Cognyte Software Ltd Stock

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Cognyte's Second Quarter Fiscal Year 2027 Earnings Conference Call. [Operator Instructions] 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.

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 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 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 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.

Beyond 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're investing to build their 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.

But a commercial AI engine on its own does not do that. It is only a starting point. What turns it into something an agency can use are 2 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 the 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 actually operating. And 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 expanded within our customer base. Among our expansions this quarter, 2 in Asia Pacific stand out, one to expand its network intelligence capabilities, and 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. And 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 since quarter end, with several additional significant agreements signed. We'll 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 4 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. The environment is fragmented. They are under pressure to move faster than their systems allow. And 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 3 growth drivers: expanding with existing customers, winning new agencies and accelerating our growth in the United States. I'm 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 '28 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 represents 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, while recurring revenue also grew significantly faster.

As a result, both are becoming larger contributors to our overall revenue mix. A point to note about recurring revenue is that our model is different from a traditional SaaS model. A portion of our recurring revenue comes from term-based licensing arrangements that are recognized at a point in time rather than ratably over the life of the contract. As a result, recurring revenue is not the same as ARR and can fluctuate between quarters based on the timing of revenue recognition. What matters strategically is that recurring revenue is growing faster than the company overall and becoming a larger part of our business, enhancing revenue visibility and supporting long-term growth.

Now I will review the results in more details. Breaking down the revenue mix, software revenue grew 34.5% year-over-year to $49.2 million. Software revenue is comprised of perpetual licenses, appliances and term-based subscription licenses. Software services revenue grew by $4.8 million or 10.3% year-over-year, to $51.6 million, coming mainly from support contracts and to a lesser extent, cloud-based SaaS subscriptions. Total software revenue was $100.8 million, up 20.9%, growing significantly faster than total revenue and up by $17.5 million year-over-year.

Software revenue now represented more than 92% of total revenue versus approximately 86% 1 year ago. Professional services revenue was $8.4 million in Q2, compared to $14.2 million last year. Recurring revenue increased by 18.4% to $56.2 million, representing 51.4% of total revenue.

On gross margin and profit, we continue to improve year-over-year. Q2 non-GAAP gross margin was 73.7%, an expansion of 154 basis points. Non-GAAP gross profit grew 14.4%, or $10.1 million, to a total of $80.5 million. Again, faster than revenue. Our model continues to deliver strong financial leverage and profitability is expanding significantly faster than revenue.

The majority of the year-over-year increase in operating expenses reflected foreign exchange movements, primarily the weaker U.S. dollar against the Israeli shekel. We continued to partially hedge future periods. We partially offset that impact through ongoing efficiency initiatives across the organization, including increased use of enterprise AI. Despite the FX headwinds, operating expenses grew more slowly than revenue, allowing profitability to grow significantly faster.

Q2 non-GAAP operating expenses were $68.2 million. GAAP operating income increased 69.7% year-over-year to $4.7 million against revenue growth of 12%. Non-GAAP operating income increased 52.5% to $12.2 million. Adjusted EBITDA increased 35.7% to $14.9 million. Non-GAAP EPS was $0.15, nearly double the $0.08 we generated last year. GAAP diluted EPS was $0.06, compared with $0.02 a year ago, reflecting the significant improvement in our profitability. These results demonstrate the operating leverage we have been working to build. Revenue grew 12%, while non-GAAP operating income grew more than 4x as fast.

Looking at the first half, the same trends are evident. H1 revenue was $214.7 million, up 11.2%. Total software revenue was $198.1 million, up 19.8%. Recurring revenue was $108.1 million, up 14.2%. GAAP operating income was $9.1 million, up 85.1% year-over-year. Non-GAAP operating income was $22.9 million, up 47.2%. Importantly, we achieved these results despite approximately $7 million of net unfavorable foreign exchange impact on operating profitability in the first half of the year. So across both the quarter and the first half, we are seeing consistent execution against our financial model. Compared with a year ago, Cognyte is generating more revenue with higher quality, more software revenue, higher recurring revenue, higher gross margins and meaningfully greater profitability.

Turning to RPO. Total RPO at quarter end was $470.2 million, including $313.4 million of short-term RPO. As we have discussed previously, RPO remains an indicator of future contracted revenue, but movement in the metric can also reflect contract structure, duration, renewals and the consumption of large multiyear agreements. Reported RPO excludes the cancelable portion of subscription contract.

At July 31, approximately $42 million of future revenue associated with those arrangements was therefore not included in reported RPO. In addition, approximately $30 million of the change in the RPO reflected the consumption of large multiyear support contracts as we delivered against those agreements and recognized the associated revenue.

Short-term RPO is an important component of our revenue visibility, but it does not capture the full picture. When we combine short-term RPO with expected renewals of recurring business and contracts signed since quarter end, we have visibility into approximately 85% of the revenue required to support our plan over the next 12 months.

The remaining approximately 15% is expected to come primarily from normal book and ship activity. That level is well within our historical execution range and supports our confidence in our growth objectives. This level of visibility is one of the reasons we believe we remain on track to achieve our FY '27 outlook and FY '28 revenue target of $500 million. Q2 billings were $76.3 million. As billings can vary significantly quarter-to-quarter based on contract terms, we believe the trailing 12-month measure is more informative. On that basis, billings were approximately 95% of revenue, which we believe reflects the underlying strength of the business.

Turning to cash flow. We generated $1.1 million of positive cash flow from operations in Q2, compared to net cash used in operating activities of $6.3 million in Q2 last year. This improvement reflects stronger collections and profitability, as well as disciplined working capital management. The second quarter also includes our annual incentive payments and other seasonal working capital uses.

Turning to our balance sheet. Our financial position remains strong. We ended the quarter with $102.2 million in cash and no debt, providing us with significant flexibility. During the first 6 months of fiscal '27, we repurchased approximately 1.5 million ordinary shares for $13.5 million. Since launching our first repurchase program in November 2024, we have repurchased approximately $40.2 million of shares through the end of Q2 FY '27, out of the $60 million authorized across the company's repurchase programs.

Our capital allocation priorities remain unchanged. We'll continue investing organically to support growth, evaluate strategic M&A opportunities where we see the potential to create returns significantly in excess of our cost of capital and use share repurchases opportunistically where we believe they represent a compelling use of capital.

Turning to our outlook. Our first half's performance remains strong and the demand environment is healthy. Based on our execution to date and the visibility we have into the remainder of the year, we are narrowing our full year revenue range around an unchanged midpoint. We now expect full year revenue of approximately $448 million, plus or minus 2%, representing approximately 12% year-over-year growth at the midpoint. We continue to expect recurring revenue to grow faster than total revenue and become a larger contributor to overall business. As we have discussed, the increasing adoption of subscription agreements can shift the timing of reported revenue recognition compared with our historical perpetual model.

While this can affect reported growth in a particular period, we believe the continued shift towards recurring arrangement strengthens the long-term visibility and durability of our revenue base. Total software represented a particularly high percentage of revenue in Q2. We expect quarterly mix to continue to fluctuate based on the timing and composition of customer activity. And our full year outlook does not assume the Q2 mix persists throughout the second half.

From a quarterly cadence perspective, we currently expect Q3 revenue to be slightly higher than Q2, followed by sequential growth in Q4, consistent with the seasonality reflected in our full-year outlook. We also remain confident in our profitability outlook. We expect non-GAAP gross margin of approximately 73.5% for the year, an improvement of 50 basis points from last year. We continue to expect non-GAAP operating income to be about $56 million, growth of more than 50% year-over-year and adjusted EBITDA of approximately $68 million, growth of about 40%. We continue to expect annual non-GAAP EPS of $0.47 at the midpoint of the range.

On cash flow, we continue to expect significant positive operating cash flow for the full year. Given the customer demand and future growth opportunities, we are making targeted inventory investment to support expected customer deliveries. As a result, the timing and the level of cash generation this year is expected to be affected. It reflects a deliberate working capital investment rather than any change in the underlying performance of the business. To close, the progress we are making reflects the strength of our strategy and the discipline of our execution.

We are building a higher-quality business, one with a greater contribution from software, a growing recurring revenue base, stronger margins and increasing operating leverage as we scale. This is not only about the first half or even the fiscal year. It's about building a more durable, more predictable and more profitable Cognyte for the long term. With healthy demand, strong customer momentum and clear visibility into the opportunities ahead, we remain confident in our FY '27 outlook and on track to achieve our FY '28 targets.

Operator, we are ready to take questions.

[Operator Instructions] Our first question in queue coming from the line of Eric Martinuzzi with Lake Street Capital Markets.

A couple of questions. First off, Elad, for the U.S. federal pipeline, you talked about there's good success there. You've got some transactions that are in the procurement phase. Just curious to know if these are transactions that you expect to be awarded during the current fiscal year, the government fiscal year ended September 30, or if that's something that's further out on the horizon?

Yes, actually, we have [ closed ] with federal agencies. We had POCs with few law enforcement fed agencies, very successful results, very good feedback from customers. And I do expect some deals already in this fiscal year.

Okay. And then for David, the RPO number that you gave, that $470 million total RPO number, that was down versus the April quarter, which was down versus the January quarter. Is there -- are we expecting that to trough and recover here? Can you give me a little bit more insight on the total RPO number?

Yes, sure. So first of all, it's important to say that demand is very strong, and it aligns to our strategy. I think it's reflected in the strong customer expansion we discussed and we shared with you and also with new logos that we have acquired. We also see growing customer preference for subscription-based arrangements. This also improves the quality and visibility of the business, but has some shift that affecting the reported RPO. RPO is an important indicator for visibility. But given the market -- the business dynamics today, it doesn't tell the full story by its own. And you need to look at it in a wider perspective.

