Cognyte Software Ltd. Ordinary Shares 2027 Q2 Earnings Call

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 investor 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, 2026, 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 investor 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, and hello everyone. Q2 was a strong quarter for Cognyte. We are growing, executing against our operating plan, and strengthening the business as we scale. Total software revenue grew 21% year-over-year, and recurring revenue grew 18%, both meaningfully faster than total revenue. Profitability expanded significantly faster than revenue, reflecting the leverage we have built into the model. Behind the performance is a healthy environment across the markets we serve. Governments in our market are prioritizing national security, military intelligence, border security, and public safety, and they are investing to build the intelligence capabilities these missions now require. Threats are moving faster, data volumes are growing, and agencies need technology they can trust, explain, and control. That is why AI and sovereignty are now the center of customer discussions. First, AI is reshaping how intelligence work is done, transforming both the threat and the opportunity.

As investigative environments become more data-intensive and time-sensitive, customers are looking for AI and agentic capabilities embedded directly within their operational workflows. AI helps agencies not only work faster, but differently, uncovering hidden connections, surfacing insight that would otherwise be missed, taking the routine work off analysts so their expertise goes where it counts. A commercial AI engine on its own does not do that. It is only a starting point. What turn it into something an agency can use are two things. The first is domain expertise, knowing how intelligence work is done, what the data means, and where the answer is likely to be. The second is governance. In mission-critical work, an analyst has to know why the technology reached a conclusion and be able to stand behind it. Agencies do not accept a black box, so they are not buying AI tools.

They are buying platforms powered by AI, built by domain experts who understand the mission. That is much harder thing to build, and the reason it is hard is the nature of the work. Intelligence work is not made of common cases. It is the rare, the obscure, and the deliberately hidden. A general-purpose model handles the common well. That is not where our customers' investigations live. Second, sovereignty. Agencies want their intelligence capabilities under their own control, their data, their infrastructure, their operations. Security agencies can't afford to depend on systems they do not own and control. They want the data to stay where they decide, the systems to run where they decide, and the ability to keep operating whatever happens around them.

Putting AI and sovereignty together with what we shared with you before, the growth in the volume and complexity of data, and how fragmented most agencies' environments have become, you can see why the Cognyte platform is such a strong fit. Agencies need to work with more data than ever, faster than ever, with AI they can trust and explain, and on infrastructure they control. This is the environment our platform is built to serve. We win for a few reasons. Agencies choose us because we cover the whole spectrum, from the field to the decision. They can run it under their own control in the environment they are actually operating. We bring domain expertise built from working with government customers around the world, which we then keep feeding back into our solutions.

These advantages are helping us win against competitors, including in-house built systems, and we saw that translate into strong commercial traction across expansions, upgrades, and new logos. New logo activity remains strong across geographies, with 40 new customers in H1 compared to 31 in the same period last year. One of them is a tier 1 national security agency in a NATO member nation who were referred to us by another agency we serve. We extended within our customer base. Among our expansion this quarter, two in Asia-Pacific stand out, one to expand its network intelligence capabilities, another to secure its borders, including mitigating unmanned aerial threats. In the U.S., we made progress across all priority segments. In federal, several opportunities have moved into procurement following strong proof of concepts and operational demonstration. In state and local, we won with both new and existing customers.

We are on target to achieve $20 million of signed deals in the U.S. this year. That momentum across our growth pillars has continued this quarter-end, with several additional significant agreements signed. We will provide more details on these wins in the coming weeks. The takeaway is simple. Our growth strategy is working, and the momentum is broad and global. We took part in major events across four continents. These events spanned a range of intelligence missions, including law enforcement, military intel, and national security. In the U.S., at the largest law enforcement event, NATIA, inbound interest was high. In addition, agencies are approaching us directly after reading about Cognyte in the trade and business press, or on referrals from other agencies, or from industry experts. In this market, agencies rely on what their peers have already deployed, and that works in our favor. Reputation is key. What we hear from prospects and customers in these engagements is the same thing we have been describing to you for several quarters.

Agencies are drowning in data they already hold. Their environment is fragmented. They are under pressure to move faster than their systems allow. Now, on top of that, they have to decide how to bring AI into work, where every conclusion has to be defensible on infrastructure they control. These are the problems we are built to address. Customers are bringing us into strategic conversations early as they shape their future plans and think through what next-generation intelligence solutions should look like. That engagement works both ways. They look to us for perspective and innovative solutions, and we listen closely to their priorities, using that insight to help shape where we invest.

Those relationships take years to build, and the trust behind them is what lets us keep growing with customers as their missions evolve. On the organization, Adam Philpott joined us as Chief Revenue Officer early last month to lead our global commercial organization. Adam brings deep experience building and scaling go-to-market teams in the security industry globally, and he joins Cognyte at an important time, with strong customer momentum and a healthy demand environment that presents a significant opportunity. His priorities are the same three growth drivers: expanding with existing customers, winning new agencies, and accelerating our growth in the United States. I am excited to have Adam on the team and look forward to working with him as we build on the momentum across the business. In closing, Cognyte is stronger, more focused, and better positioned than a year ago.

The market is moving directly towards what we have built for. Mission-critical intelligence in complex, high-stakes environment powered by trusted AI, sovereign control, and continuous innovation, all grounded in deep domain expertise earned through long-term relationships with customers around the world. Our strategy is working, our momentum is global, and the quality of our business continues to improve. With strong execution and clear visibility ahead, we remain confident in our full-year outlook and fiscal 2028 targets. We have built the platform, the expertise, and the trust this market now demands, and we are moving forward with confidence and ambition. With that, I'll turn the call over to David for a deeper review of our results and outlook.

Thank you, Elad, and hello, everyone. Elad talked about the quality of the business improving. That is exactly what our financial model is designed to deliver. We drive profitable growth by increasing the contribution from software and recurring revenue, expanding gross margins, and maintaining discipline around operating expenses. That model is working. Revenue was approximately $109 million, up 12% year-over-year. Total software revenue grew 20.9% to $100.8 million and represented more than 92% of total revenue in Q2. Recurring revenue grew 18.4% year-over-year to $56.2 million and represented 51.4% of total revenue. Professional services represented less than 8% of total revenue, compared with approximately 15% a year ago, reflecting the increasing software content of our business. This ongoing mix shift supports higher quality revenue, stronger margins, and greater scalability. Put simply, software revenue grew at nearly twice the company overall growth rate, but recurring revenue also grew significantly faster.