Good day. Thank you for standing by. Welcome to Cognyte’s Third Quarter Fiscal Year 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Dean Ridlon, Head of Investor Relations. Please go ahead, sir.

Thank you, operator. Hello, everyone. I am Dean Ridlon, Cognyte’s Head of Investor Relations. Thank you for joining us today. I am 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 would like to view these slides in real-time during the call, please visit the Investors section of our website at cognyte.com, click on the Investors tab, click on the webcast link and select 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, 2022 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 the company uses have limitations and may differ from those used by other companies. Now, I’d like to turn the call over to Elad.

Thank you, Dean. Welcome everyone to the third quarter conference call. In Q3, we continued to win large orders. Our booking came higher than revenue and our backlog increased sequentially, at the same time slow backlog conversion drove a sequential revenue decline. We believe Q4 will be a turning point and we expect to resume sequential revenue growth. We also expect fiscal ‘24 revenue to grow by approximately 5% compared to current year. I will discuss the trends driving our growth outlook in a few minutes. Revenue decline year-to-date drove significant losses. As a result, we took actions to reduce our losses and cash burn and we are targeting to achieve about breakeven cash flow from operations in Q4 and for next year. Operationally, we improved the focus of the company during a period of tough macroeconomic conditions. In that regard, as previously announced on December 1, we successfully completed the divestiture of our Situational Intelligence Solutions, which we refer to as SIS. Looking forward, we believe our differentiated technology and strong customer relations position us well for long-term growth and profitability. We have been navigating the business with the current storm and continue to closely engage with our customers to drive new business and to improve visibility by firming up the backlog conversion schedule. With that, let me now give you a little bit more color about Q3 trends. In Q3, like in previous quarters, despite the challenging macroeconomic environment, we continue to win multiple large deals. We operate in approximately 100 countries and saw different demand dynamics across countries. We currently see that in some countries there are customers having temporary challenges related to budgets operational readiness. At the same time, we continue to operate in many countries that are not significantly disrupted by these challenges. I would…

Thank you, Elad and hello everyone. Our discussion today will include non-GAAP financial measures. A reconciliation between our GAAP and non-GAAP financial measures is available, as Dean mentioned, in our earnings release and in the Investors section of our website. Our website includes a financial dashboard with a tab that details our historical results, excluding the recently divested Situational Intelligence Solutions. Revenue for Q3 came in at $71.3 million. Looking at the revenue mix, software services came in at $43 million reflecting strong renewal rates. Total revenue came in at $22 million, a significant decline from last year, reflecting backlog conversion delays as Elad explained. Professional services and other revenue came in at $6.3 million impacted by our software revenue level. As a result of the SIS divestiture, I will discuss our results for the current year without SIS. Non-GAAP revenue for Q3 came in at $61.5 million. During Q3, our booking activity came in higher than our reported revenue and drove an increase in our backlog. Q3 RPO was $527 million, an increase of approximately $20 million from the end of Q2. RPO for the next 12 months is $248 million. The RPO reflects all adjustments to our contractual obligations. Turning to gross margin, Q3 gross margin was 61.1% on a non-GAAP basis, primarily due to a loss of professional services. We expect to improve the margin on professional services as a result of our cost reduction initiative and improved deployment efficiency due to better visibility. Our Q3 non-GAAP operating expense was $59.6 million, $5.8 million lower than Q2 and $9.5 million lower than Q1 reflecting our cost control activities. Despite the improvement in OpEx, the lower revenue level in Q3 resulted in a non-GAAP operating loss of $22 million for the quarter. Cash used in operation was mainly…

Thank you. [Operator Instructions] Our first question comes from the line of Mike Cikos with Needham & Company. Your line is now open.

Hey, guys. Thanks for taking the question. You have Mike Cikos on the line here. So appreciate you guys calling out this visibility in the guidance that you have. But maybe can you just provide us a little more color? I know you have been working with customers on better understanding the deployment of that backlog that’s been building this year. But can you can you provide additional details as far as what gave management the confidence to reinstate guidance at this time?

Yes. So, hi, Mike, this is Elad. Yes, we are in the turning point. We expect to grow sequentially in Q4 and very next year. In the past few quarters, we are working with our customers to confirm the deployment schedule. Remember, we were able to increase backlog and RPO each and every quarter this year. However, we experienced some backlog conversion delays related to customers readiness of budgets. So we spent a lot of time with our customers’ intensive meetings and discussions to better understand what are the reasons behind it and then also try to be helpful and prioritize with them the deployments going forward. And then we have also to remember that at this time, they usually also plan the budgets going forward. So, the results of the discussions were that today we have visibility towards the deployment schedule for the next quarters and for next year. And this actually provides us with a confidence level – with high confidence level in the outlook and that’s the reason we resumed guidance. Just a little bit more color, if you look at our RPO, so we had an RPO of – total RPO of about $530 million more or less. And if you look at the short-term RPO after the discussion with our customers, it stands on about $250 million, which is more or less 50% of the total RPO, but also reflects more than 80% of the outlook for next year. So, this gives us the confidence that we have in order to provide guidance this time.