This includes RPO that excludes the subscription periods, as David mentioned earlier, that remain subject to cancellation. And it's about $42 million by the end of Q2. You have large multiyear contracts that are recognized and consumed over time. We shared a few times before that we have very large renewals for 3 years. So every year, we consume 1/3 of it. So you see that the consumption takes the RPO down. And if you look at it specifically for this quarter, actually, this year, it's about $30 million. Other 2 indicators that are related to RPO are the renewals. Renewals are not included in RPO until they are contractually committed. So it's important to understand that it doesn't really matter whether the customers are buying perpetual or buying subscription. Still, the solutions that we deliver to them are integrated in their environment, deliver a lot of value. So there will be renewals. But until it's committed by the contract, it's not part of the RPO. And also the timing of large deals impacts the quarter end balance.

So if you have to look at the visibility more broadly, you should take the RPO, the expected renewals, the customer activity, the strong start we have seen in Q3 that we'll share more color in the next few weeks. We believe we have very strong visibility over the next 12 months. And as David mentioned before, it's about 85% coverage for the next 12 months revenues, and we remain confident in our outlook for this year and also for fiscal '28 target. So we are seeing a very healthy demand, very strong market, and very strong execution into this market.

Understand. Appreciate the insight from the questions and congrats on the quarter.

Our next question coming from the line of Taz Koujalgi with ROTH Capital.

A couple of clarifications. So number one for David. If I look at the cRPO bookings now, David, it accelerated. It was strong this quarter again, similar to last quarter. I think if I'm doing my math right, your cRPO bookings grew 16%. You're guiding to revenues growth of 12% this year and 12% next year. We know typically, that cRPO bookings are a good leading indicator of revenue. So given the gap between your revenue guide and cRPO bookings that we've seen for the last 2 quarters, are you just being conservative? Or there's something else that we should be mindful of, given the cRPO bookings are growing at 16%, but you're guiding to revenues -- revenue growth of only 12% for this year and for next year?

Thank you, Taz. So actually, we are seeing a few things that are happening in the business, and we're actually very pleased from that. So -- we spoke during the call about the quality of the revenue. You see that we have more and more subscription revenue that's coming and much more software. If you look at the overall mix, software is becoming a very significant portion, and we have the growth of 21%, and it's a consistent growth that we see over the last few periods. So this is something that we see as a trend.

As for the demand and what we have in our hands, it gives us a lot of confidence into the end of this year and also when we enter into the next year. The visibility is high. You mentioned percentage, 12% and 15%. The way that we look at that is that we are working with our customers to see deployment and what can be done. And based on that, I think putting our guidance, and we are feeling comfortable with the guidance. And if we will need to update, we'll be more than happy to do it.

Taz, let me add on this, that actually, while we are growing top line, we are improving the quality of the revenue a lot. So as David mentioned, software mix is growing, the recurring revenue is growing, profitability is expanding. So actually, if you would compare the perpetual equivalent versus the subscription that we see today, actually, the growth would be higher if you continue to deliver the same as perpetual license in a few points. So actually, the growth rate is faster than it looks in the numbers.

Yes. No, fair point. And then, David, last quarter, we had a little bit of weakness on the operating cash flow due to, I guess, the shift to subscriptions and also FX. This quarter also, the cash flow looks negative. Any comment on -- I know last year, you -- last quarter, you said the full year guide was maintained at $45 million. Any comment on the full year expectations for cash flow for this year?

Yes. Thank you, Taz. So cash actually in Q2 was strong. What we see in Q2 that we were able to generate a positive cash flow from operations and actually pleased from the quarter. Q1 -- Q2 actually is the Q that we had some specific expenses that related to annual bonus and stuff like that, that's taking place usually in Q2. And although this seasonal expenses, we were able -- seasonal payment, we were able to drive a strong cash flow from operations. Actually, if you look this year, we're generating $1.1 million of cash from operations. Last year, Q2 was negative $6.3 million. So actually, if you look at Q2 versus Q2 last year, you're seeing a strong cash from operation.

On the other perspective, given the trends that we see in the business and given what we see actually in hardware and the need for inventory and supply chain that required the planning -- a different planning, we are making a deliberate decision to increase the level of inventory, and it's mainly to support what we see customer demands and deliverables, and we don't want to have any risk related to execution and deliverables. So we made a decision to increase the levels of the inventory. So that also impact about our -- the way that we're looking into this year cash flow. We think that the right thing that is to make the right decision in the short term of increasing inventory level to support future growth and the execution and customer delivery.

So just to clarify, so we are expecting cash flow of $45 million for the year?

So in this stage, what we are planning is that we would like to increase the inventory level. As you can see, the balances in the end of Q2, and we continue to do this decision. We believe that this is the right thing to do in this time of the year. It allows us to better plan, better support future demand. We see significant demand in front of us, and we want to be able to deliver to our customer on time. And that is great for us, the right -- in our view, the right decision to increase inventory, and we will not -- we will invest in the right things to make the growth into the future.

Okay. One last one. So I think around last quarter, you had expected -- you had mentioned that you expect about $20 million of bookings from U.S. for fiscal '27. Are we still on track of that? Or is that is -- we could be slightly better than what you had expected last quarter for the U.S.?

Yes, absolutely. Yes, we are on track. We are on track to achieve the $20 million signed deals this year. I expect this to come from state local and also some federal contracts should land this fiscal year. Yes, we are doing a good progress in the U.S.

[Operator Instructions] Our next question in the queue coming from the line of Matthew Calitri with Needham & Company.

It is Matt Calitri over at Needham. David, I want to stay on the cash flow for a second there. So I understood with the inventory purchases, and obviously, that's a prudent decision by you guys, so credit there. But there was a slight change in language there from significant positive operating cash flow versus the $45 million. Like how should we think about the impact of that level of inventory purchasing?

Matt, I'll start and then I'll let David continue. I think it's important to understand that we want to be in a position to be able to grow as the demand is growing. And for that reason, we want to be able to invest in inventory for 2 reasons actually. The first one is related to demand and the second one is related to the supply environment. Supply environment today, the delivery time is long and the prices are going up, and we want to be in a position that we are able to fulfill the demand -- the growing demand of the customers.

So that's the rationale behind it. And it's quite difficult to predict how far we'll go with inventory increase, but we'll do it, of course, in a cautious manner in a way that balances, of course, the level of inventory we have in stock, but also the ability to fulfill the demand on time and to fulfill and to be able to deliver to customers as contracted. So that's the logic and the rationale behind it.

Now I'll let David answer specifically to the question.

So given that we cannot quantify in this phase like the impact of the incremental inventory and what we see changing in this area and taking session that we are seeing much more subscription, we have not quantified what will be the cash flow operation. But overall, we think that it will be significantly in the positive. And the question like, how much exactly we will invest in the inventory levels, it will be based on what we see in the market. And currently, what we see in the market, we see strong demand. You can see that we already increased the level of the inventory in the first half of the year significantly. And against this inventory, we have actually a strong demand, and we have a customer planning to be delivered for this inventory. So actually, we are in a very good situation that allow us to satisfy our customer to plan ahead and avoid disruption that's related from supply chain that it is not in our control.

Got it. Okay. That makes sense. And then the other part to that is obviously the impact from the subscription recognition and great to see the continued adoption of subscription. Like is there a way to think about what growth might look like had we not have that sort of revenue recognition headwind? And more than anything, I'm just trying to square away like the strong results and underlying currents here with -- and the visibility with you guys keeping the guide unchanged and some of this RPO and billings dynamics that you spoke about earlier?

Yes. So Matt, I'll -- first of all, I'll share why some customers move to subscription, and then I'll give you our view of how it would be different if it would be perpetual. So threats are moving quickly. We said that earlier in the call, agencies need the latest capabilities. Governments, when they go to perpetual license and buy a solution later on to upgrade and expand, it's another new cycle of purchasing, which is a headache for them. So actually, the fact that some of them are moving to subscription gives them the flexibility to get the latest and greatest technology and expand without being required to go through the entire process. And we see it happening gradually, but faster than expected. This is one.

Second, we continue to sell both perpetual and subscription. And a perpetual is still the dominant portion, okay? So we are moving to subscription faster than expected, but we have heavy portions that is still perpetual. It's also important to understand that regardless of contract structure, whether it's subscription or perpetual, our solutions are deeply integrated and embedded into customer operational environments. If you heard earlier in the call, I mentioned AI and sovereignty. Sovereignty, some of it means that customers want on-prem deployments. So it could be that they will go for a subscription agreement, but still it will be on-prem. That's usually what happens. So subscription is something that gives the customers flexibility while being able to run faster in terms of technology and make sure that they maintain advantages versus the adversary. So that's the rationale of moving to subscription for customers.

Our view is that if we would be in the same pace as last year, for example, selling perpetual versus subscription or the mix is not changing, we would see a few percentage more in growth rate. So I think that it's great news that we maintain the top line growth outlook, while more of the revenue is coming from recurring. This is, I think, a good indication that the market is growing faster than it looks in the numbers and the predictability and the visibility are improving over time. It's reflected in the recurring, it's reflected in the software mix, and it's also reflected in the profitability levels. So I think that the business is improving.

And I'm showing there are no further questions in the Q&A queue at this time. I will now turn the call back over to Dean for any closing remarks.

Thank you, Livia, and thank you all for participating in today's call. Should you have any 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.

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Cognyte First Quarter Fiscal Year 2027 Earnings Conference Call. [Operator Instructions] Please note that today's conference may be recorded. I will now hand the conference call over to your speaker host, Dean Ridlon, Head of Investor Relations. Please go ahead.

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 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 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 would like to turn the call over to Elad.

Thank you, Dean. Hello, everyone, and thank you for joining us today. We delivered a solid start to fiscal '27, reflecting steady execution across the business and sustained demand for Cognyte's investigative analytics solutions. Revenue grew double digit year-over-year, supported by strong customer activity and better-than-expected adoption of our subscription offering, momentum that is driving the growth of recurring revenue. Gross margin remained strong. Profitability improved significantly, growing faster than revenue and reflecting the leverage in our model. This successful outcome also reflected our proactive management of macro pressures, notably foreign exchange movements and rising hardware-related costs, which we'll continue to monitor closely and work to offset.

