Thank you, operator. 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 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 31st, 2023, 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 would like to turn the call over to Elad.

Elad Sharon - Chief Executive Officer

Thank you, Dean. Welcome, everyone to our fourth quarter conference call. I'm pleased to report solid Q4 results and that our visibility continues to improve. Non-GAAP revenue adjusted for the SIS divestiture came in at $71 million at the upper end of our expectations and represent 16% sequential growth. Gross margins were also improved compared to Q3 and we continue to benefit from our cost reduction actions.

As a result of our strong sequential revenue growth, higher gross margins, reduced operating expenses and strong collections during the quarter, cash flow from operations was positive during Q4. And we continue to win large deals with our bookings coming in higher than revenues, resulting in our revenue performance obligations or RPO of about $580 million at the end of Q4, a sequential increase of more than $50 million. Overall, I'm pleased with our fourth quarter results. And because of our positive momentum and improved visibility, we are raising revenue guidance for fiscal '24.

Our investigative analytic solutions help customers address a variety of use cases primarily across national security, law enforcement, national intelligence and cybersecurity agencies. Behind our momentum and improved revenue outlook is the strength of our customer base and our differentiated solutions.

I would like to review some of the large deals we won during Q4. First deal is for over $20 million with an existing national intelligence customer primarily to combat cyber threats. The deal is a functionality upgrades to an existing solution and to expand capacity to address the customer increasing the amount of data. We believe we're selective as a result of our cutting-edge analytics capabilities, which significantly improves time to decision, as well as our strong long-term relationship with this customer. We expect about 40% of this deal to be recognized as revenue over the next 12 months.

The second deal is for approximately $20 million and represent a functionality upgrade and a multi-support contract with a national security agency. In this deal, the customer is adding capabilities to address anti-terror and criminal activities. We believe we're selective based on our solution's ability to address the customer's evolving needs and the long track record of success we have with this customer. We expect to recognize about 20% of this deal over the next 12 months.

The third deal is for approximately $6 million from an existing national security customer. The deal is to outlet a solution with more functionalities, including the ability to analyze high volumes of additional data sources. We believe we're selected based on our strong analytics engines and the long-term deep relationship with this customer. The customer is using our solution to accelerate investigations and decision-making in order to effectively combat terror and criminal activities. We expect to recognize most of the deal over the next 12 months.

Let's review what happened in fiscal '23. We continued to win many large deals from our large customer base and new customers. At the same time, due to budget constraints and operational readiness, many customers delayed deployments. This resulted in an unusual dynamics with revenue declining and not really increasing.

Given the unusual dynamics, we took the following proactive actions. We streamlined the operations of the Company, we focused on use cases in countries where we see the best opportunities, we adjusted our cost structure and following-up these dialog with our customers, we regained visibility in Q4. We believe that our proactive actions were necessary to address the unusual dynamics and we believe it will position us for growth and profitability.

We are entering fiscal '24 with improved visibility following the active dialog we had with our customers. Our short-term RPO, which reflects orders we expect to convert into revenues over the next 12 months was approximately $280 million, representing more than 90% of our revenue outlook for the year.

We have a global presence and do business in more than 100 countries. Our new and existing customers view us as domain experts and trusted partner that helps them address the evolving needs with our market-leading analytic solutions. Our solutions deliver powerful functionality that helps customers accelerate and improve investigations and decision-making.

Looking at our outlook for this fiscal year, as a result of our increasing backlog and strong Q4 order activity, we are raising our revenue guidance for fiscal '24 to $300 million, plus or minus 2%, reflecting approximately 6% year-over-year growth on SIS adjusted non-GAAP basis.

Regarding our cost structure for fiscal '24, given our large RPO, we have decided to keep our operating expenses relatively flat on a quarterly basis, and together with the expected sequential revenue growth for the year, we are expecting to achieve positive quarterly EBITDA in Q4. As of cash flow, we are expecting cash flow from operations for the full year to be breakeven.

Looking beyond fiscal '24, we believe we are well-positioned for sustained growth as market conditions improve. Our customers continue to face significant investigative challenges across many use cases. Well organized, well-funded adversaries are becoming harder to detect as they take advantage of the latest technologies to hide in the shadows. At the same time, customers have to address growing volume and diversity of structures and unstructured data and data is for granted and spread across organizational silos, making investigations more difficult.

Our mission is to enable our customers with the latest technology to make faster decisions to mitigate the wide range of threats before they unfold. Recent innovation in the AI technology presents significant opportunity to uncover insights from data that were not possible with legacy technologies. We have a large R&D organization and we are focused on incorporating recent technologies into our solutions. We believe that our continuing investment in R&D will provide incremental value to our customers and drive more demand for our solutions.

Now, let me turn the call over to David to provide more details. David?

