All right, well, welcome back, everyone, to our 28th Needham Growth Conference. I'm Matt Calitri. I'm part of our Infrastructure Software Equity Research team, and it's a pleasure to be joined by Cognyte today. We have CEO Elad Sharon and CFO David Abadi with us. Thank you guys for being here.
Thank you for having us.
Maybe just for an intro here for any investors who might be newer to the story, just if you could give a breakdown of what Cognyte does and what's the value proposition.
Yes. Good afternoon. Cognyte is a leading investigative analytics software vendor. Our customers are primarily security agencies, law enforcement, national security, national intelligence, military intelligence agencies. Actually, we help them to convert the huge amounts of data, structured and unstructured, of all kinds, into insights in order for them to be able to improve the speed, accuracy, and success rate of investigations and make the world safer. We're in this business for three decades. We have hundreds of customers in nearly 100 countries. Our focus actually is to be able to help our customers to make sense out of their chaotic data and make sure that our customers' outcomes provide them with the capabilities and the tools to be very successful in preventing and neutralizing threats of all kinds.
That's great. And when you think about your growth strategy over the next two, three years, what does that look like?
Yeah. So when we look at the next few years, we have a few growth pillars. We actually gave three targets back in April last year to be with a top line of $500 million and with adjusted EBITDA to close to 20%, which is about two years from now for fiscal year ending January 2028. And there are actually three main pillars that we believe will drive this growth. The first one is the repeat business from existing customer base. Although we sell our offerings primarily in perpetual, that's the way our customers are buying our offerings because they use CapEx and not OpEx. Still, the purchasing behavior is recurring. Data is growing really fast. Technology is running fast. The adversaries are becoming more sophisticated, and customers need technology in order to keep pace with those changes.
We believe that repeat business will continue to be strong and will drive about 50% of the growth in the next two years. Actually, between now, which the guidance is $400 million top line for this year towards two years from now, $500 million, we have an incremental growth of $100 million. So 50% will come from repeat business of existing customers. The second pillar is related to the U.S. market. As you know, we are working hard to penetrate the U.S. market. We believe that about 25% of this incremental growth will come from this market. The third pillar is actually new logos from the outside of the U.S.. So generally speaking, we do have three main pillars. Of course, we didn't assume perfect world, and we believe that we are on track to achieve those targets.
That's a very helpful breakdown of the ramp there. When you think about those couple of pillars, are there any operational changes that need to be put into place, or is it purely a matter of execution at this point?
Yeah. So in order to be able to achieve this growth, you need a few things. The first one is loyal customer embrace, and we have it. We have hundreds of customers. Some of them are with us for many, many years. The other one is technology innovation. And I do believe that we have a very strong offering, and our customers are very happy with the technology that we offer them that generates lots of value. And the third one is the execution. So I do think that it's primarily execution. And of course, we'll continue to innovate and make sure that our customers are happy with what we deliver to them, and we maintain differentiation and market leadership.
When you think about the strong execution that Cognyte's delivered over the last couple of quarters, what do you attribute that to?
I think it's related, first of all, to our large customer base. When we drive the roadmap, when we design the roadmap for the next few years, actually, there are three feeds that are coming into the roadmap. First one is we just ask our customers. Luckily, we have many of them in many countries and many different use cases coming from different agencies, national security, national intelligence, military intelligence. So we have the luxury to get firsthand from customers what they believe the gaps will be in the future and also what are the gaps they have today. So this is one area. The second one is related to the technology innovation. Together with the domain expertise that we have in the company, we have a very strong team in the technology side, but also domain experts that came from similar organizations like our customers.
So this combination of being able to understand our customers' real pains together with being able to execute on the technology side, I think it's a strength. AI is a significant factor that is helping to increase even more the value we deliver to our customers. So it's a combination of the customer base, the strength of the technology, and the domain expertise we bring to the market.
You mentioned the work you guys are doing in the U.S. federal. That's a newer growth vector for you guys. Obviously, a lot of disruption there in the last couple of years, most recently with the shutdown. Since that has ended, have you seen any sort of uptick in conversations or willingness to get deals done?
Yes. So maybe I'll give a brief view of how we look at the U.S. market in general, and then I'll discuss the federal. So we were not participating in the U.S. market for historical reasons, and we decided to change this and start playing in this market. A couple of years ago, the idea was to start with state and local operational units in the law enforcement agency. We chose this specific market segment because we believe we need to create brand awareness, brand recognition, and start with agencies that are more flexible to test us and to evaluate us. Fortunately, we were able to acquire new customers in state and local. Some of them already put some follow-on orders, and we do think that the brand of Cognyte is becoming known to the market. We're now doing the same with the federal. So we took many actions.