Across the world, agencies are undergoing pressure to resolve increasingly complex investigations and to augment the data into intelligence and intelligence into operational action. Before turning to our customer activity, a few words on the trends shaping demand. First, the intelligence environment is growing more complex. Threats are moving faster, data volumes are expanding rapidly. Information is increasingly fragmented across domains and adversaries are becoming more interconnected and sophisticated. As a result, agencies must generate actionable intelligence faster and operate more effectively in highly dynamic environments.

Second, agencies across law enforcement, national security, defense and other public safety organizations are advancing and expanding their intelligence and investigative capabilities and investing in advanced technologies to meet evolving mission requirements. This includes growing investments in integrated intelligence capabilities for use cases such as border security, operational intelligence, multi-domain investigations, financial crime and cyber-related threats. Third, AI is reshaping how intelligence work gets 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 operational workflows with the governance, oversight, explainability and accountability required for mission-critical environments rather than stand-alone AI tools.

It helps agencies not only work faster, but also uncover hidden connections, surface insights that would otherwise be missed and improve decision-making. These are not abstract trends. They show up directly in how our customers describe their challenges to us in our customer conversations, in competitive evaluations and in expansion conversations. Agencies that came to us a few years ago for a single use case are now asking how to extend across domains, integrate additional data sources and enable broader investigative and operational workflows through our unified intelligence platform. This pull from the installed base is one of the clear signals of platform stickiness we see. These trends align closely with Cognyte's strength and are increasingly visible in customer demand across our business.

Day in and day out, customers depend on our cutting-edge AI-driven analytics to solve problems that matter most to their missions. During Q1, we executed against the key pillars of our growth strategy. What drives both new and existing customer wins is straightforward. We collapse work that used to take weeks of manual correlation into one cohesive environment, fusing data across sources, surfacing connections and delivering actionable intelligence. When agencies evaluate us against alternatives, the combination of value, speed and integration is what wins the deal. And importantly, once deployed, the platform becomes deeply embedded in how the missions operate.

As a result, we are displacing incumbents, including in-house built systems as agencies recognize that fragmented and modular intensive workflows cannot keep pace with the scale, speed and complexity of modern investigations. With that background, the Q1 results show real traction. We saw strong customer engagement globally, new logos, competitive deals, expansions and upgrades. We extended within our customer base, including a new 3-year subscription agreements valued at over $20 million, which we recently announced as well as a large expansion deal valued at over $10 million. New logo activity remained robust across geographies, and we are encouraged by the pace and quality of customers we are bringing on.

In the U.S., we made good progress. In state and local, we secured a number of new logos. In federal, we advanced multiple opportunities through proof of concepts and live operational demonstrations with excellent feedback. The pipeline is maturing, including opportunities that we develop directly and through our partnerships. This year, we expect to generate $20 million in deals and believe there is a significant long-term opportunity in the largest and most sophisticated security market in the world. We evolved our solutions in line with where our customers' missions are heading and have over time, shared some examples from our portfolio with you. Today, I want to highlight financial investigations, another growing domain we are bringing significant innovation.

We recently introduced new capabilities in this area, addressing rising demand around transnational illicit financing and the broader evolution of financial crime. They help agencies follow the money across traditional and digital currencies, expose the hidden networks behind sanctions evasion and terror financing, the networks that bad actors work hard to conceal. And this innovation is already delivering in the field. As we previously announced, Tier 1 military intelligence agency in EMEA used our platform to counter terror financing with successful results and even earned the National Ministry of Defense Innovation Award for their operational impact. This reflects how we operate across every domain. We listen closely to our customers, monitor the evolving threat landscape to our domain specialists, identify where missions are heading and deliver integrated solutions that address emerging operational needs, the same engine behind border intelligence, financial investigations and what comes next.

Moving to guidance. Based on our performance and customer engagement, we remain confident in our full year fiscal '27 outlook. We are reaffirming total revenue guidance while at the same time, lifting our recurring revenue growth expectations and improving visibility. We are focused on execution, innovation and market opportunities that support sustainable, profitable growth. In summary, we delivered another quarter of solid results while growing recurring revenue. We operate in a growing mission-critical market with high barriers to entry. We continue to expand with both new and existing customers. We are making encouraging progress in the U.S. with approximately $20 million of business expected this year. AI continues to strengthen the value and differentiation of our platform, and we remain well positioned for continued growth and expanding profitability.

At the core of everything we do is a simple proposition. We help the people responsible for keeping the world safe, do their job faster, more effectively and with greater confidence in their intelligence. That mission only becomes more critical as the threat environment grows more complex. And the more complex the threat environment becomes, the more indispensable our platform becomes to the agencies that rely on it. With that, I will turn the call over to David for a deeper view of our results. David?

Thank you, Elad, and hello, everyone. We started fiscal '27 with another quarter of solid execution across the business. Our results this quarter reflect the substantial value our differentiated solutions deliver to customers and the ongoing operational discipline with which we are running the business. Perpetual deployments remain a critical component of our business, reflecting customer preferences driven by workflow and stringent security requirements. At the same time, we are seeing a clear and growing shift towards subscription adoption across parts of our customer base. This shift is strengthening recurring revenue and increasing long-term visibility, while naturally introducing timing dynamics across RPO, billings and cash generation. Revenue for Q1 FY '27 was $105.5 million, up $9.9 million or 10.4% year-over-year, reflecting a continuing healthy demand environment.

Breaking down the revenue mix. Software revenue was $47.3 million, an increase of $9.9 million or 26.5% year-over-year. Software revenue is comprised of perpetual licenses, appliances and some term-based subscription licenses. Software services revenue grew by $5.4 million or 12.1% year-over-year to $50.1 million. Software services revenue comes mainly from support contracts and to a lesser extent, cloud-based SaaS subscriptions. Total software revenue grew by $15.3 million year-over-year or 18.6%, significantly faster than total revenue, reflecting the increasing contribution of software revenue within our business mix. Professional services revenue was $8.2 million in Q1, down from $13.5 million in Q1 last year. Quarterly fluctuations in professional services revenue is expected and are primarily a result of revenue recognition timing.

Recurring revenue increased by 10% to $51.9 million, representing 49.2% of total revenue. The growth was driven by the stronger-than-expected adoption of our subscription offerings, where we have seen an increased momentum recently. This supports the expansion of our recurring revenue base and visibility. Looking at gross margin and profit, we continue to make meaningful improvement. Q1 non-GAAP gross margin was 72.9%, an expansion of 100 basis points year-over-year. Non-GAAP gross profit continued to grow faster than revenue and increased by $8.2 million or 12% year-over-year to $76.9 million.

On profitability, Q1 non-GAAP operating expenses were $66.2 million. The majority of the year-over-year increase in OpEx is due to the continuing weakness of the U.S. dollar mainly versus Israeli shekel. GAAP operating income was $4.4 million, doubling from $2.2 million last year. Non-GAAP operating income reached $10.7 million, an increase of $3.1 million or 41.5% year-over-year. Adjusted EBITDA continues to expand significantly faster than revenue. It was $13.6 million, up 31.5% from the $10.3 million generated in Q1 last year. As a result of the FX dynamics, Q1 FY '27 non-GAAP other expenses were a loss of $2.2 million. While we maintain our annual non-GAAP tax expenses outlook for the year to be about $15 million, in Q1, our non-GAAP tax expenses were $5.1 million. As a result, Q1 non-GAAP EPS was $0.03, reflecting the timing of the tax accruals, which are weighted towards the first half of the year and FX-related other expenses. We continue to expect annual non-GAAP EPS of $0.47.

Our Q1 performance again highlights that as software revenue grows, the leverage in our model generates significantly higher profitability. As recurring revenue becomes a larger part of the business, some of our operational metrics increasingly reflect the timing characteristics of subscription arrangements. Q1 billings grew 31.2% year-over-year to $102.7 million. RPO or remaining performance obligations is contracted revenue to be recognized in future periods and remains an important indicator of our revenue visibility. It is influenced by factors, including sales cycles, subscription deals, deployment timing, contract duration, renewal timing and seasonality.

RPO continues to reflect the increasing contribution of subscription-based arrangement within our business mix. As a reminder, our RPO calculation excluded $42 million of cancelable subscription amounts as of January 31, 2026, and accounts for the proportional annual consumption of multiyear large support contracts. Taking these factors into account, the strength of our reported RPO remains clear. While fluctuations from quarter-to-quarter are expected in RPO, current levels support our growth expectations. At the end of Q1, total RPO was $528.8 million. Total RPO is sum of contract liabilities of $128.9 million and backlog of $399.8 million. Short-term RPO was $363.4 million, providing solid visibility into revenue over the next 12 months.

Turning to cash performance. We ended the quarter with $109.2 million in cash and no debt, providing significant strategic flexibility. During Q1, we generated $6.5 million from the sales of a minority investment. Recent FX and hardware cost dynamics and the demand for subscription offering affect the timing profile of cash generation and collections. In Q1, we had negative cash flow from operations of $4.7 million and negative free cash flow of $6.1 million, primarily driven by adoption of subscription offering, FX dynamics and inventory buildup to support future revenue. We are actively monitoring the various dynamics and continue to expect cash flow from operations to be about $45 million for the full year.

The Board remains committed to long-term shareholder value creation and has confidence in our growth prospects. Our capital allocation approach is disciplined and focused on returns. Cash above what we maintain for liquidity and working capital is deployed to the opportunities we believe offer the strongest long-term returns, including acquisitions and share repurchases. During Q1, we bought about 1 million ordinary shares for an aggregate purchase price of approximately $8.2 million. Since launching our first repurchase program in November 2024, we have repurchased approximately $35 million of shares through the end of Q1. Out of the $60 million authorized across our repurchase programs. We remain focused on balancing investment in innovation and market expansion while improving operating efficiency.

