAP) (in thousands) | Metric | October 31, 2022 | January 31, 2022 | Change | | :-------------------- | :--------------- | :--------------- | :----- | | Cash and cash equivalents | $42,643 | $152,590 | $(109,947) | | Accounts receivable, net | $124,261 | $179,198 | $(54,937) | | Goodwill | $115,398 | $158,233 | $(42,835) | | Total assets | $507,253 | $664,605 | $(157,352) | | Short-term loan | $50,000 | $100,000 | $(50,000) | | Total liabilities | $279,315 | $365,516 | $(86,201) | | Total stockholders' equity | $227,938 | $299,089 | $(71,151) | Condensed Consolidated Statements of Cash Flows For the nine months ended October 31, 2022, Cognyte experienced a net cash outflow of $(46.1) million from operating activities, a significant decrease from the $9.6 million inflow in the prior year; financing activities used $(51.4) million, largely due to a $50 million repayment of a short-term loan Condensed Consolidated Statements of Cash Flows (GAAP) - Nine Months Ended October 31 (in thousands) | Metric | 2022 | 2021 | Change | | :-------------------- | :--- | :--- | :----- | | Net cash (used in) provided by operating activities | $(46,137) | $9,589 | $(55,726) | | Net cash used in investing activities | $(13,199) | $(18,358) | $5,159 | | Net cash used in financing activities | $(51,443) | $(39,780) | $(11,663) | | Net decrease in cash, cash equivalents, restricted cash, and restricted cash equivalents | $(111,262) | $(48,834) | $(62,428) | - A significant financing outflow in 2022 was the repayment of a $50 million short-term loan[25] Non-GAAP Financial Measures & Reconciliations Non-GAAP Revenue Non-GAAP revenue for the nine months ended October 31, 2022, was $239.5 million, slightly higher than GAAP revenue due to fair value adjustments from business acquisitions; for the three months, non-GAAP revenue was $71.5 million Non-GAAP Revenue Reconciliation (in thousands) | Metric | Nine Months Ended Oct 31, 2022 | Three Months Ended Oct 31, 2022 | | :-------------------- | :----------------------------- | :------------------------------ | | Total GAAP revenue | $238,801 | $71,254 | | Revenue adjustments | $732 | $244 | | Total non-GAAP revenue | $239,533 | $71,498 | Non-GAAP Gross Profit and Gross Margin Non-GAAP gross profit for the nine months ended October 31, 2022, was $151.0 million, with a non-GAAP gross margin of 63.0%, an improvement over the GAAP gross margin of 61.7%; for the three months, non-GAAP gross margin was 63.4% compared to GAAP's 62.0% Non-GAAP Gross Profit and Gross Margin Reconciliation - Nine Months Ended Oct 31 (in thousands) | Metric | 2022 | 2021 | | :----- | :--- | :--- | | GAAP gross profit | $147,279 | $251,864 | | GAAP gross margin | 61.7% | 72.1% | | Adjustments (Revenue, Amortization, Stock-based comp, Restructuring, Separation) | $3,734 | $4,812 | | Non-GAAP gross profit | $151,013 | $256,676 | | Non-GAAP gross margin | 63.0% | 73.3% | Non-GAAP Gross Profit and Gross Margin Reconciliation - Three Months Ended Oct 31 (in thousands) | Metric | 2022 | 2021 | | :----- | :--- | :--- | | GAAP gross profit | $44,207 | $86,076 | | GAAP gross margin | 62.0% | 72.7% | | Adjustments (Revenue, Amortization, Stock-based comp, Restructuring) | $1,118 | $1,409 | | Non-GAAP gross profit | $45,325 | $87,485 | | Non-GAAP gross margin | 63.4% | 73.7% | Non-GAAP Operating Expenses Non-GAAP operating expenses, including Research and Development (R&D) and Selling, General and Administrative (SG&A), are presented after adjustments for items such as stock-based compensation, restructuring, acquisition, and separation expenses, providing a more focused view of core operational costs Non-GAAP Research and Development, Net Non-GAAP Research and Development, Net Reconciliation - Nine Months Ended Oct 31 (in thousands) | Metric | 2022 | 2021 | | :----- | :--- | :--- | | GAAP R&D, net | $109,655 | $105,069 | | Stock-based compensation expenses | $(5,043) | $(6,014) | | Restructuring expenses, net | $(1,329) | $(189) | | Separation expenses, net | — | $(67) | | Other adjustments | $2 | $40 | | Non-GAAP R&D, net | $103,285 | $98,839 | | As a percentage of non-GAAP revenue | 43.1% | 28.2% | Non-GAAP Selling, General and