I'll just mention a few of them. One of them is related to the local team that we have here, foot on the ground for sales and marketing. We are participating in industry conferences. We are engaging with customers quite heavily, state, local, and federal. We established partners' network. We have partners in the U.S. helping us to access the market faster, including LexisNexis, which we shared a press release recently. We have Matt O'Neill with us in the board of directors. Matt O'Neill joined the board after serving in the U.S. Secret Service for 23 years. We recently hired Eric to become the new GM for North America for Cognyte. He actually joined us after serving as the head of the federal sales of Cellebrite until recently.
So we're taking many actions in order to expand presence, improve the brand name, and make sure that we are ready when budgets are flowing. In terms of the federal specifically, there are disruptions. Everybody is aware of that, continuing resolution, and the administration shutdown. Although it's theoretically over, the budgets didn't flow yet. But it doesn't change anything for our plan. Our plan is to continue and improve the infrastructure we have here and make sure that Cognyte is a well-known brand and to continue to engage with customers and POC and demo our solutions so they feel the value firsthand. So when they are ready to purchase, we are here.
What do you think that ramp will sort of look like once the budget flows and deals start to get closed? What kind of cadence are you expecting there?
Yeah. So government in general, a sales cycle is a few quarters. It's not one day. So I expect it to be a gradual process. For fiscal 2028, as I mentioned before, we expect about 25% of the incremental growth of $100 million to come from the U.S. So about $25 million we assume to be the growth for the U.S. in three years from now. And of course, we'll push hard in order to make it happen and maybe even better.
Pivoting to third quarter earnings, can you refresh the audience on some of the key metrics and takeaways from the print?
Q3 was another strong quarter for Cognyte. Actually, we were able to deliver more than $100 million, which represents 30% top line growth. While we were growing 30% on top line, our gross profit grew faster, about 18%. This is a trend that we see over time. We see strong growth on the top line, and gross profit is growing faster. It's another way to see how the value that we are sending to our customer, it's playing a role there. On top of that, we were able to generate operating income of $9 million, which is nearly triple what we did last year. It was a very strong quarter from all aspects. We were able also to raise our guidance for the year.
So we are now aiming to have $400 million of top line, which represents 14%, and Adjusted EBITDA of $47 million, which is a 60% year-over-year growth. If you look at overall in the nine months, this trend was across these nine months. So top line is growing in the same range, gross profit growing faster, and the leverage on the model playing a role. So we are very pleased with what we were doing.
When you talk about the value realization by customers, Cognyte's actually able to charge more and still win deals in a lot of cases. Is that right?
It's a fair argument. You can see that when we are competing, it's not about pricing. It's about value and the willingness to pay for our solutions. So customers are willing to pay premium prices because of the value that is different versus the competition that we bring to the table. And this is the reason that you see that gross margin is very strong.
What have been the most topical investor questions and points since you guys printed earnings?
So actually, in this quarter, it was continued to learn and understand how much leverage we have in the model. Actually, if somebody looks at our performance, they see that we are able all the time to grow and improve profitability, and obviously, the question is how much we can continue to do that, and the fact that we have a three-year target, which is practically January 2028, which is two years from now, it's given them the way to look at the business, so we are talking about top line growth of about a CAGR of 13% and to be with Adjusted EBITDA above 20%, and they see the leverage, and they're trying to understand how far it can go and what will be the future. Another topic is the growth pillars that are playing a role. Elad was speaking about the $100 million and what we've contributed.
This is a place that people were asking about that.
So I guess in a similar vein, when we think about the momentum you guys are seeing, what factors should we be looking at to measure progress on an ongoing basis?
So first of all, the way we look at it is how we are perceived by our customers, whether they are willing to pay premium and whether they expand with us regularly. And actually, the repeat business is very strong. So this is one indication that the innovation that we are doing in order to generate more and more value for our customers over time is working for us. Of course, we need to look at the top line growth, but we also need to look at the U.S. market. This is another indication whether we are on track. And it's important to mention that we look at the business not just for the next two years, but we look beyond that. And we are already exploring other market segments that can potentially benefit from technology outside of the security business.
We believe that being able to take data of all kinds, structured and unstructured at any scale, and convert it into smart insights very fast in a sophisticated manner and make the decision-making very simple for the decision-makers is extremely important, not just for security. Security is basically in order to save lives, prevent financial damage, and make sure that the society is safe. We could maybe look at insurance markets or banking or other markets that need exactly the same flow of technology, being able to convert data into insights, but the ROI will be different. For example, to make sure that the risk assessment is done by strong data-driven conclusions and not by gut feel, to make sure that the financial risks are managed in the right manner, to make sure that you know your customer better than you know them today.
