Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Cognyte Software Ltd. Third Quarter Fiscal Year 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please note that today's conference may be recorded. I will now hand the conference over to your speaker host, Dean Ridlon, Head of Investor Relations. Please go ahead.

Hello, everyone. I'm Dean Ridlon, Cognyte Software Ltd.'s Head of Investor Relations. Thank you for joining us today. I'm here with Elad Sharon, Cognyte Software Ltd.'s CEO, and David Abadi, Cognyte Software Ltd.'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 Investors 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 Software Ltd. 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 Software Ltd.'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, 2025, 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 that 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.

Hello, everyone, and thank you for joining us. Cognyte Software Ltd. delivered another strong quarter in 2026. Revenue grew in the mid-teens, and operating income grew significantly faster. Cash flow from operations was strong, and the team continued to execute well. These results underscore the strength of our value proposition and the healthy demand for AI-powered investigative and decision intelligence solutions. Momentum continues to build. We are raising our full-year guidance and are making strong progress towards achieving our targets for the fiscal year ending January 31, 2028. Let me walk you through the key drivers of the quarter. We executed with clarity on purpose, helping our customers make the world safer and delivered meaningful customer wins in the law enforcement, national security, and military intelligence sectors. In Q3, we secured several major deals and expansions. This included a $5 million follow-on subscription agreement with a tier-one military intelligence organization in EMEA, building on an earlier about $10 million perpetual award from this year. This marks another important win in the military intelligence domain, reinforcing the momentum we have established with defense organizations. We also saw continued momentum with long-standing national intelligence customers, renewing and expanding multimillion-dollar contracts, reflecting the strength of our repeat business and the trust our existing customer base places in us. While government customers typically procure through perpetual licenses, we continue to see strong patterns of recurring demand driven by capacity expansions, new functionality, new use cases, and coverage of additional units within agencies. This repeatability in our perpetual business has the potential to drive revenue durability, provide multi-visibility, and support our long-term growth. The US market continues to present a significant opportunity for us, and we continue to invest accordingly, expanding our partner ecosystem, strengthening our team, and increasing field activities. Our new partnership with…

Thank you, Elad, and hello, everyone. We continue to make strong progress and have exceeded our business expectations with the support of healthy demand and good visibility. For the third quarter, revenue was $100.7 million, up 13.2% year over year, driven by ongoing demand for our software solutions. Software revenue was $41.9 million, an increase of $11.9 million or 39.6% year over year. Software revenue is comprised of perpetual licenses, appliances, and some term-based subscription licenses. Software service revenue was $46.9 million, up $1.6 million from last year. Software services revenue comes mainly from support contracts and, to a lesser extent, cloud-based SaaS subscriptions. Our total software revenue for the quarter, which is the sum of software and software services revenue, was approximately $88.7 million, a year-over-year increase of 17.9% and represents 88.1% of total revenue. Professional service revenue in Q3 was $12 million, a decrease of $1.7 million over last year. We are on track to have professional service revenue be about 13% of total revenue on an annual basis. Recurring revenue reached $47.5 million, representing 47.1% of total revenue. It's worth noting that recurring revenue as reported in our GAAP financials is driven primarily by support contracts, and some term-based and SaaS subscription offerings, and enhances our visibility in both the near and long term. As Elad discussed, the majority of our revenue continues to come from the sales of perpetual licenses with recurring behavior. Non-GAAP gross margin for the quarter was 73.1%, expanding by 297 basis points year over year. A meaningful achievement that reflects the continuing revenue growth and efficiencies related to COGS. Throughout the year, gross profit has grown significantly faster than revenue, and this continued in the third quarter. Gross profit was $73.6 million, an increase of 18% year over year. The sustained improvement…

Thank you. Our first question is from the line of Matthew Kalitri with Needham and Company. Your line is now open.

Great. Hey, guys. This is Matt Colicchio over at Needham. Thanks for taking our questions. When I look at some of the large deal announcements, year to date, you've announced customer wins totaling over $65 million in ACV. Can you help break down how much of this amount is currently RPO and revenue?