Administrative Expenses Non-GAAP Selling, General and Administrative Expenses Reconciliation - Nine Months Ended Oct 31 (in thousands) | Metric | 2022 | 2021 | | :----- | :--- | :--- | | GAAP SG&A expenses | $119,273 | $139,019 | | Stock-based compensation expenses | $(9,192) | $(17,343) | | Acquisition (expenses) benefit, net | $(656) | $(432) | | Restructuring (expenses) benefit, net | $(2,707) | $(429) | | Separation expenses, net | $(52) | $(10,987) | | Provision for legal claim | $(37) | $(1,391) | | Other adjustments | $(4) | $(766) | | Non-GAAP SG&A expenses | $106,625 | $107,671 | | As a percentage of non-GAAP revenue | 44.5% | 30.7% | Non-GAAP Operating (Loss) Income, Operating Margin and Adjusted EBITDA For the nine months ended October 31, 2022, Cognyte reported a non-GAAP operating loss of $(58.9) million and an Adjusted EBITDA of $(46.7) million, with corresponding margins of (24.6)% and (19.5)%; this reflects significant adjustments from GAAP operating loss of $(82.4) million Non-GAAP Operating (Loss) Income and Adjusted EBITDA Reconciliation - Nine Months Ended Oct 31 (in thousands) | Metric | 2022 | 2021 | | :----- | :--- | :--- | | GAAP operating (loss) income | $(82,402) | $6,571 | | Total adjustments | $23,505 | $43,595 | | Non-GAAP operating (loss) income | $(58,897) | $50,166 | | Non-GAAP operating margin | (24.6)% | 14.3% | | Depreciation and amortization | $12,191 | $11,592 | | Adjusted EBITDA | $(46,706) | $61,758 | | Adjusted EBITDA margin | (19.5)% | 17.6% | Non-GAAP Operating (Loss) Income and Adjusted EBITDA Reconciliation - Three Months Ended Oct 31 (in thousands) | Metric | 2022 | 2021 | | :----- | :--- | :--- | | GAAP operating (loss) income | $(26,001) | $7,239 | | Total adjustments | $6,618 | $10,884 | | Non-GAAP operating (loss) income | $(19,383) | $18,124 | | Non-GAAP operating margin | (27.1)% | 15.3% | | Depreciation and amortization | $3,980 | $3,999 | | Adjusted EBITDA | $(15,403) | $22,123 | | Adjusted EBITDA margin | (21.5)% | 18.6% | Non-GAAP Net (Loss) Income and Diluted EPS For the nine months ended October 31, 2022, non-GAAP net loss attributable to Cognyte was $(73.2) million, resulting in a non-GAAP diluted EPS of $(1.08), an improvement compared to the GAAP net loss of $(87.0) million and diluted EPS of $(1.29) Non-GAAP Net (Loss) Income and Diluted EPS Reconciliation - Nine Months Ended Oct 31 (in thousands, except per share data) | Metric | 2022 | 2021 | | :----- | :--- | :--- | | GAAP net (loss) income attributable to Cognyte Software Ltd. | $(87,028) | $(2,458) | | Total adjustments | $13,821 | $41,102 | | Non-GAAP net (loss) income attributable to Cognyte Software Ltd. | $(73,207) | $38,644 | | GAAP diluted net (loss) income per share attributable to Cognyte Software Ltd. | $(1.29) | $(0.04) | | Non-GAAP diluted net (loss) income per share attributable to Cognyte Software Ltd. | $(1.08) | $0.58 | Non-GAAP Net (Loss) Income and Diluted EPS Reconciliation - Three Months Ended Oct 31 (in thousands, except per share data) | Metric | 2022 | 2021 | | :----- | :--- | :--- | | GAAP net (loss) income attributable to Cognyte Software Ltd. | $(27,786) | $2,216 | | Total adjustments | $10,919 | $11,686 | | Non-GAAP net (loss) income attributable to Cognyte Software Ltd. | $(16,867) | $13,902 | | GAAP diluted net (loss) income per share attributable to Cognyte Software Ltd. | $(0.41) | $0.03 | | Non-GAAP diluted net (loss) income per share attributable to Cognyte Software Ltd. | $(0.25) | $0.21 | Non-GAAP Tax Provision The non-GAAP provision for income taxes for the nine months ended October 31, 2022, was $10.1 million, with a non-GAAP effective income tax rate of (16.9)%, significantly differing from the GAAP provision of $2.1 million and an effective tax rate of (2.6)% Non-GAAP Tax Provision Reconciliation - Nine Months Ended Oct 31 (in thousands) | Metric | 2022 | 2021 | | :----- | :--- | :--- | | GAAP provision for income taxes | $2,089 | $4,123 | | GAAP Effective income tax rate | (2.6)% | 76.5% | | Non-GAAP tax adjustments | $8,024 | $1,764 | | Non-GAAP provision (benefit) for income taxes | $10,113 | $5,887 | | Non-GAAP effective income tax rate | (16.9)% | 12.2% | Revenue on a