So this is another layer that we look into for the long term. We're just in exploration mode now. But we do believe that data that you can convert into insights in a very smart and strong manner is a very significant asset that can be used for other segments as well.
It does make sense that the technology would transact that way and always good to hear about the long-term roadmap. One of the ways we're seeing the value of the technology resonate is in some of these large deal announcements you guys have been making. Is Cognyte moving up market, or what's driving this higher propensity for customer spend?
Yeah. So first of all, it's not unique. Every year we do see a wide range of deal size, ranging from a few hundreds of K dollars all the way to $10-$20-plus million. This is not unique for this year. Large deals are usually driven by two factors. The first one is the amounts of data customers have. And if you look at customers that have access to huge amounts of data, they need to run after the pace of the data growth. So this is one area. The other area is functionality for those major deployments. And it depends also on the use case. So if you look at law enforcement agencies, usually in their case, they have to go to the court to get a warrant, and then they have access to certain data sets, and it's quite limited.
If you look at other organizations like national security that are fighting more terror than criminal activities, they have more liberty and access to huge amounts of data. And when it comes to deals that are related to national security, huge amounts of data, and by definition, this requires also strong functionality and analytics, you see the large deals flowing. It could be either new deals from these kinds of customers, but in many cases, it's expansions of existing customer install base, which is a significant vote of confidence in our solutions.
When you think about the negotiation processes for some of these larger expansions and deals, do the key offerings that they're looking for or the sales cycles, how does stuff like that differ from a more, I guess, a smaller sale?
Yeah. So usually, first of all, the demand generation or the lead generation can either be driven by customer real need. They now have certain needs that they didn't cover before, or we go to the market with new capabilities that they were not aware of, and now when we have it, they believe that it creates a lot of value. When it comes to large deals, usually the sales cycle may range between usually three to four quarters to eight quarters, depends on the deal. In certain cases, it's sole vendor, sole source. It happens in two cases. The first one is when it's about expansion and upgrades. Only Cognyte can expand and upgrade its own install base, of course, and the second is that some customers, by regulation, have the authority to go for a sole vendor if they believe the value is significantly better than others.
When it comes to competitive bid, usually it takes a little bit longer because actually they come with an RFI, and then all vendors answer, and then there is a short list of the vendors that can continue to the next phase, and then starts the technological discussions. And then we push customers. We usually encourage them to go for proof of concepts and demos because on paper, everybody's complying to anything. When it comes to the real life, it's not so easy. So we are trying to convince them to go for POCs and demos with all vendors, including with us. And this process usually takes longer. So it can vary between three to four quarters to eight quarters for very large deals, but it could be also very short for smaller deals.
It could be one quarter, two quarters, sometimes three quarters, and then you can close the deal.
That makes sense. I'd imagine it varies by customer type to a certain extent too. When you think about some of these defense contractors you guys are working with, is there a lot of regulatory stuff going on there that you're working through?
Could you please repeat? I'm not sure I got the question.
Yeah. So when you guys are signing deals with Departments of Defense as a military organization, you talked about when it's a competitive bid and you have to go through bake-offs and stuff like that. Is there also a sign-off process by the host country or whatever? Does that process vary at all?
Yeah. So actually, there are certain regulations and rules of how you sign government contracts. We know how to do it. We do it directly and indirectly, sometimes with local partners or resellers. And we comply with all applicable laws and regulations. It's something that we are doing for quite a long time. But you mentioned defense. Maybe I want to give you another data point. Recently, we do see that military intelligence appetite is growing, including from NATO countries. We do believe that it's related to border security concerns, illegal immigration, ammunition, and drugs trafficking, and many kinds of bad things that are happening around the borders. And this is also generating large deals. We shared a few of them recently.
When you talk about those deals, is that where you're seeing a lot of strength with signals intelligence, and I've caught some very helpful blog posts you guys have put up to tell the story across, especially in our software world. Oftentimes, use cases aren't so tangible, so it's been cool to see, but is it safe to say that these use cases are here today, or how much of it is you hear the president talk about how he's focused on borders and drug trafficking and stuff like that, and you think that that opportunity is ahead?