Yes. So, actually, what is in the RPO is the software license part. I'm checking whether you want to understand how we convert it to revenues. What exactly is the question?

I'm just trying to understand, like, when you announced these deals, how it works from signing to deployment and along that, like, how long usually elapses there and also, like, how does that flow through RPO and then start to be recognized in revenue? Just from a timing perspective.

Okay. So, usually, when we talk about large deals, the sales cycle takes a few quarters, between two, three to five, four quarters. And if it's a very significant deal, it takes a little bit longer. When it comes to the backlog conversion to revenue, it depends on the size of the deal. If it's a relatively small deal and the customer is ready, it could take a few months. If the deal is a larger deal and requires cost preparations and environment integrations, so it may take a few quarters. When a deal is landed, it's immediately on the RPO. If the scheduled timing to convert to revenue is within the next twelve months, it will land also in the CRPO. If we believe the portions of the deal are scheduled beyond twelve months, you'll see that in the RPO, but not in the CRPO. The relevant portion, of course. So that's usually how it works.

Got it. And maybe Okay. And that Oh, sorry.

Maybe to add on that, when you have a deal with the only the nonconstant bill element is included in the RPO.

Understood. Okay. Very, very helpful. Thank you. And then what portion of the license deals are being recognized upfront and how does that impact recognition in revenue versus RPO?

So we have multiple types of revenue recognition. In certain cases, we recognize over a percentage of time, meaning, like, or that we recognize the deal on a percentage of completion. Sorry. Or it could be upon delivery or upon SAT, which is acceptance criteria. It's really dependent on the contract with the customer. If you want to look, you can see that when we share the CRPO, it's based on the planning that when we believe the delivery will take place and they will be able to recognize revenue. So that is taken into consideration in our planning, and this is the reason that we are sharing the CRPO to give you an idea of what will happen in the next twelve months. You can see that we have a lot of wins, and everything is covered on the RPO. And we take that as a total number, and we'll be able to have very strong visibility, and that gives us the ability to plan efficiently. And that also allows us to see that our margin is even improving because we are able to deploy in a more efficient way, and that gives us also some benefits.

Okay. Awesome. Turning to US Federal, what are overall conversations like there? How did they change during the government shutdown we just went through, and have they picked up since it ended?

Yes. So maybe I'll give an overview of where we are in the US. So agencies in the US face similar problems that other agencies are facing and that we are serving worldwide. So we see that the demand drivers and the needs are very similar to other territories. And for that reason, we also believe that our technology is an excellent fit for the US needs. We discussed in previous calls that we started with certain local. We're able to acquire new customers. We got also follow-on orders and already have a lot of confidence from customers that there is a very good fit. In terms of the federal agencies, first of all, we started later, and then the shutdown came. Of course, the shutdown disrupted the engagements for a certain amount of time. Having said that, it doesn't change the fact that those agencies are facing challenges, new technology, and for that reason, I believe that they'll come back to the table. Some of the federal customers that we are engaging with already came to us after the shutdown relief and asked to resume discussions. I can also tell you in the US that, regardless of the shutdown, we continue to do a lot of efforts in order to expand our market access and brand awareness. We enhanced the sales and marketing activities. We participated in relevant industry conferences that I shared in previous calls. An example is Napier. We're expanding our partner's network. We signed with LexisNexis in Q3. So we have a lot of activities running federal agencies in the US. So if I have to summarize it, I really believe our opportunity is significant, and it's not a matter of if. It's a matter of when, and we'll continue to be very focused on this territory and continue to invest, and I believe the fruits will come.

Okay. Great to hear. And then, last one for me. I believe you'd said in the prepared remarks that you've delivered structured training to LexisNexis. Are they ready to start selling now, or where are you at in that training process?