David Abadi - Chief Financial Officer

Thank you, Elad; and hello, everyone. Our discussion today will include non-GAAP financial measures. Reconciliation between our GAAP and non-GAAP financial measures is available, as Dean mentioned, in our earning release and in the Investors section of our website. Our website also includes a financial dashboard with a tab that detail our historical results, excluding the recently divested Situation Intelligent Solution. This should help as you are updating your models.

As Elad mentioned, we had a solid performance in Q4 across revenue, cash flow from operations and bookings. During Q4, we continued to win deals from existing and new customers, including multiple seven-digit and eight-digit deals, driven by ongoing demand of our investigative analytics software and our strong differentiation.

Non-GAAP revenue for Q4 came in at $73.6 million including $2.4 million of revenue for one month of SIS business. As a reminder, we divested SIS on December 1st for a total consideration of about $47 million. During Q4, we collected about $42 million with the balance expected to be received during Q2 subject to working capital adjustment.

An additional earn-out amount may be paid subject to their sales business meeting set of performance based goals. The sale was completed at an attractive multiple and enabled us to increase our focus on use cases that we believe have stronger growth and margin profiles and better leverage our current competitive strength and customer relationships.

As a result of SIS divestiture, I will discuss our non-GAAP adjusted result without SIS. Q4 adjusted non-GAAP revenue came in at about $71 million, up 16% from Q3. Looking at the revenue mix, software revenue came in at $24 million, representing more than 30% sequential growth. Software services revenue came in at $40 million, representing 6.7% sequential growth and professional services and other revenue came in at $7 million.

While Q4 adjusted non-GAAP revenue grew by 16% from Q3, our gross profit grew faster by 23%. Q4 gross margin was 64.9% on adjusted non-GAAP basis, up 380 basis points from the Q3 level. Our Q4 adjusted non-GAAP operating expenses were $55 million, $4.6 million lower than Q3, reflecting our cost reduction initiative throughout last year.

Approximately half of our operating expenses are related to R&D, which is a level that we believe is appropriate on an ongoing basis to maintain leadership in current and future solution that our customer will need. And the other half is related to SG&A, a level that we believe supports our revenue growth expectations. We ended Q4 with an adjusted non-GAAP operating loss of $8.8 million for the quarter.

Turning to cash. We generated positive cash flow from operation of $9.1 million during Q4. The positive cash flow was driven by our improved financial result and strong cash collections. In terms of balance sheet, we ended the quarter with cash of about $56 million and no debt.

Turning to RPO. RPO increased sequentially in Q2, Q3 and Q4 last year. Total RPO at the end of Q4 was $583 million, an increase of more than $50 million from the end of Q3 and $85 million from Q4 in the prior year. $281 million of our total RPO is for the next 12 months. $281 million of short-term RPO is close to our revenue outlook, providing us good visibility for the current year.

Turning to FY '24. For the full year, we expect $300 million of revenue, plus or minus 2%, reflecting approximately 6% year-over-year growth on SIS adjusted non-GAAP basis at the midpoint of the range. Our revenue outlook is driven by our current view of the better deployment schedules for this year based on discussions we have had with our customers and assume similar macro environment conditions.

Let me share with you more color on how we see the year evolving. For revenue, based on our current short-term backlog, we expect Q1 revenue to be at a similar level to last year's Q4 adjusted non-GAAP revenue, and we expect modest sequential increases throughout FY '24, bringing total revenue to about $300 million. We expect non-GAAP gross margin to improve year-over-year and to be about 65%. Gross margins may fluctuate between quarters based on our revenue mix. For our non-GAAP operating expenses, we expect Q1 to be about $55 million, a similar level to Q4 of fiscal '23 and be relatively flat throughout the year.

During FY '24, we will have the full benefit from the cost reduction actions we made throughout FY '23. Our improved cost structure combined with sequential revenue growth will allow us to improve margins over time. We expect adjusted EBITDA to improve over the year and expect positive quarterly adjusted EBITDA by Q4 of this year. We expect our cash taxes to be about $12 million and non-controlling minority interest to be between $4 million and $5 million. As a result, we expect annual EPS loss to come in at $0.60 at the midpoint of the revenue range. For share count, we assume about 70 million weighted average fully diluted shares in FY '24.

Turning to cash flow, we continue to target about breakeven cash flow from operations for the year and we expect about $10 million of payments for capex, partially offset by additional expected receipts from the SIS divestiture related to the holdback.

To summarize, we believe threats are pervasive and continue to evolve. As a result, our customer need our innovative solutions to address these challenges. We are a market leader in investigative analytics and have a strong and lengthy track records with customers around the world. We are pleased to be in a position to raise our revenue outlook. We expect about $300 million of revenue for FY '24, an increase of about 6% on SIS adjusted non-GAAP basis and targeting breakeven cash flow from operations for the year.