Yeah. So first of all, it's important to say that intelligence agencies have to be ready and proactive and not reactive. They shouldn't wait for something bad to happen and then start building their infrastructure. It's the opposite. Actually, the intelligence, good intelligence agencies usually can prevent bad things from happening. In this case of demand generators and sentiment, sometimes, yes, there are certain events or incidents or discussions like border security that create more appetite to be even more ready because the risk level and the stakes are very high. And in this case, usually it creates more demand. It doesn't happen in one day. But generally speaking, when there are certain concerns that are increasing in certain territory, you will see more needs and more requirements related to this use case. But it doesn't mean that they don't have to be prepared for many other use cases.
Again, it's trafficking, border security, financial crime, organized crime, terror activities, many special forces that are outside of the country that need to have also intelligence in real time on the field. So there are many different use cases that they have to deal with. Of course, from time to time, the priority for what use case is more important is related to the environment and the sentiment. And now security related to borders is more important than before.
We talked about expansion deals and some of those larger deals, but of course, you got to keep filling the top of the funnel too. What are you guys seeing on the new logo side, and have you made any changes to your approach there, or how do you guys look at that?
Yeah. So the way to acquire new logos is by actually a few actions that we take. The first one is we are participating in industry conferences. There are industry conferences in many territories, including in the U.S. Many customers, prospect customers are coming there, and we make sure that we are participating with full power in those that are more important for us. The second thing is proactive sales and marketing efforts that are targeted for specific customers that we believe have the real need, don't have the solution today, and they have the budget to cover it. The third thing is related to our own conference. Actually, every two years, more or less, we have our own, we call it Intelligence Summit. We invite many existing and prospect customers. In November 2024, it was in Madrid. We do see usually about 300 participants coming from nearly 70 countries.
Many of them are existing ones, but many of them are also new, and we let them talk to each other. So actually, we get at the same hotel for three days summit, we get customers that are generating value for our solution to talk to other prospect customers and become references on the spot. And we also push prospect customers to go to try actually with POCs and demos. And when they feel the value, usually the lead generation is started, and then we can go on with this customer all the way to a new deal. We do expect to continue and acquire new logos in the U.S. and outside of the U.S.
It's a great organic way to kind of generate interest instead of just feeling like you're getting sold to all the time.
Yeah.
We also touched on partners. How is progress there? How do you view partner relationships, I guess, both in the U.S. and more broadly?
Yeah. So if you look at partners' network, there are. I'll try to simplify it. There are two kinds of partners: the proactive ones and the passive ones. The proactive ones are those that are trying to help you with the sales efforts. LexisNexis is an example for that. After we signed the agreement with LexisNexis, our experts educated the sales force, and we go together to their customers, or sometimes they go alone to their customers, and actually they accelerate our market access. The second kind of partners is more purchasing vehicles. Actually, the customer, we do the sales efforts. The customers make a decision, and then they tell us, "Go do this contract with this contract vehicle because we know how to work with them in terms of logistics and paperwork," et cetera. And we have both kinds of partners globally, not just in the U.S..
In the U.S., we have already a few partners working with us and operational, not just LexisNexis. But this is a natural way of how we do business. We want to accelerate market access. We want to see new customers, and we want not just to rely on our direct sales, but also expand it to other organizations that can take us in front of customers faster. And we do it all the time in all territories.
How about from a competitive standpoint? Are you guys finding yourself winning more displacement deals in the past, or what's sort of that greenfield, battlefield next?
Yeah. So when it comes to existing customers, obviously, it's not acquiring new ones, but it's actually expanding what we have already. When it comes to new territories like the U.S., almost every deal is pushing incumbents out. It's a displacement of incumbents. In certain cases, it's a displacement of homegrown solutions. Sometimes some customers have their own local developments either by their own resources, or sometimes they hire an external company to develop something for them. Usually, it is not cost-efficient, and the value is not great because when you serve only yourself with a certain budget, you don't benefit from a commercial company technology like ours that talks to hundreds of customers around the globe and has a better view of what are the current and future needs. So it's a combination.
We will see the repeat business to continue to be strong, and we'll see also new customers that we acquire and pushing incumbents out. Actually, state and local deals that we had, some of them we shared with press releases and also others, most of them are pushing incumbents out.
Does AI change the competitive landscape at all for having non-traditional entrants trying to come into the market? Or on the flip side, does your value proposition with AI capabilities really change, I guess, negotiating against legacy providers?