Yes. So with LexisNexis, we signed last quarter. The partnership is focused on helping with access expansion to the state and local and federal areas. We conducted trainings to their sales force, and we also had joint meetings and events with the LexisNexis team. We are educating them. Some of their sales force are already ready to go to customers and discuss our offerings. In certain cases, we go together. So the progress is very good, and I believe it will progress very fast.

Awesome to hear. Thanks so much.

Thank you. Our next question comes from the line of Taz Kajolgi with Roth Capital. Your line is now open.

Hey, guys. Thanks for taking my question. I just want to follow-up on the US market. I know this is very early for you guys in terms of entering the US market. But just a little bit of color on how the US market differs from other parts of the world in terms of competitive landscape that you guys see in bake-offs? When you look at US deals in the US market, what does the competitive landscape look like? Who do you guys normally see in those scenarios versus other parts of the world?

Yeah. So first of all, the challenges are similar. In the US market, we've started with operational units within law enforcement agencies, first state and local, and also federal. And that's the market we are focusing on. And the competitive landscape is a little bit different, but with similar technologies. Actually, operational units are using similar solutions globally. But in the US, we do see LP Harris, for example, and Noctasik as companies that are focused in the US territory.

Got it. Very helpful. Then maybe for David. David, can you comment on the duration, the contract duration this quarter? If I look at the mix of RPO versus CRPO, it looks like the duration probably went down year over year slightly. Maybe just clarify if that was the case and what do you think about the duration contract duration trends going forward?

So if you think if you look at the overall RPO, it's very strong. Short term and long term, both of them give us the confidence that we will continue to grow over time. If you look at the CRPO, it grew year over year, I would say, in about 10% year over year growth. And given what we see from a demand perspective and how deals are flowing, we are very comfortable with this RPO.

Got it. Just a few more for me. So, strong numbers from you guys overall this quarter looks very good. But if you look at the professional services line, the PS line, I think it was a little bit lighter versus last quarter. Any comment on if deployments were pushed out or anything to help us understand why that services line seems a little bit lighter than what was last quarter?

So, actually, professional services, when we started the year, actually, we mentioned that professional services will be around 13% of total revenue. This is what we saw that...

Ladies and gentlemen, please stand by. Your conference will resume momentarily. Speakers, you may resume your conference. Thank you.

So, unfortunately, there was a problem with the line, so I will repeat my answer from the beginning because I don't really know where we stopped. So...

And you mentioned that you gave us a guide of 13% of full-year revenues for the services. Right? So that's where I guess we got cut off.

Okay. So I would just remind everyone, like, what I was going to say is the professional services. The professional services, it could be deployment services. It could be some development work, training, or artery selling. And we actually deliver it because that creates a faster adoption by the customers. And also allows us to bring to the table faster the, I would say, the cross-sell and the upsell. So overall, the situation within professional services between quarters is mainly related to revenue recognition criteria. And, actually, I'm very pleased with where we are. And we are aligned with our target to be in 13% of total revenue on the professional services. I think that you also asked about software and software services. So you can see that first overall software revenue, which is the combination of total, of software and software services grew by 18%. If you look at the way that we acquired customers, most of the customers are once we acquired them, they're staying with us for a long period. Usually, they acquired perpetual licenses with support contracts. This is the majority of them. And if you think about it, it's a recurring nature in behavior. So meaning that the customer continues to buy with you on a regular basis. So we do have certain cases that the customer does an upgrade of existing licenses, which was under support and it's moved to be a software. So from our perspective, the right metrics to look at the business is the total software, which combines the software and the software services. And when you look at that, you can see that it's also growing very, very well.

Got it. Very helpful. Last one for me, David. I know you gave us a guide for the full revenue for the year. But if you can give us some more details or some more color on how to think about that mix between software, software service, and PS. Because I know last if I look at Q4 of last year, I think we had a big jump in software revenue. I think Q3 to Q4, there's a big jump. Seasonally. In software revenues. I just want to make sure that we don't end up mismodeling the different line items for revenue. So maybe if you can, some more color or some more clarity on how to think about the mix of the revenue between software, software services, and PS.