That’s great. I appreciate that. And if I could just ask one more question with respect to that confidence that you guys have in the guidance here. It’s just interesting to me. Like I know this year, we have obviously seen delays to that backlog conversion, is it fair to think that customers are behaving differently or thinking differently about next year now, just because I am trying to understand why that backlog convert – why we would have more confidence in that backlog conversion for next year, just given maybe some of the delays that we have experienced this year?

Yes. So we have to remember that the macroeconomic environment affected also our customers. Also for them, it took time to digest and they now plan the budgets again. They looked into their availability and readiness. Our discussions with them gave us the confidence level that we now have the deployment schedule that is more realistic. And that’s actually the baseline for the short-term RPO that we believe will be converted. So it’s a combination of strong backlog that increased over the year, together with many discussions we have with them to reconfirm the deployment schedule and prioritize it. And also to remember that not all countries were affected by that. There are certain countries that were affected more, some affected less, some were not affected at all. So overall, now we have a very good view about the deployment schedule. And obviously, when market turns and revenue hopefully will go up, once this storm is behind us and given the high software margins, I would also expect the growth rate to increase and the margins to expand. So this is it in a nutshell. I hope I answered.

You did. That’s great. That’s great. And a final question before I turn it over to my colleagues, but I just wanted to make sure I was clear on the gross margins. Obviously, we saw that professional services and other, I think was below what we had been forecasting on our side. So can you help us think about what led to the professional services gross margin contracting this quarter? And then the other comment is historically from Q3 to Q4 gross margins have compressed. And I just wanted to see, should we expect a similar pattern as we think about Q4 gross margins? And that’s all. Thank you, guys.

Okay. Hi, Mike, it’s David. So, when we look at the gross margin, and the main driver for our gross margin is actually the software revenue, which that affect our ability to improve gross margin over the years. When you look at the Q3, we had professional services with the negative gross margin, and it was mainly driven by two things. One of them is that low level of software revenue. And the other one is because of like the cost structure associated with the deployment schedule that we were planning. Giving now that we have much better visibility and the cost reduction that we already made, that will allow us to improve the gross margin on professional services over time. And on the long-term, we will be able to return back to the level of software gross margin of overall 70%. When you look at the – as for your question about Q4 and the future period, so overall, we believe that it will take some time to do the recovering, in the end, from a gross margin perspective, I would assume slight improvement from the current level that we are seeing right now.

Okay. Thank you very much guys.

Thank you. [Operator Instructions] And our next question comes from Peter Levine with Evercore ISI. Your line is now open.

Great. Thanks for taking my question here. Maybe just to follow-up on the prior question is, can you kind of just help us understand like what’s the recession playbook for you guys. Obviously, we have seen other companies take steps in terms of employees willing to kind of dial that back. Obviously, you have kind of built in some efficiencies this year. But obviously, if the economy gets worse, like what’s the recession playbook? Like, what cards you have in your back pocket to kind of offset, I think some additional call it headwinds that you guys might face next year?

Yes. So, I assume you are asking, I just want to make sure I understand the question, Peter. I assume you are asking what are our assumptions for next year in terms of the macro environment that’s the question?

You are right. Yes. I am assuming, obviously, no one knows what’s going to happen. But I think you have still the guide for next year. But what’s the offset to that, right, like, where is the risk? And then what do you see as the risk in terms of you may perhaps not hitting those numbers?

Yes. So, when we built our guidance, we assumed similar macro environment conditions as this year. So, we didn’t assume that the situation will be better. We also don’t have any signs that it will be worse. So, the assumption was that it will be similar to this year. Obviously, we took some actions related to cost structure to make sure that, we are aligning the organization to the outlook and generate breakeven cash flow from Ops. This was the goal. And the thinking behind it was that first, we have to stand behind the commitments to our customers. And second, that we preserve the opportunity to resume growth when market conditions improve. So, overall, the assumption is a similar macro environment as this year.

Okay. And then maybe can you kind of touch upon like the competitive landscape? And maybe what your customers are doing today? I think the deals that are getting deferred, are you seeing more companies compete in RFPs? Are these customers just pulling back completely, or you get a sense that maybe they are allocating their budget elsewhere? Can you just kind of give us a sense of the appetite from your customers in terms of their budgets and where that allocation is kind of heading towards?