Constant Currency Basis For the nine months ended October 31, 2022, reported GAAP revenue decreased by (31.6)%, but on a constant currency basis, the decrease was (30.0)%, indicating a 1.6% negative impact from foreign currency exchange rates; a similar trend was observed for the three-month period Revenue Change on a Constant Currency Basis - Nine Months Ended Oct 31 | Metric | GAAP Revenue | Non-GAAP Revenue | | :----- | :----------- | :--------------- | | Reported period-over-period revenue change | (31.6)% | (31.6)% | | % impact from change in foreign currency exchange rates | 1.6% | 1.6% | | Constant currency period-over-period revenue change | (30.0)% | (30.1)% | Revenue Change on a Constant Currency Basis - Three Months Ended Oct 31 | Metric | GAAP Revenue | Non-GAAP Revenue | | :----- | :----------- | :--------------- | | Reported period-over-period revenue change | (39.8)% | (39.8)% | | % impact from change in foreign currency exchange rates | 1.8% | 1.8% | | Constant currency period-over-period revenue change | (38.0)% | (37.9)% | Supplemental Information & Disclosures About Non-GAAP Financial Measures Cognyte provides non-GAAP financial measures to offer investors useful supplemental information, facilitate comparisons, and align with management's internal metrics; these measures exclude items such as revenue adjustments, amortization of acquired intangibles, stock-based compensation, acquisition/restructuring/separation expenses, legal claims, and other adjustments, as well as using a non-GAAP effective income tax rate to present a clearer view of core operational performance - Non-GAAP financial measures are used to provide investors with useful supplemental information, facilitate comparison of financial results and business trends between periods, and align with key metrics used by management[41][42] - Adjustments to GAAP measures include revenue adjustments, amortization of acquired technology and other acquired intangible assets, stock-based compensation expenses, acquisition expenses, restructuring expenses, separation expenses, provision for legal claim, and other adjustments[44][45][48][49][50][51][52] - Adjusted EBITDA is defined as net income (loss) attributable to non-controlling interest before interest expense, interest income, income taxes, depreciation expense, amortization expense, and other non-GAAP adjustments[54] About Constant Currency Constant currency calculations are employed to assess financial performance by excluding the impact of foreign currency exchange rate fluctuations; this is achieved by translating current-period foreign currency results into U.S. dollars using prior-period average exchange rates, thereby facilitating the assessment of underlying business trends - Constant currency calculations translate current-period foreign currency revenue into U.S. dollars using prior-period average foreign currency exchange rates to exclude the effect of fluctuations[38][55] - This method facilitates the assessment of underlying business trends by removing the impact of changes in foreign currency exchange rates[55] Caution About Forward-Looking Statements This press release contains forward-looking statements that are subject to various known and unknown risks, uncertainties, assumptions, and factors, including customer behavior, supply chain disruptions, macroeconomic conditions, regulatory constraints, and competition, which could cause actual results to differ materially from expectations; the company disclaims any obligation to update these statements unless legally required - Forward-looking statements are based on management's expectations and involve known and unknown risks, uncertainties, assumptions, and other important factors that could cause actual results or conditions to differ materially[16] - Key risk factors include customer delays or cancellations, global supply chain disruptions, macroeconomic and global conditions (e.g., military actions, COVID-19), regulatory constraints, competition, and risks associated with international operations[16] - The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances, or any other reason, except as otherwise required by law[18]