Our financial model continues to scale well and as revenue grows, we see opportunities for additional leverage. For fiscal '27, we are reiterating the outlook we provided at year-end. We expect full year revenue of about $448 million, plus or minus 3%. This represents approximately 12% year-over-year growth at the midpoint of the revenue range. While we are reaffirming our total revenue outlook for FY '27, the recurring revenue is increasing faster than expected. We now expect recurring revenue to become a larger contributor to overall growth and to grow faster than total revenue. The fact that we are reiterating our revenue outlook, while recurring revenue is growing faster than anticipated, reflects the underlying strength of customer demand and the increasing predictability of our business.

We believe that our strong short-term RPO, together with the growing recurring revenue and the continuing favorable demand environment support this revenue outlook. We continue to expect sequential growth each quarter through the balance of the year, aligned with the seasonality of previous years. We continue to expect non-GAAP gross margin to increase year-over-year to approximately 73.5%. This reflects an improvement of 50 basis points from last year. Gross margin may fluctuate between quarters based on our revenue mix. As a result of the improved gross margin, we expect gross profit to increase at a faster rate than revenue growth. Given the FX environment, we took proactive action. And as a result, we continue to expect non-GAAP operating income to be about $56 million, more than 50% growth year-over-year. We expect adjusted EBITDA to be about $68 million, representing about 40% year-over-year growth, all at the midpoint of the revenue range. We continue to expect annual non-GAAP EPS to come in at $0.47 at the midpoint of the revenue range.

While we remain on track to achieve our FY '28 adjusted EBITDA target on a constant currency basis, we decided to update the target to approximately 20% to reflect exchange rate changes and we'll continue to monitor and take action accordingly. Based on the progress we continue to make across our 3 growth pillars, expanding within our installed base, winning new logos and growing our presence in the U.S. market, we believe we remain on track to meet our revenue target of approximately $500 million for the fiscal year ending January 31, 2028.

To conclude, we entered the year with solid performance across the business, and our execution remains focused and consistent. AI continues to enhance the value and operational impact of our solutions. We are performing well in the U.S. and expect $20 million of business this year. Our balance sheet remains robust, providing flexibility and stability. Our PO and recurring revenue drive visibility and predictability. Overall, we are executing effectively against our strategy and delivering consistent growth even in dynamic environments. This underscores the resilience of our business, the mission-critical nature of our solutions and the enduring trust of our customers. We are well positioned to deliver sustained profitable growth and significant value creation. Thank you again for joining us today and for your continued support of Cognyte. Operator, we are ready to take questions.

[Operator Instructions] Our first question comes from the line of Imtiaz Koujalgi with ROTH Capital.

Two questions. Number one, if you look at the current RPO, it looks -- the current RPO bookings looks like that accelerated to almost 16%. Given the strong performance in the quarter, given the acceleration in the current bookings, you're still maintaining your full year guide. So David, the question is, is it just conservatism? Or is there something that you're seeing that makes you maintain the guide for the full year?

Thank you for the question. Yes, we had a good progress that we're doing across the business. And as you can see from the results that we delivered in Q1, we ended Q1 with strong results across our revenue and profitability lines. If you refer to the RPO, it's not about conservatism or not. As part of looking at RPO, we are looking at deployment cycle and timing. And based on that, we define the guidance. We are very pleased that we keep the guidance as is while we're increasing revenue -- recurring revenue. So the adoption of the subscription that we see in the market and the ability to -- actually, in Q1, we already delivered 10% year-over-year growth in recurring revenue. And given the fact that we believe that it will continue with us, we are very pleased with these trends that we are able to keep the guidance and increasing the recurring revenue.

Very helpful. And then cash flow came in a little bit lighter, I think, than the Street was expecting. Can you just walk us through what exactly happened there with the cash flow? You said there's an impact from FX and subscription revenues. You're keeping your full year guide intact at $45 million. Maybe just given the weakness or given like a slight shortfall in Q1 cash flow, what gives you the confidence to maintain the $45 million full year cash flow guide?

So before we going into the cash flow, let's speak a little bit about the dynamics. From an FX perspective, we're seeing in the last few weeks, a significant weakness of the U.S. dollar mainly versus the shekel that creates some impact on -- also in Q1. And on top of that, we're seeing that more subscription sales and when you have subscription, the profile of cash generation and collection related to that is changing. On top of that, given what we see from cost of hardware and given the demand we see in front of us and what we expect to deliver, we decided to increase the inventory level. If you look at Q1 already, you can see that the inventory level increased by $3 million, and this is something that we did to support this year already demand, and we will continue to do it as long as we see the demand is growing, and we believe that this is the trend that we are facing right now.

Why we believe that we will continue to deliver the $45 million because when we look at the expectation that we have and what's going to be billed and collect within this year, we believe that it will be -- we'll be able to achieve the $45 million. It will be back ended. It will be more in the second half of the year. Usually, Q2 is negative and Q3 and Q4 are strong, and we believe that it will be the same this year, and we'll be able to achieve our guidance. Obviously, we're monitoring carefully the FX dynamics and what's going on in the market to make sure that we're going to achieve it.

Yes, very helpful. And then maybe one last one for Elad. Elad, you gave us -- you're expecting about $20 million of deals to come from the U.S. this year. I believe last quarter, you said that of the incremental $100 million revenues you'll get, almost 1/4 of that will come from the U.S. Given what you saw in Q1, given your guide for $20 million in this year, are we still on track to achieve what you told us last quarter for U.S. revenues?

Yes. Actually, our confidence level in the U.S. is increasing. What -- first of all, the U.S. represents one of the largest, most strategic advanced markets globally, including in the security, of course. There are many security agencies in state and local and federal level. We are in this market for quite a while now. We discussed the demand for many customers. We do see that our technology is clearly resonating. We have great customer feedback and also prospects. customers feedback, those that are already operational and the prospects that are running demos on POC with us, including in the federal side.

We are scaling our market presentation. We are growing sales and marketing efforts. And actually, our visibility is much stronger today than before. And we are leveraging partners more effectively. So if I look at the U.S. market, I always believed in this market. Today, I also have the confidence to quantify it. And I think that for this year, for next year, we should see strong results in this market. $20 million of deals in this year and the $25 million on top of it next year. And also, I see a potential for an overachievement. But for now, we guide on what we see. So generally speaking, the confidence level and the market traction is very good.

Just to be clear, the $20 million, is that bookings? Or is that revenues this year from the U.S.

The $20 million of deals that we expect to get in the U.S., we expect that a significant portion of it will translate into revenue. If it will be exactly or not, it's too early to state, but we believe that the $20 million of deal will be executed this year.

[Operator Instructions] Our next question comes from the line of Matthew Calitri with Needham & Company.

This is Matt Calitri over at Needham. And good to see the software and recurring revenue strength during the quarter. Given the outperformance delivered in the first quarter, are you still expecting an 87%-13% split between software and professional services? Or is that going to skew a little bit now?

Actually, as you mentioned, you can see that the software revenue is growing fast. And actually, we saw this pattern also last year that the software revenue is growing fast. Actually, this year, we're seeing software is growing fast and recurring revenue is growing fast and software services growing fast. From a mix perspective, we keep our same view about the year, about the mix. Obviously, Q1 is a very strong from a mix perspective that we have much less professional services, and this is what we want over time. But we, in this space, keeping the mix as is in the level of around, I would say, 87% to 13%, but it can be a little bit better, but this is the range.

Okay. So that would imply a pretty material deceleration in software revenue as we go through the rest of the year. Was there anything onetime in nature included in that? Or is it just conservative? How are you thinking about that?

Actually, it's related to the recurring revenue. Think about the idea that we have much more recurring revenue, which is something that we didn't have before. If you look at last year, last year, the growth on recurring revenue was 3.5% -- this year, we expect that it will be more than the total revenue growth. So we expect that recurring revenue will grow more than 12%, which practically when you are having more recurring revenue and that's growing fast and you keep your top line growth, it's indicated on a very healthy business while we're doing transition and being able to keep growing.

Sorry, David, I'm not sure I'm following there. But with the recurring revenue growth would be driven by software growth. So my question is just sort of on the implied decel in software if like to get from the strength in the first quarter to still that same 87% mix would imply most of the strength in the back of the year would come from professional services.

So the reason behind it, I think that in the software, you will have more recurring. The portion of the recurring will be higher. So although the growth rate of the total software will be slightly less than what you saw in Q1, but the mix, the share of the recurring revenue will be higher because in the end, we expect to grow more than 12% on total recurring revenue this year. So it's about what building the software revenue. So you will have within the software revenue, more recurring revenue.

Okay. And then on that point with the more recurring revenue. So last quarter, you guys had mentioned that while you're seeing more subscription wins, you weren't ready to call it a pattern. Clearly, that's continued, which is great to see, as you mentioned. What changed this quarter to sort of drive this continued strength and the expectation that it's going to continue?

This is Elad. So our customers are operating in a very dynamic and evolving threat environment. And when moving to subscription, they actually benefit from faster tech refresh, and they're able to maintain high value of the solutions they have and of course, do a better job and be more successful in what they do. If you remember, we discussed quite a long time that we are offering our solutions, both perpetual and subscription. and the reception of customers is gradually growing, but their purchasing behavior for most of them is still perpetual. They used to buy in CapEx and they actually buy the license and then support contracts.

Recently, I do believe that it's also related a little bit to AI, but also to the tech refresh because the changes in the technology is faster than before, they want to be able to benefit from the innovation and the availability of new technologies that we offer them. And for that reason, I believe they are more receptive to recurring revenue and to subscription. I also want to remind you that also when they buy perpetual, they still have recurring purchasing behavior. They expand with us, upgrade with us actually to land and expand. But the tech refresh is much slower than whether if you had a subscription.

So -- as David mentioned, we are very pleased that we are able to grow the recurring revenue and in parallel to maintain the top line -- the overall top line growth, I think it's a good indication that customers benefit from the value. And also we are able to increase profitability much faster than revenue. So if you look at the fundamentals of the business, we do see top line growing and maintaining guidance while recurring revenue is growing, and we maintain very strong profitability leverage. So this is an indication, I think, on market health and execution.