Oh, so let me start with the general comment. You can see that the software revenue grew this quarter significantly, almost 40% versus the previous period. So we are very pleased with the way that the software revenue grew. As I mentioned, our view is that we need to look at the total software revenue, which should mean a combination of the software and the software services. And to give you some color, I believe that it will be 87% of the total revenues. If you look at our guidance, you can say that out of the 400, 87% will come from the software and the software services.

Got it. Very helpful. Thank you.

Thank you. As a reminder to ask a question at this time, please press 11 on your touch-tone telephone. Our next question comes from the line of Charlie Zhou with Evercore. Your line is now open.

Awesome. Thank you very much for taking our question. This is Charlie for Peter at Evercore. Just a quick one for me. This quarter, we obviously saw a very impressive margin outperformance both on gross margin and operating margin. And I know you guys have provided a gross margin target of 73% by FY '28, which you guys have already achieved this quarter. Could you please just help us to maybe break down the primary drivers of the margin outperformance and also, like, how should we think about the gross margin expansion trajectory from here? And, also, any updated color on the adjusted EBITDA margin as well. Thank you.

Thank you. So, actually, we are very pleased with our 73% gross margin this quarter. And as you can see, there are different dynamics that are taking place over time. So there is a fluctuation between the quarters. But if you look at the overall, you see that the trend is in the right direction, and we are getting to the 73 already in this quarter. And we guided for this year to be at 72.3%, which is almost 130 basis points higher than last year. What we do see within our mix is that overall, when you look at the software, which is software and software services, we are above 80% of total gross margin. If you look at the professional services, we're also improving the professional services. Actually, Q3 was about 20%. But, again, I don't think that it's stable. I would say that if you think about it on an annual basis, it should be in the mid-teens. What the dynamic behind it is, first, customers are willing to pay premium prices for our solution. We have a very strong solution based on our advanced analytics, which customers are willing to pay premium prices, and we talk about it a lot that we are not fighting or competing with pricing. We are investing a lot in R&D because we believe that once you acquire a customer and you provide the customer with a premium solution and addressing their evolving needs, they will continue to stay with you and be willing to pay the right level of pricing. So it's all about the value, and that drives incremental gross margin. And, also, there are some efficiencies that are taking place with our COGS, mainly related to our capability to improve cost structure if it's the fact that we are applying AI capability within the organization that also drives better profitability. So overall, it's driven by the value we provide to our customers. About adjusted EBITDA, we are guiding for this year to be $47 million. It's almost 60%, I think it talks about the leverage. When you think about us as a company, look at our financials over the last few years, we are on a regular basis delivering leverage in our model. We believe in profitable growth. We structure the business in a way that while we are growing, we drive more profitability, and I'm very pleased that we're able to drive it to the bottom line and to create value for shareholders. This is what we are trying to do. This is what we are delivering, and I believe that we'll continue to do so.

Thank you very much. Maybe just to follow-up on the adjusted EBITDA margin. Based on your guidance, you're basically projected to achieve around 12% adjusted EBITDA margin by fiscal 2026. And you guys have provided a greater than 20% target for fiscal 2028. Should we think about the 800 basis points expansion from here as more linear, like, 400 basis points in '27 and maybe 400 basis points in '28? Is that the correct way to think about it?

Actually, I think, you know, we shared the target for FY 2028 in April. And we are very pleased with where we are getting. We are progressing towards our targets. Obviously, it would be a gradual improvement over time. We are not in a position now to give the plan for the next year, but it would be over time a gradual improvement.

Awesome. Sounds good. Thank you very much.

Thank you. And I'm currently showing no further questions at this time. I'd like to turn the call back over to Dean Ridlon for closing remarks.

Thank you, Shannon, and thank you, everyone, for joining us on today's call. Please feel free to reach out to me should you have any questions, and we look forward to speaking with you again next quarter. Thank you all.

This concludes today's conference. Thank you for your participation. You may now disconnect.