Cognyte Software Ltd. Q2 FY2027 earnings call

• Strong Market Dynamics: Governments are prioritizing national security and intelligence capabilities, driving demand for AI-powered platforms that offer explainability and sovereignty.
• Strategic Focus on AI and Sovereignty: Customers require trusted AI embedded in workflows with domain expertise and governance; they prefer platforms under their own control rather than black-box commercial tools.
• Commercial Traction: New logo activity remains strong with 14 new customers in H1 (including a tier 1 NATO agency). Significant expansions occurred in Asia Pacific (network intelligence and border security).
• US Progress: Federal opportunities moved into procurement following successful proofs of concept. State and local wins continued. The company is on target to achieve $20 million in signed deals in the US this fiscal year.
• Leadership Addition: Adam Philpott joined as Chief Revenue Officer to lead global commercial efforts, focusing on expansion, new logos, and US growth.
• Financial Leverage: Profitability expanded significantly faster than revenue. Non-GAAP gross margin improved by 154 basis points to 73.7%. Non-GAAP operating income increased 52.5% to $12.2 million.
• Mix Shift: Increasing shift toward software and recurring revenue enhances quality, margins, and scalability. Recurring revenue is growing faster than total revenue despite being recognized at point-in-time for some term-based licenses.

Total revenue was $109 million, up 12% year over year. Total software revenue grew 20.9% to $100.8 million, representing more than 92% of total revenue. Recurring revenue grew 18.4% to $56.2 million, accounting for 51.4% of total revenue. Professional services revenue declined to $8.4 million from $14.2 million a year ago, reflecting less than 8% of total revenue compared to approximately 15% previously.

• FY 2027 Revenue: Narrowed full-year revenue range around an unchanged midpoint of approximately $448 million (+/- 2%), representing ~12% year-over-year growth.
• Quarterly Cadence: Expects Q3 revenue to be slightly higher than Q2, followed by sequential growth in Q4.
• Profitability: Expects non-GAAP gross margin of ~73.5%, non-GAAP operating income of ~$56 million, adjusted EBITDA of ~$68 million, and non-GAAP EPS of $0.47.
• Cash Flow: Maintains expectation for significant positive operating cash flow for the full year, though timing/levels may be affected by deliberate inventory investments to support customer deliveries and supply chain risks.
• Long-term Target: Remains on track to achieve FY 2028 revenue target of $500 million.

• Foreign Exchange Headwinds: Weaker US dollar against the Israeli shekel impacted operating expenses, partially offset by hedging and efficiency initiatives.
• Supply Chain and Inventory: Deliberate increase in inventory levels to mitigate long delivery times and rising prices in the supply environment impacts short-term cash flow generation.
• Revenue Recognition Timing: Shift toward subscription agreements affects the timing of reported revenue recognition compared to historical perpetual models, causing fluctuations in quarterly metrics like RPO.
• RPO Volatility: Reported RPO fluctuates due to contract structures, consumption of large multi-year contracts, and exclusion of cancelable portions, requiring broader visibility analysis beyond just RPO numbers.

Q: Eric Martinuzzi asked about the timeline for US federal pipeline transactions currently in procurement, specifically if awards would occur in the current fiscal year. / A: Elad Sharon confirmed that several federal agencies have completed successful proofs of concept with very positive feedback. He expects some of these deals to be awarded during the current fiscal year, aligning with the progress made in the federal segment.

Q: Taz Kajolgi questioned the gap between accelerating CRPO bookings (growing ~60%) and conservative revenue guidance (~12%), asking if management was being overly cautious. / A: David Abadi explained that the gap reflects a strategic shift toward higher-quality subscription revenue rather than weakness. Elad Sharon added that underlying growth is actually faster than reported because the mix shift to subscriptions delays recognition compared to perpetual licenses; if the mix remained static, top-line growth would appear higher.

Q: Matthew Calitri sought clarification on how the shift to subscription revenue recognition impacts reported growth rates compared to a hypothetical perpetual-only scenario. / A: Elad Sharon noted that while subscription adoption is faster than expected, perpetual licenses still dominate. He estimated that without the mix shift, growth would be a few percentage points higher. However, he emphasized that the shift improves long-term predictability and visibility, indicating the market is growing faster than the headline numbers suggest.

Q: Taz Kajolgi asked if the company maintained its full-year operating cash flow guidance of $45 million despite recent negative quarterly trends and inventory purchases. / A: David Abadi clarified that Q2 generated positive operating cash flow ($1.1 million), contrasting with last year's outflow. He explained that the company is deliberately increasing inventory to secure supply and meet strong customer demand, which impacts cash flow timing but supports future execution. They remain confident in generating significant positive cash flow for the full year.