[Operator Instructions] I'm currently showing no further questions at this time. I'd like to hand the call back over to Dean Ridlon for closing remarks.

Thank you, Shannon, and thank you all for participating in today's call. Should you have any 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. Thank you for your participation. You may now disconnect.

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Cognyte Fourth Quarter Fiscal Year 2026 Earnings Conference Call. [Operator Instructions] Please be advised 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.

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 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 as 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, being filed today 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 would like to turn the call over to Elad.

Thank you, Dean. Hello, everyone, and thank you for joining us today. Before we begin, I want to acknowledge and thank our employees, customers, partners and investors for their continued support over the past month. Cognyte's mission is to help make the world a safer place. That mission is constant and our teams continue to execute.

We delivered strong results in the fourth quarter and closed fiscal '26 with another year of consistent execution. Revenue grew by double digit with strong gross margin, profitability improved significantly, and we continue to generate solid cash flow.

Fiscal '26 played out largely as we expected with strong repeat business from our installed base, continued new customer momentum and strengthening profitability. We expect this growth to continue into fiscal '27 and today provided revenue guidance of $448 million at the midpoint of the revenue range, and we are on track to achieving our targets for the fiscal year ending January 2028.

We'll share more details later in this call. We operate in a market environment where the underlying drivers continue to strengthen, threats are becoming more complex, adversary is more sophisticated and the volume of data continues to grow exponentially. At the same time, decisions need to be made faster than ever. This is driving sustained demand for mission-critical intelligence technology, exactly where Cognyte is positioned.

Our solutions operate in extremely demanding environment across national security, military intelligence and law enforcement. In these environments, performance is not optional. Our customers are not experimenting. They are deploying systems that must work consistently in real operational conditions. Over time, our value becomes deeply embedded in our customers' workflows and operational systems. This creates durable relationships, high switching costs and a strong competitive position.

Over the past year, we executed against our 3 primary growth pillars. First, installed base expansion. Customers continue to expand deployments, upgrade functionality and are also extending into new use cases and operational domains. For example, border intelligence. Repeat business continued to represent a significant portion of our revenue, reflecting the trust our customers place in us and the operational value we consistently deliver.

Second, new logos. We added 61 new customers this year as our solutions continue to prove themselves globally and deliver real operational value. This important new business is driven by our proven track record and customer references and is aligned with our land and expand strategy. We increased our footprint within military intelligence agencies, including in NATO countries.

And third, North America. This is a key market for us. We recently strengthened our North American leadership, bringing in a seasoned sales executive with deep experience and track record in the federal market. We also added a new channel partner, Carahsoft, who will provide access to federal, state and local procurement channels and will support broader deployments of our solutions. Together, these steps reinforce our commitment to scaling our U.S. presence and aligning with long-term federal modernization programs.

Our growth is driven by a balanced approach, installed base expansion, new customer acquisition and U.S. market scaling. In Q4, we secured several significant deals across geographies and customer segments. One example is with a long-standing national security customer in EMEA, where we amended the perpetual agreement into a 5-year subscription at a new annual value of $6 million. This reflects both a significant expansion in scope and a shift in commercial model.

The transition to subscription was driven by the customers' need for continuous access to new capabilities, AI-driven functionality and faster upgrade cycles. While most agencies still prefer perpetual deployments, we are seeing a gradual increase in the adoption of subscription models. We also signed several multimillion dollar deals across multiple regions, including new solution deployments, expansions and support contracts.

In addition, this morning, we announced an about $5 million deal with one of the largest state law enforcement agencies in the United States. This is a new customer win, replacing an incumbent provider. The deployment will support mission-critical field operations, including fugitive apprehension, missing children cases, criminal investigations and search and rescue.

It represents an important step in expanding our footprint in the U.S. Security and intelligence agencies globally are accelerating efforts to address increasingly complex threat environments. Today's challenges extend beyond traditional crime and national security. Agencies must respond to hybrid threats, cross-border activity, cyber-enabled and organized crime, all of which increase the volume and complexity of data they must analyze. This is driving sustained demand for platforms that can fuse, correlate and analyze data to deliver actionable intelligence for real-time decision-making.

Across regions, we see a consistent shift toward more integrated proactive intelligence models with greater emphasis on cross-unit collaboration and faster time to decision. Our platform is purpose-built to support exactly this type of complex operational environment. As agencies continue to modernize and scale, our positioning is directly aligned with their immediate and long-term priorities.

Today, we are seeing growing adoption and reliance on artificial intelligence. AI is embedded in our platform, shaped by real-world investigative use cases and years of operational experience. AI also plays a part in our customers' growing challenges. It increases the scale and the sophistication of the threat to our customers address.

In our market, access to AI models and Gen AI is not the main constraints, operationalizing them is. Having access to advanced AI is not enough for an analyst to process sensitive communication data, correlate it with financial and behavioral signals or generate outputs that meet legal and evidence standards. The challenge is everything required to make AI usable in real investigated environments. That includes integrating fragmented and sensitive data, applying domain-specific intelligence methodologies, operating in strict security and compliance frameworks and embedding AI into investigative workflows that produce actionable, auditable outcomes.

As AI capabilities continue to advance, this infrastructure becomes more, not less critical. Customers are not buying AI features. They are buying operational outcomes powered by AI. This is what makes our advanced AI operationally useful, and it's not easy to replicate. We believe AI is a structural tailwind for our business. Earlier this month, we hosted our Intelligence Summit, bringing together senior intelligence and law enforcement leaders from across the globe.

The level of participation and engagement reinforced Cognyte's strong leadership position within the investigation and intelligence communities. The conversations were direct and forward-looking. Leaders are not discussing theory. They are executing modernization programs now. They are confronting real operational challenges and sharing practical approaches between them and with us.

Across panels and closed door discussions, agencies emphasized 3 priorities: connecting fragmented data into a unified intelligence picture, reducing time from data to decision in live investigations, enabling collaboration across units, agencies and even countries. We were honored to host Jürgen Stock, former Secretary General of INTERPOL and former Vice President of Germany's Federal Criminal Police Office as our keynote speaker.

He spoke about the importance of sharing fragmented intelligence across domains and the need to partner with the private sector, specifically in technology to accelerate innovation and operational effectiveness. The summit once again confirmed why customers choose to partner with Cognyte, access to advanced proven technology and methodologies, solutions that translate directly into real-time operational outcomes and the quality, support and long-term trust they can rely on.

In summary, we delivered strong results. We operate in a growing high barrier mission-critical market. We are expanding with both new and existing customers. AI is a structural tailwind. We remain focused on execution and long-term value creation and are well positioned for continued growth.

We operate where the hardest problems live. This is not a coincidence. It reflects 30-plus years of connecting advanced technology to operational realities. Ultimately, we help eliminate the unknown, so our customers can act with clarity, speed and confidence.

With that, I'll turn the call over to David for a deeper review of our results. David?

Thank you, Elad, and hello, everyone. As Elad outlined, Q4 ends a year of continued strong execution across the business. Our results this quarter and throughout FY '26 demonstrate our durable business proposition, the value of our differentiated solutions and the operational discipline that all drive these strong results.

Let me begin with our fourth quarter results. Revenue for Q4 FY '26 was $106.2 million, up $11.7 million or 12.4% year-over-year, reflecting a healthy demand environment and the value of our solutions. Breaking down the revenue mix. Software revenue was $45.9 million, an increase of $8.5 million or 22.6% year-over-year.

Software revenue is comprised of perpetual licenses, appliances and some term-based subscription licenses. Software services revenue grew by $3.4 million to $49.3 million. Software services revenue comes mainly from support contracts and to a lesser extent, cloud-based SaaS subscriptions. Total software revenue, which includes the combination of software and software services revenue, grew by $11.9 million year-over-year or 14.2%.

Professional services revenue was similar to Q4 of the prior year. Fluctuation in professional service revenue between quarters is expected and are a result of revenue recognition timing. Recurring revenue increased by 5.6% to $50 million, representing 47.1% of total revenue. Note that recurring revenue is calculated from GAAP revenue, driven primarily by support contracts and sub time-based and SaaS subscription offerings that enhances our visibility in both the near and long term.

Looking at gross margin, we continue to make significant improvements. Q4 non-GAAP gross margin reached a record of 74.7%, an expansion of 320 basis points year-over-year. Non-GAAP gross profit grew much faster than revenue and increased by $11.8 million or 17.4% year-over-year to $79.4 million. It's important to mention that all the incremental year-over-year increase in revenue flow through to gross profit. This again demonstrates how our differentiation translates into strong gross margins.

On profitability, Q4 non-GAAP operating expenses were $67.3 million. GAAP operating income was $5.2 million, up from $697,000 last year. Non-GAAP operating income reached $12.1 million, doubling year-over-year. Adjusted EBITDA continues to expand significantly faster than revenue. It was $15 million, up 62.5% from the $9.3 million generated in Q4 last year.

GAAP net income was $5.1 million compared to a net loss of $0.2 million in the same period last year. The improvement is largely due to the significant increase in operating income. Our Q4 performance again highlights the scalability of our model as software revenue grows and the leverage in our model generates significantly higher profitability.

While most of our government customers buy through perpetual licenses, we offer both models and have seen some recent wins in subscription. Subscription agreements support greater visibility over time and align with broader software market trends. RPO or remaining performance obligations represents contracted revenue to be recognized in future periods, influenced by factors such as sales cycles, subscription deals, deployment time lines, contract lens, renewal timing and seasonality.

The strength of our RPO remains an important pillar of our near- and long-term visibility. While fluctuations are expected in RPO, current levels support our growth expectations. At the end of Q4, total RPO was $557.2 million. Total RPO is a sum of contract liabilities of $123.7 million and backlog of $433.4 million.