Looking beyond FY '24, we believe that the combination of our cutting-edge technology, large customer base and significant backlog position us well for long-term growth.

With that, I would like to hand the call over to the operator to open the lines for questions. Operator?

Question & Answers

Operator

[Operator Instructions] Our first question comes from Mike Cikos with Needham. Your line is now open.

Mike Cikos - Needham & Company - Analyst

Hey, great. Thanks, guys. You have Mike Cikos here from Needham. I just wanted to ask you first on the RPO and the short-term RPO specifically, I appreciate the visibility you guys are talking to. But I know that this RPO you're citing call it $281 million, which is about 90% of the revenue forecast for the upcoming year. Maybe it would be helpful, but do you guys typically come into the year with that 90% outlook based on that short-term RPO or has that been more heavily handicapped this go around just given the macro? And the reason for the question really just full disclosure here, but I'm trying to put together the numbers on my side given the SIS divestiture which is a newer phenomenon for the business?

Elad Sharon - Chief Executive Officer

Hi, Mike. Thank you. So actually, when we look at it on the guidance, the way we look at it is that in our last call, we discussed a good visibility. It was a result of the dialog we had throughout the year with our customers and it was related to deployment schedule. And last call, we're able to resume guidance because of this regaining visibility.

Now when we look at where we are today, following the strong Q4, booking came in ahead of expectations and we are able to raise revenue guidance and just to remind you, we had a strong booking in Q4 and the RPO is indeed a short-term RPO stands on $280 million relatively high. In terms of percentage to enter the year, this RPO is relatively high. But given the macro conditions, we think that our outlook is the appropriate guidance for the year.

Mike Cikos - Needham & Company - Analyst

Thank you for that. Thank you. I really appreciate it. And if I could just ask another question here on the gross margins, I think you guys are looking for probably about 200 basis points of year-to-year improvement in the adjusted gross margin, if I look at fiscal '23 ex the SIS divestiture, versus David's commentary for fiscal '24. Can you help us think through what's expected to drive that gross margin improvement is part of it based on the revenue mix? And then can you also talk about any improvements you guys have made the product itself or their components that would be beneficial as well?

David Abadi - Chief Financial Officer

Yes, Mike. It's David. We're looking to gross margin of 65% next year. This is what we are planning. And indeed, it's like about 200 basis points improvement year-over-year. The main driver for that, it will be the software revenue, the software revenue arriving with the higher margin. And allow us to improve our gross margin.

Mike Cikos - Needham & Company - Analyst

Got it, got it. So is that software revenue growth I guess the benefit there is coming from revenue mix or is the software revenue actually showing margin or expected to show margin improvement next year?

David Abadi - Chief Financial Officer

It's more matter of mix. It's the absolute dollar that will come more from software revenue.

Mike Cikos - Needham & Company - Analyst

Got it. Okay. And then just the last question here. I know that you guys had spoken about, I guess, 1Q of this coming year is expected to be relatively similar in revenues to what we just saw in Q4. And I'm trying to get a better sense. Is that typical should we expect that on a go-forward basis or is there usually more seasonality, but based on the deployment schedules from your customers, you have maybe more support for that outlook that we have today?

Elad Sharon - Chief Executive Officer

If you look at the typical year, on a typical year, usually Q4 will be the strongest quarter of the year. Obviously, last year was unusual from all - I would say, from all directions. So we cannot look at last year as a typical year. When we look at Q1 to be similar to Q4, I would say that it's not typical, but it's again, it's part of our ability to regain visibility, the strong booking of Q4, which allow us to share with you that Q1 would be similar to Q4.

Mike Cikos - Needham & Company - Analyst

Got it. Thank you very much. I'll turn it over to my colleagues. Appreciate it.

Elad Sharon - Chief Executive Officer

Thank you.

Operator

Please standby for our next question. Our next question comes from Peter Levine with Evercore. Your line is now open.

Peter Levine - Evercore ISI - Analyst

Great. Thanks for taking my questions. I appreciate the color on the - I think the upsells you called out for Q4, the $220 million deals, but maybe can you provide a little bit of color on what the top of the funnel looks like for net new deals and what those conversations look like today versus, call it, six or 12 months ago?

Elad Sharon - Chief Executive Officer

Peter just for me to understand the question, to make sure that I understand the question, are you talking about demand. This is the question?

Peter Levine - Evercore ISI - Analyst

Yeah, on the demand side, because if I believe that the $220 million deals you highlighted on call, those are upsells. So curious to know what net new - kind of net new customers coming in on the top of the funnel. Like how is that building as we kind of enter calendar '23. So again, just curious to know what those conversations look like and if you could show any metrics in terms of your pipeline demand [Indecipherable] over last year. Just curious to know what the environment for net new deals coming into the door looks like.