Yes. Sure. So, we still demand also this year, if you look at the bookings and RPO, it was increasing. The problem was not actually – the main issue was not the bookings, but it was the backlog conversion, mainly the backlog conversion. So, actually POs that the customers gave us, and when customers – that when customers give bills, they do it because they need a product and they need a solution that they have to address their challenges. So, this is something that gives the confidence that the demand is there. We run the company in tough situation – macro environment, having said that, we do have very good relationship with our customers. We maintain market leadership in terms of product differentiation. We are global, work in more than 100 countries. So, overall, the leadership position remains. Of course, some customers are having budget issues, and they have to slowdown either buying or to push or delay backlog conversion. And that’s what we are focusing on. About competitors, I tend to believe that competitor will face the same challenges that we do. Different competitors operating in different parts of the market, not all of them have the rich portfolio that we do and address the many use cases. So, it depends on what competitor and what area he is serving. I do believe that by the end of this macroeconomic storm, some of the competitors will be struggling and maybe it will be – though it will be interesting for us to go to consider M&A in the future.

Okay. That’s very helpful. I can squeeze one last one is, we talked about backlog convergence. But can you talk about maybe what you are seeing at the top of the funnel today meaning like net new RFPs coming in on top? Are you seeing an uptick in activity when looking at the funnel today, call it versus six months ago, or even three months ago?

Yes. So, if you – I assume you are asking about the funnel, right?

Yes.

So, as part of our decision to focus our efforts on areas where we can maximize opportunities because we know that in certain territory – certain countries, they are suffering budget constraints and not ready, etcetera. So, our decisions are to focus the business on where the opportunities are and maximize the ROI. And what we do now is we are focusing on subset of the funnel that will generate the highest potential for us. And the funnel we have today is big enough to support book-to-bill greater than one alternative, it was that way this year, book-to-bill was greater than one this year. We expect the same to be next year.

Great. Thank you for taking my questions and enjoy the holidays and New Year.

Thank you, Peter.

Thank you. [Operator Instructions] And our next question comes from Brian Ruttenbur with Imperial Capital. Your line is now open.

Great. Thank you very much. Couple of follow-up questions along the lines of guidance, for fiscal ‘24 with the divestiture and you are talking about 5% growth back of the envelope, I come up with a $270 million to $280 million number, if that’s the right ballpark to be thinking about in terms of total revenue?

So, we share the guidance for Q4, which give you a range between $63 million to $72 million. If you take from the midpoint 5%, you will be around $290 million. So, this should be like around the number that you should get.

Okay. Thank you. So, it’s roughly ballpark $290 million, I didn’t know how things will ebb and flow quarter-to-quarter, because certain seasonality in there. So, that’s why I was trying to get clarity on that. So, roughly $290 million in revenue, gross margins should be in the low-60s. I didn’t catch it should be up from previous high-60s, what was the number on gross margin?

So, let’s separate the discussion about, overall gross margin. So, gross margin is driven by our software model. And as revenue will grow, we will be able to drive more dollars with higher profitability. When we look at the Q4 and next year, we expect a slight improvement on the gross margin due to the increase in the top line. So, I would say low-60s, like for modeling perspective.

You said low-60s instead of, is that correct?

That’s correct, low-60s.

Okay. And then there should be a decrease, and I saw a drop in R&D from second quarter to third quarter. I am just trying to understand the breakdown of those operating expense, SG&A and R&D, going forward, now that you have completed the divestiture, just trying to understand what kind of levels we are looking at in terms of R&D and SG&A moving forward?

So, in general, we will provide much more color on our cost structure during our next earning calls. We do think that, overall, Q4 OpEx will be around $55 million, and we will continue to benefit from our cost saving initiative over the next year.

Okay. Is there a percentage breakdown? It’s roughly historically close to 50-50, but a little bit higher SG&A versus R&D? And that’s how – of that $55 million, I am just trying to put in buckets. Is that how it should be still weighted, like historical?

You should say like the trends would be similar.

Perfect. And then you also said cash flow breakeven in 2024. Is there a specific, second half of 2024 is, or is it all going to be fourth quarter, any kind of guidance along those lines?

So, well, cash flow from operation, we expect it to be breakeven in Q4 this year and also for next year. As you look at next year, we think that, there will be sequential growth on revenue throughout the year. And the OpEx benefit we will enjoy also during the year. So, giving this trend, you should expect that H2 will be better than H1 from cash flow from operation.

Great. Thank you very much.

Thank you.

Thank you. And I am showing no further questions. At this time, I would like to hand the conference back over to Mr. Ridlon for any closing comments.

Thank you, operator and thank you everyone for joining us on today’s call. Should you have any additional questions, please feel free to reach out to me and we look forward to speaking with you again next quarter.

This concludes today’s conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.