Short-term RPO rose to $369.5 million, providing solid visibility into revenue over the next 12 months. It's worth noting that had we included cancelable periods of subscription deals in total RPO, it would have increased by approximately $42 million. Q4 billings grew 15.6% year-over-year to $109.9 million.

Turning to our full year FY '26 results. Revenue for FY '26 was $400 million, up 14.1% year-over-year. Full year non-GAAP gross margin increased to 73%, up 200 basis points year-over-year, primarily driven by scale and operational efficiencies.

We achieved our FY '28 gross margin target 2 years ahead of our plan. Profitability continued to improve significantly, reflecting the leverage we have in our business model. GAAP operating income reached $13.3 million, a significant turnaround from a $5.1 million GAAP operating loss last year. Non-GAAP operating income was $36.7 million, more than double year-over-year. Out of the $49.4 million year-over-year increase in revenue, $21 million flowed through to non-GAAP operating income.

Adjusted EBITDA was $48.2 million, up from $29.1 million, a 65.7% year-over-year increase. GAAP net income was $4.6 million compared to net loss of $7.2 million last year. Across the board, FY '26 showcases a disciplined operating model that scales effectively with our strategy.

Turning to cash performance. In Q4, net cash from operating activities was $20 million, slightly above the same quarter last year, benefiting from both increased profitability and strong collections. For the full year, operating cash flow totaled $40.3 million, reflecting consistent execution and disciplined working capital management.

Cash flow from operations came in below our expectation of $45 million due to delays in collecting certain receivables in the quarter. These receivables were collected early in Q1. We ended the year with $116.9 million in cash and no debt, providing significant strategic flexibility. Our capital allocation is consistent and return focused. We maintain the liquidity and working capital necessary to run the business.

Above this operating baseline, we allocate excess cash to areas that can generate the highest long-term return, such as acquisitions and share repurchase programs. Earlier this month, the Board of Directors approved an additional $20 million to our existing share repurchase program. This increase brings the total authorized for share repurchases to $40 million and reflects the Board's ongoing commitment to long-term shareholder value creation and confidence in our growth prospects.

During Q4, we bought approximately 592,000 ordinary shares for an aggregate purchase price of approximately $5.5 million. For the full year, we repurchased approximately 2.3 million ordinary shares for an aggregate purchase price of approximately $21.4 million.

Since the initiation of our first repurchase program in November 2024 until the end of Q4, we have repurchased a total of approximately $26.7 million worth of shares out of the total program authorized for $60 million. Throughout the year, we remain focused on balancing investment in innovation and market expansion, while improving operating efficiency.

Our financial model is scaling, and we believe there is an opportunity for additional leverage as revenue continues to grow. And now looking ahead, for fiscal '27, we expect full year revenue of about $448 million, plus or minus 3%. This represents approximately 12% year-over-year growth at the midpoint of the revenue range. We believe the mix between total software revenue and professional services revenue to remain similar to last year.

We believe that our strong short-term RPO of $369.5 million and the continuing favorable demand environment support this outlook. We expect Q1 revenue to be slightly below the Q4 levels we are reporting today with sequential growth each quarter throughout the year, aligned with the seasonality of previous years.

We expect non-GAAP gross margin to increase year-over-year to approximately 73.5%, above our target for FY '28. This reflects improvement of 50 basis points. Gross margin may fluctuate between quarters based on our revenue mix. This improved gross margin allow us to partially offset the foreign exchange headwinds related to the recent strength of the Israeli shekel versus the U.S. dollar. As a result of the improved gross margin, we expect gross profit to increase at a faster rate than revenue growth.

For the full year, we expect our non-GAAP operating expenses to grow slower than revenue, reaching approximately $273 million, an increase of about 7%. A significant portion of the increase is due to strengthening of the Israeli shekel against the U.S. dollar. Operating expense seasonality should be similar to last year with slight fluctuations throughout the year. We expect non-GAAP operating income to be about $56 million, more than 50% year-over-year growth.

We expect adjusted EBITDA to be about $68 million, representing about 40% year-over-year growth, all at the midpoint of the revenue range. We expect our non-GAAP taxes to be about 27% or $15 million and noncontrolling minority interest of about $5 million. As a result, we expect annual non-GAAP EPS to come in at $0.47 at the midpoint of the revenue range based on a weighted average of approximately 75 million fully diluted shares in FY '27 and we expect to generate GAAP net income again this year.

Turning to cash flow. We expect to generate $45 million of cash flow from operations in fiscal '27. For the full year, we expect total CapEx of approximately $11 million. Regarding our FY '28 targets, given the business momentum, expanding profitability and visibility, we believe we are on track to meet our targets for the fiscal year ending January 31, 2028, revenue of approximately $500 million and adjusted EBITDA margin of over 20%.

To conclude, Q4 capped a year of strong performance. We delivered strong growth, expanding margins and strong cash generation. Our AI-driven investigative analytics solutions are built on decades of domain expertise and designed for mission-critical environments.

Our balance sheet is strong. Our backlog provides visibility and our execution remains focused and consistent, and we are well positioned to deliver sustained profitable growth and long-term value creation. Thank you again for joining us today and for your continued support of Cognyte. Operator, we are ready to take questions.

[Operator Instructions]

Our first question comes from Taz Koujalgi with ROTH Capital.

A couple of questions from my side. So if I look at -- if I'm doing my math right, very strong bookings growth this year based on RPO, the RPO number that you disclosed. Can you just give us some puts and takes on the bookings number being so strong? How is the duration? Were there is some large contracts that closed early in this quarter?

If you look at the market, one way to think about this is actually to see firsthand what our customers told us during the Intelligence Summit. We had 2 weeks ago. Actually, we do see that across geographies and customer segments, the demand drivers are very consistent. And actually, we give answers to all of those, which is increasing sophistication of the bad actors, growing volume in fragmented data, AI and also the need to move much, much faster.

And given the demand drivers are significant and growing and healthy across domains and across territories, we do see that actually the demand is very healthy. In terms of the large deals that you've mentioned, we had a few of them. I gave an example earlier this call. We had a few more multimillion dollar deal. One example is $10-plus million deal with Tier 1 national security customer in EMEA, which is an expansion and upgrade with functionality. We have these customers with us for over a decade. We had another $5 million order from top NATO member, military organization.

So you can see that one national security, the other one is military intelligence, and we had another one in APAC of $5-plus million subscription deal, another customer that is with us for [ 2 ] decades.

So actually, what you see is that the need is there. Customers are going to the same direction globally and across segments, law enforcement, national security and national intelligence. And actually, this is what drives the demand. And as you mentioned, the RPO is strong. The cRPO is nearly $370 million. The total RPO is over $0.5 billion, and this gives us the visibility into fiscal '27.

Got it. Very helpful. And then you mentioned about the strong -- the addition of new partners in the U.S. market. As you think about your goals going forward from $400 million this year to $448 million and then $500 million in fiscal '28, maybe some more color on what is the mix of the U.S. business today, either from a revenue or bookings perspective?

And then what are you expecting, I guess, for the next 2 years for the U.S. mix to be to reach that $500 million target in the next 2 years? What is assumed in the guide of the $500 million? How much should the U.S. be, broadly speaking, of that $500 million in the next 2 years? What is assumed in the guide for U.S.?

Yes, sure. So U.S. is one of the largest and most advanced intelligence and law enforcement agency market globally. They face actually similar problems. We had some customers joining us for the Intelligence Summit. So we actually do see that they suffer same problems and they need similar technology. And actually, we do believe that we have a very strong fit into their needs.

In terms of fiscal '28, between fiscal '26 and '28, we need incremental $100 million. We do believe that about 50% of it will come from expansions and upgrades of existing customer base. About 25% will come from new customers outside of the U.S. And we believe about 25%, the rest 25% should come from the U.S., and we are taking actions in order to continue and expand presence in the U.S.

Including partners, including hiring a new general manager for North America that came from Cellebrite. He was leading the federal sales in Cellebrite, including a lot of sales and marketing efforts. So generally speaking, they do believe that we take the right actions, and that's the assumption. The 25% incremental out of the $100 million will come from the U.S.

Got it. Very helpful. Just one for David. So David, you've seen -- you've shown strong leverage in the model. Your adjusted EBITDA margin this year was 12%. You outperformed your guidance. I think there's a little bit of a -- if I'm looking -- if I'm doing the math right, the free cash flow seems a little bit, I guess, lighter than the guide. So maybe just help us understand the gap between the EBITDA and the free cash flow number this year.

Yes. Thank you, Taz. We had a strong year with the cash collection and cash from operation and free cash flow. During this year, we were able to generate $40 million of cash from operations and $30 million of free cash flow. We came short versus our initial expectation of $45 million, mainly because of certain collection that took place early in this quarter. But if you look at the overall picture, we were able to generate $40 million on a $36 million of non-GAAP operating income.

So actually, we were overachieving the operating income. And obviously, you have more things under the line like taxes and things that you paid. So in general, we are pleased with where we are from a cash from operation and free cash flow. And going forward, we guided for next year for $45 million.

Got it. Very helpful. And then if I look at the adjusted EBITDA guide for next year, you're guiding to 15% and I think that jumps to 20% in fiscal '28. Maybe just remind us what are the sources of leverage. You're guiding from 12% to 15% for next year, but then the guide goes from 15% to 20% in fiscal '28. So maybe just some remind us on what the sources of leverage are for the next 2 years?

So actually, we are very pleased with the leverage that we had with the gross margin. As you saw, we achieved 73% gross margin 2 years ahead of our initial plan. So this is one of the area that we believe that we'll continue to create leverage.

We guided for FY '27 to 73.5% -- so this is an area -- the gross margin itself, it's a place that we think that will create -- continue to create for us leverage. And obviously, we have also some OpEx leverage. We -- OpEx will grow this year at 7%, while top line will grow 12%. So that creates for us the leverage. And we believe that it will continue with us into FY '28.

Our next question comes from Matthew Calitri with Needham & Company.

