Cognyte Software Q1 Earnings: Faces Customer Delays (NASDAQ: CGNT)

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A quick overview of Cognite Software Ltd.

Cognite Software Ltd. (NASDAQ:CGNT) recently released its FQ1 2023 financial results on June 28, 2022, missing revenue and earnings estimates.

The company provides forensic analysis software for security threat environments.

While management seems to be focused on what they can control, namely costs and removing internal sales conversion slowdowns, I fear the company is going through an extended period of slow customer rollouts.

For the short term, I am waiting for the CGNT.

Cognite Software Overview

Cognyte, based in Herzliya, Israel, was founded to develop an open software platform to help governments and businesses conduct security investigations.

The company is headed by chief executive Elad Sharon, who previously served as president of Verint Systems.

The company’s core offerings include an analytics platform covering networks, blockchains, internet, cyber threats and situational intelligence environments.

The company acquires customers through its direct sales and marketing efforts, as well as through partner relationships.

Cognyte also counts a number of nationwide agencies among its major customers, such as the US NSA and various law enforcement agencies.

Cogneyte Market and Competition

According to a 2021 market research report by MarketsAndMarkets, the global security analytics market was estimated at $12 billion in 2021 and is expected to exceed $25 billion by 2026.

This represents a projected CAGR of a very strong 16.2% from 2022 to 2026.

The main drivers of this expected growth are an increasing threat environment in terms of the number of attacks and the complexity and sophistication of security breaches.

Additionally, businesses have a greater need for modern systems to help them prevent repeat attacks and maintain regulatory compliance.

The increase in machine learning/AI-enhanced systems will also continue due to the demand for greater automation of surveillance and response activities.

Major competitors or other industry participants include:

  • IBM

  • Cisco

  • Broadcom

  • Splunk

  • RSA Security

  • FireEye

  • Log Rhythm

  • Securonix

  • Hillstone Networks

  • Exabeam

  • Quick7

  • Alert logic

  • Snowflake

  • Others

Cogneyte’s recent financial performance

  • Total revenue per quarter increased until the last quarter:

Total turnover over 5 quarters

Total turnover over 5 quarters (Looking for Alpha)

  • Gross margin by quarter followed approximately the same trajectory as total revenue:

Gross profit over 5 quarters

Gross profit over 5 quarters (Looking for Alpha)

  • Selling, G&A expenses as a percentage of total revenue per quarter have trended significantly higher in recent quarters:

Sales over 5 quarters, G&A % of turnover

Sales over 5 quarters, G&A % of turnover (Looking for Alpha)

  • The operating result per quarter has become significantly negative over the last 2 quarters:

Operating result for the 5 quarters

Operating result for the 5 quarters (Looking for Alpha)

  • Earnings per share (diluted) became extremely negative during the last reporting period:

5 quarters of earnings per share

5 quarters of earnings per share (Looking for Alpha)

(All data in the graphs above are in accordance with GAAP)

Over the past 12 months, CGNT’s stock price has fallen 82.2% compared to the US S&P 500 index decline of around 5.6%, as shown in the chart below :

52 week stock prices

52 week stock prices (Looking for Alpha)

Valuation and other metrics for Cognite software

Below is a table of relevant capitalization and valuation figures for the company:

Measure

Rising

Enterprise value

$300,840,000

Market capitalization

$327,280,000

Enterprise Value / Sales [TTM]

0.67

Revenue growth rate [TTM]

-2.41%

Operating cash flow [TTM]

-$19,310,000

Earnings per share (fully diluted)

-$0.61

(Source – Alpha Research)

The Rule of 40 is a software industry rule of thumb that states that as long as the combined revenue growth rate and EBITDA percentage rate are equal to or greater than 40%, the company is on a trajectory acceptable growth/EBITDA.

CGNT’s most recent GAAP Rule of 40 calculation was negative (5%) in the first quarter of 2023, so the company needs significant improvements in this regard, according to the table below:

Rule of 40 – GAAP

Calculation

Recent Rev. Growth %

-2%

% EBITDA GAAP

-2%

Total

-5%

(Source – Alpha Research)

Comment on Cognyte

In its latest earnings call (Source – Seeking Alpha), covering Q1 2023 results, management highlighted delays in delivering software orders due to both external hardware supply chain slowdowns and clients impacted by “the global macroeconomic and geopolitical environment”, including agency budget cuts.

In response, management has begun to reduce headcount, which is now 5% lower than at the start of the year, while seeking to improve pipeline conversion metrics.

Management suspended its forecast due to a wide range of potential results, which doesn’t exactly inspire confidence in the stock in the near term.

Regarding its financial results, total revenue produced a “significant decline” of 24.7% year-over-year due to customer deployment delays and slow pipeline conversions. .

Gross profit fell as a result and operating losses worsened sharply, with the company generating $27.9 million in operating losses for the quarter.

For the balance sheet, the company ended the quarter with cash, cash equivalents and short-term investments of $107 million, while the company spent $11.2 million on free cash usage.

Looking ahead, management believes the slowdown is temporary and will resume its forward guidance “as soon as possible.”

Regarding valuation, the market values ​​CGNT at an EV/Sales multiple of around 0.67x.

The SaaS Capital Index of publicly held SaaS software companies had an EV/Average Revenue multiple of approximately 7.5x as of June 30, 2022, as shown in the chart below:

SaaS Capital Index

SaaS Capital Index (SaaS Capital)

Thus, by comparison, CGNT is currently valued by the market at a steep discount to the SaaS Capital Index, at least as of June 30, 2022.

The main risks to the company’s outlook are a potential macroeconomic slowdown or recession, which could continue to slow sales conversions as well as slower customer rollouts due to ongoing supply chain challenges.

A possible upside catalyst is this combination of reduced headcount and faster sales conversion results due to management’s greater focus on removing conversion slowdowns to the extent they can.

It’s hard to get excited about CGNT’s near-term prospects because even before the last 2 quarters, the company wasn’t growing as fast.

While management seems to be focused on what they can control, namely costs and removing internal sales conversion slowdowns, I fear the company is going through an extended period of slow customer rollouts.

For the short term, I’m waiting for CGNT.