Elad Sharon - Chief Executive Officer

Yes. So maybe let me share with you more color about volume. So if we look at last year at fiscal '23, we did have, in one hand, revenue declining significantly. It was related mainly to backlog conversion. We discussed it in previous calls that customers were suffering a budget - were suffering from budget constraint and operational readiness. But at the same time, if you look at the bookings last year, it was strong. So the demand and the need for our solution is there. With new customers and also with existing customers and in the example I gave last call, about the deal of over $20 million it was related to new customer.

So we do see demand coming from existing and new customers. But again, it's important to say that the demand that they need is there. I mean, customers are facing a very complex situation, the challenges are becoming more complicated. The bad guys are becoming more sophisticated. And for that reason, we do see that bookings, although the revenue was declining, the bookings was healthy. The RPO stands now on $590 million the total RPO and as Mike mentioned before, the short term RPO is $280 million. So it's a healthy demand.

Going forward, we do see that demand continues throughout this year because of many reasons. Actually, we do see that threats are more complicated. We do see that data is growing in diversity and in volumes. We do see that data analytics is becoming even more important for customers. Without it, they cannot generate insights and actually they cannot make the decisions on time.

And there is another layer here, which is the AI. AI is playing bigger role now. It's creating even more value for customers to find more insights and faster and we expect also this one to create more demand for existing and new customers. So generally speaking, the demand last year was good, although the revenue was declining, was healthy, relatively healthy. And we expect this year to continue.

Peter Levine - Evercore ISI - Analyst

Thanks for that. And then maybe just two quick follow-ons. One, could you share or provide any color on what net retention looks like.

And then second is, can you share kind of the competitive landscape, the pipeline that you're building today? Is it - are you seeing new entrants into this market or customers conducting longer RFPs or is it more of like a budget-related macro issue that's kind of holding or just not holding, but maybe taking some of your sales cycles longer? Thanks.

Elad Sharon - Chief Executive Officer

Yeah. So what we saw last year, what we call these unusual dynamics is that in one hand the revenue was declining, but the demand was healthy, relatively healthy. So I think what we saw in the market is related mainly or primarily to macroeconomic situation. We saw that customers put the orders, but they couldn't pay on time for the orders. And for that reason, we couldn't deploy on time. So I think that it's more related to temporary disruption in the market that is related to the macroenvironment and not any fundamental issue with the market demand. That's how I see the situation. And actually, evidently, in Q4, we saw strong bookings. And the RPO last year was increasing significantly by more than $80 million. So the demand is there.

Peter Levine - Evercore ISI - Analyst

And then [Speech Overlap] net retention. Just the last part, which is on the net retention, sorry.

David Abadi - Chief Financial Officer

Yeah. So actually we look differently from - when we look at our customer base, most of our customers once they are joining us like we have a long-term relationship and it's - the length of the journey is usually for, I would say, like for multiple years, we are not using net retention as a KPI, because we think that it's less relevant to our business. When we look at that, it's like when we join a customer, as customer join, we require the customer, we over time able to sell more to the customer and increase our footprint with them. They are buying more from our solution, and more useful test and expand the capabilities.

Peter Levine - Evercore ISI - Analyst

Great. Thank you very much for the color.

Elad Sharon - Chief Executive Officer

Thank you.

Operator

[Operator Instructions] Please standby for our next question. Our next question comes from Brian Ruttenbur with Imperial Capital. Your line is now open.

Brian Ruttenbur - Imperial Capital - Analyst

Yes. Thank you very much. Question about your balance sheet. You talk about additional cash coming in from the sale, as well as no cash burn. And can you walk us through where you see the balance sheet maybe at the end of the first quarter or maybe even at the end of the fiscal year where you see things shaking out in terms of cash and debt?

David Abadi - Chief Financial Officer

So, currently we have $56 million of cash and no debt. As you might think, we had also a credit facility in case we need for additional $100 million in case we want to do any strategic initiative. When I'm looking at how the year will follow, I believe that we're targeting breakeven cash from operation. We currently have a strong working capital. I think that we have relatively enough inventory to fulfill all the deployment that we have for this year. So all the financial KPI put us in a very good position. And obviously, we look over time, what is the right to do, how do you allocate your capital in the most effective way.

Brian Ruttenbur - Imperial Capital - Analyst

Okay. So I guess in summary is your cash position right now should only be at this level at the end of the year or better? Is that a good summary with no debt?

David Abadi - Chief Financial Officer

Yeah. Given the fact that we actually guided for breakeven from cash from operation and yes, we have some capital expenditure offset by certain payment that we expect from the SIS divestiture, I would say, yes in high level, it should be very similar.

Brian Ruttenbur - Imperial Capital - Analyst

Great. Thank you very much.

Operator

I show no further questions at this time. I would now like to turn the conference back to Dean for closing remarks.

Dean Ridlon - Head of Investor Relations

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.

Operator

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Q4 2023

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