Matt Calitri over at Needham here. I'm curious on what the puts and takes are to the initial FY '27 guide, particularly as it relates to the ramp in the U.S., but I would also love to hear any color on why you widened that range by a point versus previous guides and then expectations on new customers versus expansions, group sense contribution, AI, anything of that nature?

So fiscal '27 guidance actually presents double-digit top line growth, 12% with an adjusted EBITDA growth of 40%. So it means that we expect another strong year in terms of leverage and top line growth. In terms of the range, we added plus/minus 1% to each side, given the volatility and uncertainty in the market, it can grow in both directions, upside and downside, but we feel comfortable with the midpoint. But the reason for the plus/minus 3% is related to the market environment.

In terms of what drives the guidance, the way we look at it is we look at the cRPO, we look at our performance, we look at the market environment. We also look at the anticipated conversion timing of the cRPO to revenues. And taking all of those together, we have a very good visibility into the year. So overall, I think that we should expect another strong year. And we're also on track to meet the target for fiscal '28. So we are on track.

Okay. Great. Sticking there for a second, how would you categorize the size of the cohort of customers you expect to renew or expand this year compared to prior years? I know there aren't set dates with the perpetual model, but what are your assumptions based on what you're seeing for pipeline or historical customer trends?

Yes. So the history shows that unlike commercial stuff that you buy and you stick with it in our domain, the challenges are much, much higher and the pace is very fast. Just a few examples, customers that have a certain deployment today, they'll have to support data that is growing.

They'll have to support more functionality. They'll have to catch up with technology, including AI-powered analytics and Gen AI. They'll have to address new use cases that are coming, whether it's financial crime or others. We do see that in military intelligence, there are new concerns related to border control and others.

So generally speaking, this is a very dynamic environment and customers have to continue and upgrade and expand. And we expect that the upgrades and expansions are actually what we call repeat business, or leverage of our customer base will continue to be strong also going forward. So this is something that is a significant, I would say, baseline for our business.

On top of it, we have, of course, the new logos, which is primarily land and expand strategy. Usually, they start small and grow over time with us and the U.S. business, which I discussed earlier, which is a strategic and important market for us and another growth pillar. So overall, I do believe that the repeat business will continue to be very strong, given that the environment is changing and customers have to adapt and run and catch up with this.

Awesome. Great to hear. And then, David, on the cash flow from operations, what caused the delay in collections? And how are you thinking about that conversion rate of adjusted EBITDA to cash flow as you scale towards the '27 and '28 targets?

So actually, we had certain delays that took place due to, I would say, customer delays, and we collect everything in the beginning of the quarter. So this is something that may happen. And then you are relying on customer when they pay.

And if we look ahead, you need to take into consideration that on top of the adjusted EBITDA, you need to take other items like tax payment and other expense below the line that may take a place. For this year, we guided for $45 million of cash flow from operation, while the guidance for the adjusted EBITDA is $68 million. I think this is something that you can take as a going-forward view about how it will convert over time.

Okay. Great. And then -- it was also cash flow in '26, the cash flow from operations was very heavily weighted towards the second half. Is that seasonality expected to repeat or any commentary on that?

So actually, there is some seasonality in cash flow from operation. Usually, Q2 cash flow operation is negative due to actually expenses and less about collection. You may have some seasonality related to the size of the deal. So meaning that if there is a large deal that's taking place in a certain quarter, you will see an impact on that quarter. But it's not a given part. It's not seasonality on the nature of between Q1 to Q3. It's more about the specific deal and the mix of the deal in a given quarter, except for Q2, which usually is impacted by certain expenses that are taking place in Q2.

Our next question comes from Eric Martinuzzi with Lake Street Capital Markets, LLC.

Congrats on the good finish to FY '26. Your comment about the seasonality of the Q1 revenue would point towards kind of the lower end of the overall full year guided growth range. Just curious to know, if you expect that to reverse? Is that more of a second half reversal to get to the midpoint? Or is it maybe Q2, Q3, Q4 will kind of grow to offset that slightly lower growth rate in Q1?

So usually, from a seasonality perspective, Q1 is slightly below Q4. It really depends on certain things that are taking place, certain dynamics that usually takes from Q4. If you look year-over-year, it may create some fluctuation between the quarters from a growth perspective. But when we look at the overall year and the pattern of the year, usually, you start in Q1 slightly below Q4 and then growing over quarters. This was a typical year. It's not different versus other years.

Okay. And then the -- you talked about a slight preference for subscription versus perpetual. Is that also part of the slightly wider guided range for FY '27, just not being able to predict how customers are expecting to buy? Are you -- are bids being responded to with both a subscription and a perpetual and you just don't know, which the customer is going to choose?

So obviously, when you convert certain deals into subscription, it do have an impact on revenue and over time. But given the fact that we have such a strong cRPO, it gives us more confidence about how the year will look like. So you need to remember that we have $370 million of cRPO. So a big portion of our guidance is covered already.

Subscription can play a role, but given the plus or minus of 3% that we gave, it's more about what we see in the market and there is upside and downside that can play a role given the geopolitical situation and what we see in the overall environment, and we thought that this is the right approach for this year.

Okay. And then lastly, more of a macro question. But historically, you have talked about pipeline or top of funnel activity increasing with increased global conflict. Any signs with regard to the Iran war impact on pipeline?

Yes. So actually, if you look at the market, generally speaking, when there are security concerns, usually, it will translate into demand in certain areas, certain territories, certain use cases. It takes time because it's government agencies, it takes certain time to respond. But what I can give you as an anecdote for this question today is for the example, the military intelligence. We do see demand growing in military intelligence, including in NATO countries. The reason is that they have to use this technology with their special forces and also have to improve their broader security.

Usually, it's military intelligence. So we do see that certain areas with certain use cases have tailwinds related to the geopolitical situation today in the Middle East. So the answer is that usually security concerns, it create some more demand. Of course, it depends on the territory and depends on the use case. But generally speaking, the answer is yes.

Our next question comes from Charlie Zhou with Evercore ISI.

This is Charlie for Peter, Evercore. I have 2 questions for you guys. Firstly, with the incremental buyback authorization now in place, how should we think about the cadence of buybacks in FY '27? And then maybe just walk through how are you balancing buybacks relative to ongoing investments in growth and expansion?

Thank you, Charlie. So actually, we are very pleased that early this March, we were able to announce additional $20 million, which gave us a total plan since November '24 of $60 million. The remaining capacity under this plan is around $33 million remains for us to execute. Looking in the overall picture, we ended the year with $117 million of cash with a very strong balance sheet and continue to generate cash.

What we are trying to do is to take a balanced approach between investing in our value creation for our shareholders and creating a buyback. And this is why we are placing all these plans. Actually, the Board ongoing commitment to long-term shareholders value creation and confidence in our growth prospects allow us to do that. Going forward, we will continue to assess on a regular basis.

Now we have enough capacity for the upcoming quarters, and we'll continue to execute that. We are executing it technically under -- we have 2 ways to do it, regular purchase in the market when we are not black out and using a 10b5 plan during the blackout period. So by doing -- using these 2 tools, we're able to execute.

Got it. That makes sense. And second one, maybe for you, David. Both gross and operating margins came in very nicely this quarter. And as you mentioned on the call, the incremental gross margin this quarter came in at around 100%. And based on your gross margin guide, it seems that the incremental gross margin will be around 83% for next year. And maybe can you just help us think about the key drivers of that outperformance first and then how sustainable are those benefits as we move through FY '27?

So we are very pleased with the gross margin improvement. If you look at the last few years, we improved on a regular basis our gross margin, it's a continued improvement. It's actually another indication and validation for us about the value perceived by our customers. Our customers are buying premium solution and willing to pay for that, and we invest a lot on R&D. And the way that you get a return on that is by being able to sell our solution to Tier 1 customers that appreciate this value that we provide them.

Looking at the overall trend, you can see that the total software is crossing the 80% gross margin and the professional service continue to increase above 20%. The combination of the 2 of them allow us to improve more margin when the scale is coming. So overall, we believe that this trend will continue. We already guided for this year to be at 73.5%. And we believe that in the long run, we leave more room for improvement on gross margin.

And I'm not showing any further questions at this time. I'd like to turn the call back over to Dean for any further remarks.

Thank you, Kevin, and thank you all for joining us today. Should you have any questions, please feel free to reach out to me, and we look forward to speaking with you again next quarter.

Thank you. Ladies and gentlemen, this does conclude today's presentation. We thank you for your participation. You may now disconnect, and have a wonderful day.

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Cognyte Third Quarter Fiscal Year 2026 Earnings Conference Call. [Operator Instructions] 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.

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 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, 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 cognite.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 delivered another strong quarter in Q3 of fiscal 2026. Revenue grew in the mid-teens. 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 and purpose, helping our customers make the world safer, and delivered meaningful customer wins across 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 1 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 different 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 patents of reoccurring demand, driven by capacity expansions, new functionality, new use case sales 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 U.S. 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 LexisNexis Risk Solutions is progressing well with deepening technical alignment, expanding joint engagements and strengthening our traction with both federal and state local stakeholders. Over the past quarter, we participated in joint events and delivered structured solution training to their sales organization. This is one example of the multiple partnerships we are building to broaden our reach and grow our business in this region.

We continue to see increased interest for military intelligence organizations, including from several NATO countries, reflecting the growing relevance of our capabilities to multi-domain defense missions. At the same time, momentum across core law enforcement and national intelligence markets remain strong. Recent industry events reinforce these trends with meaningful customer conversations and expanding engagement across all regions.

Today's threat environment is more connected, fluid and complex than ever. Our customers face adversaries that cross borders, mandates and jurisdictions while the data needed to understand threats remains augmented in silos. Our customers and we are increasingly seeing threat vectors evolve into hybrid and transnational scenarios. Let me share what this actually looks like in the real world.