Yeah. So actually, I know that in certain markets, AI became a real risk for vendors because simple tools can do what they did with very sophisticated and expensive software. In our case, it's exactly the opposite. And I want to explain why. But let's first start maybe with what value we can increase for our customers using AI. So one area is uncovering more hidden insights out of the same data sets they have. An example is cryptocurrency de-anonymization. Cryptocurrency environment is encrypted. It's anonymized. Sometimes bad things happening in the cryptocurrency, funding terror is done through cryptocurrency networks, and customers need to understand who is the real entity behind the transaction. We can do that with using AI engines. So uncovering more hidden insights out of the same data sets is improving with AI. Another element is Copilot like GenAI.
Actually, customers can utilize the technology faster and more efficiently, and sometimes with less experts. Actually, you don't need to be a super tech expert in order to query the solution. Just ask in natural language and you get the answer, so those layers are very important for our customers, but why AI is a potential and not a risk for us for a few reasons. The first one is that we are on-prem. Utilizing AI and actually training engines with on-prem data that is not connected to the outside world is not an easy task. This is one. Second, AI for security is used in a different way. If we as consumers use AI in order to summarize a document and understand what's inside, the security agencies are doing exactly the opposite.
They are trying to find what is out of context, what is strange, what doesn't make sense, what are the patterns maybe that they see in different documents that may be related to organized crime. So it's not a trivial use of AI, and we have to adjust it to the investigative analytics use cases of our customers. So this is a second reason why not, why it's not a risk for us, but it's a benefit. And the third one is that you have to think about investigation as a holistic process. You get a lead, you start investigation, you get more data, you get more leads, you continue to investigate. And this investigation is done in a centralized platform with governance and audit trail, and you have to comply with all regulations.
So using an AI tool that knows to do something very specific and do it outside of the flow usually doesn't make sense and not very efficient. And for those three reasons, AI for us and for our customers is a benefit and a potential and not a risk.
There's a big advantage being part of that whole feedback loop in there.
Yeah.
I want to make sure I'm not taking up all the time here too. Do you have any questions from the audience? Can you just explain at a high level how your analytics platform is different from a Cellebrite or forensics?
Yeah. Cellebrite is actually primarily focusing on forensics, right? Actually, they can take a device, take the data out of the device, and they have this kind of data, and they developed a layer, as far as I know, developed a layer to analyze data related to forensics data. We don't provide the data to the customers. Customers have their own data. Data can be telecom data. It can be dark web. It could be open source. It can be social media. It can be databases that they have, for example, a criminal records activities database. It can be many different things, structured and unstructured. Our platform can deal with data at any scale, structured and unstructured, including encrypted data that we can sometimes uncover hidden insights, including hidden relations, hidden connections. This is something that I don't think is comparable to others.
When you win business, are you typically sole source with those customers, or are they using multiple vendors to sort of protect the populace, minimize potential crime, fight bad guys?
Yeah. So when it comes to operational units, customers sometimes may mix technologies because it's not too expensive. When it comes to the main solution, main platform, centralized one, usually they'll go for one solution because it's very expensive. It requires heavy hardware that they have to prepare and IT efforts because it's on-prem, and it's usually customer's responsibility. The integration into the data sources is also taking time and efforts. So usually, if it's about central platform, they'll have one vendor, and it's sticky. It will be replaced only if they see that others can bring much more value. And we did have this kind of examples that we replaced central solutions. But generally speaking, they won't have more than one. You have to think about it like an Oracle of an enterprise. Nobody has two. Yeah.
As we're getting down to the end of time here, maybe just what do you guys think is most misunderstood or underappreciated about the Cognyte story?
Yeah. I think maybe a few things. The first one is the loyal customer base that we have globally, hundreds of customers in nearly 100 countries, many of them I know personally for two decades. And this is an asset, not just because there is a repeat business coming from those customers, which is extremely important, but also because you have the environment to understand what are their future needs. You can direct your R&D exactly to what are their pain points. And it's very important to maintain this relationship for the long term, and we do. This is one thing. I think that it's quite difficult because we do not explain much about our technology and what exactly this does. Obviously, it's a little bit sensitive. So questions like you asked, whether AI is a risk or an opportunity for us, people, it's hard for them to understand.
We try to make it clearer over time. The third one that I think people better understand today is the leverage we have in our model. A year ago, we said that we have a leverage in our financial model, and while the top line grows at a certain pace, the profitability will grow much, much faster. People didn't understand how this works. I think that after a few quarters that we actually delivered our results, I think today it's clear, and I don't hear questions like I heard before whether 20% adjusted EBITDA by fiscal 2028 is reasonable or not. Everybody thinks today that it is doable and achievable.
Awesome. And with that, we're out of time. But Elad, David, thank you so much for being here and joining us, and excited to keep following the story here.
Thank you.
Thank you, Matt. Thank you all.