First, a case involving sophisticated advanced national criminal networks. Opioids move across borders. Violent crime rises in major cities. Unusual captocurrency flows are detected by financial intelligence units. On paper, these appear unrelated. Border police focus on drugs, local police handle the violence and financial intelligence units, investigate the elicit finance. Each operates within its own mandate and its own systems. But when you correlate the signals, trafficking routes, communication metadata, financial flows and travel patterns, it becomes clear. These activities are being conducted by the same criminal network.

Another example, a case involving hybrid activity driven by state-backed actors. Online personas inside social unrest, protest turn violent in major cities, the hospital is hit by ransomware. Again, disappear and related, the intelligence agency tracks the online activity, public or their unit deal with the unrest and sub unit handles the hospital. Each operates within its own mandate and its own systems. But when you correlate the signals, cyber indicators, financial flows, travel patterns, online behaviors it becomes clear, it is one coordinated campaign.

The adversaries see the whole picture for the agencies, it's a significant challenge. And whether the threat is criminal, financial, terror or hybrid, the root problem is always the same. The threat is unified. The data is not. This is exactly where Cognyte creates the most value. We have the good guys close the gap by giving them a clearer picture of the threats they need to predict and prevent. We help agencies eliminate the unknown by revealing the hidden connections adversaries rely on.

Our AI-driven multi-domain, multisource cost restriction decision intelligence platform uses data across silos, uncovering hidden insights that allow agencies to resolve identities and relationships, detect hybrid behavior and criminal partners and enable faster, higher confidence decisions. And while our platform can uncover in such across silos, its value begins inside each individual agency unit and mission. Every day, we power investigative tactical and analytical workflows for financial intelligence, broader security, organized from investigations, content terror and more. This strong foundation inside its agency is ultimately what makes wider collaboration possible.

I mentioned earlier that rate unified and data is not. We operate in one of the most complex data environments in the world, massive volumes, high velocity, fragmented systems and dozens of structured and unstructured formats. We see data differently enabling agencies to analyze massive diverse datasets that no human or point solution could process alone. Our platform ingests, normalizes and reaches and correlates all of it, creating a coherent connected operational picture of actionable intelligence. This is why we continue to win.

Decision Intelligence is becoming the foundation of modern investigations and our technology leadership in this domain continues to be recognized. This quarter, we again received strong Gartner recognition for predictive analytics and intelligence platforms for improved decision-making. All I've just discussed is reflected in our financial results. We delivered another quarter of profitable growth with strong year-over-year gains across revenue and profitability.

Our financial leverage remains strong with 13% top line growth, we nearly tripled non-GAAP operating income year-over-year. Given our performance and momentum, we are raising our full year outlook for the fiscal year ending January 2026. We now expect revenue of approximately $400 million, which represents year-over-year growth of approximately 14% and adjusted EBITDA of approximately $47 million which represents year-over-year growth of approximately 60%.

As we look ahead, we see a future defined by opportunity. Demand for our capabilities is healthy and continues to grow. Our air-driven technology gives us a clear edge and our team are executing with precision and purpose. With the deep trust of our growing global customer base, we're excited about the future and well positioned for the road ahead. We remain committed to delivering sustained value for our customers, our partners, our employees and our shareholders.

David, over to you.

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 best as 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 represented 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 to 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 [ retained ] revenue as reported in our GAAP financials is driven primarily by support contracts and some base and a subscription offerings and enhances our visibility involves the near and long term.

As Elad discussed, the majority of our revenue continues to come from the sales of perpetual licenses with reoccurring 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 discontinued in the third quarter. Gross profit was $73.6 million, an increase of 18% year-over-year. The sustained improvement in our gross profit demonstrates the willingness of our loyal global customers to pay a premium for our differentiated technology.

As we go the meaningful operating leverage we have in our model is delivering steady material year-over-year improvements in profitability. Once again, non-GAAP operating income and adjusted EBITDA both grew significantly faster than revenue. In Q3, we generated $9 million of non-GAAP operating income, nearly triple the $3.4 million generated in Q3 last year. Adjusted EBITDA for the third quarter was $11.9 million, 81.4% higher than the $6.6 million generated last Q3. Put another way, we converted approximately $12 million in incremental revenue into approximately $5.3 million in incremental adjusted EBITDA, reflecting the operational leverage we have in our business model.

Q3 non-GAAP operating expenses were $64.6 million, in line with our expectations. The global macroeconomic environment led to a weakening of the U.S. dollar against the Iseli shekel and several other currencies, resulting in evaluation expenses of $1.9 million.

Turning to tax. Q3 tax expenses were relatively higher due to increased pretax income, our global tax structure and regional revenue mix. However, this does not affect our full year tax outlook or annual guidance. We continue to expect our annual non-GAAP tax expenses to be about $11 million. Non-GAAP net income for the quarter was about $2 million, resulting in non-GAAP EPS of $0.03. GAAP net loss for Q3 was $3.4 million compared to a loss of $2.6 million in Q3 last year. The higher loss this quarter was primarily driven by increased tax expenses and FX impacts, as I discussed earlier. Our Q3 GAAP EPS loss was $0.07.

Looking at our results for the first 3 quarters of the year, our revenue was $293.8 million up 14.7% year-over-year, and our non-GAAP gross profit grew even far after at 17.2% year-over-year. This performance highlights the operating leverage we have in our model, which continues to drive meaningful year-over-year improvements in profitability.

Our GAAP operating income for the first 3 quarters of this year was $8.1 million versus an operating loss of $5.8 million during the same period last year. Non-GAAP operating income was $24.6 million, up nearly 3x from the $9.7 million generated during the same period last fiscal year.

Our adjusted EBITDA for the first 9 months of this fiscal year was $33.2 million, compared to $19.9 million in the same period last year, representing an increase of 67.2%. Non-GAAP EPS was $0.18 in the first 9 months of this fiscal year compared to $0.04 in the same period last year.

Turning to our balance sheet. Our short- and long-term contract liabilities commonly referred to as deferred revenue remained robust at about $117.9 million at the end of Q3. During Q3, with strong cash flow from operations of $25 million and a free cash flow of $23.2 million. For the first 9 months of fiscal 2026, net cash flow from operations of $20.4 million and free cash flow of $11.9 million.

During Q3, we continued to execute our share repurchase program which the Board approved in July 2025, repurchasing approximately 152,000 ordinary shares for a total of about $1.3 million. During the quarter, we further strengthened our cash position, which increased to $106.6 million with no debt, reflecting disciplined working capital management.

Turning to capital allocation. We maintain sufficient working capital to run the business. Above this operating baseline, we regularly evaluate where we can deploy excess cash. including making targeted acquisitions that strengthen our strategic position and returning capital to shareholders.

Now let me walk you through our execution against some of our key performance indicators. RPO or remaining performance obligations represent contracted revenue to be recognized in future periods. RPO is expected to continue to fluctuate as it is influenced by factors such as sales cycles seasonality, deployment time lines, contract plans and renewal timing. It is worth noting that the cancelable portion of subscription deals is excluded from RPO.

At the end of Q3, total RPO was $576.6 million versus $567.6 million at the same period last year. Total RPO is the sum of deferred revenue of $117.9 million and backlog of $458.7 million. Short-term RPO at the end of Q3 increased to $358.9 million, which we believe provides solid visibility into revenue over the next 12 months. This healthy RPO levels validate the strength and resilience of our business. Q3 billings were $107.7 million an increase of 2.9% versus the same period last year.

We remain focused on driving strong results. Given the strong foundation we have built and the momentum of the business, we are raising our outlook for this fiscal year. We now expect revenue of $400 million, plus or minus 1%, and which represents approximately 14% year-over-year growth at the midpoint of the range. We expect total software revenue to be approximately 87% of total revenue, aligned with our strategic goals.

Annual non-GAAP gross margin to be 72.3%, reflecting an improvement of 130 basis points over the last fiscal year. Adjusted EBITDA of $47 million at the midpoint, representing about 60% year-over-year growth. This increased outlook for revenue, profitability and our continuing execution is expected to generate non-GAAP diluted EPS of $0.24 at the midpoint of the revenue range. And we remain confident in our ability to generate $45 million of operating cash flow in FY '26.

We are very pleased with our consistent execution and the progress we are making towards achieving our targets for the fiscal year ending January 31, 2028. We revenue of about $500 million, gross margin of approximately 73%, adjusted EBITDA margin of greater than 20%.

In closing, Q3 was another quarter of strong performance for Cognite. We delivered meaningful revenue growth, expanded margins and generated robust cash flow, all while continuing to invest in innovation. We believe we are delivering against all our growth pillars, increasing wallet share with existing high-value customers, adding new logos and further expanding our market reach in the U.S.

The combination of installed base expansion strong contracted backlog and execution of our growth strategy give us confidence in our ability to generate sustained profitable growth. We believe we are well positioned to deliver on our commitments and create long-term value for shareholders.

Thank you for your continued support. We will now open the call for questions.

[Operator Instructions] Our first question comes from the line of Matthew Calitri with Needham & Company.

This is Matt Calitri over at Needham. 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 impacting RPO and revenue.

So yes. So Matt, this is Elad. 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 the question is?

I'm just trying to understand like when you announce these deals, like 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 2, 3 to 5, 4 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 customer preparations and environment integration, 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 12 months, it will land also in the CRPO. If we believe that the deal or portions of the deal are scheduled beyond 12 months, you will see that in the RPO, but not in the CRPO, the relevant portion, of course. So that's usually how it works.

Maybe to add on that same decision that when you have a deal with the subscription, only the nonconsumable element is included in the RPO.

Understood. Okay, very helpful. 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 type of revenue recognition. In certain cases, we recognize over a percentage of time, meaning that we recognize the deal on percentage of completion, sorry, or it could be upon delivery or it on stat, which is acceptance criteria. It's really dependent in the contract with the customers. If you want to look, you can see that when we share the CRPO is best on the planning that when we believe that delivery will take place and then we'll be able to recognize revenue.

So let me take that in consideration in our planning, and this is the reason that we are sharing the CRPO to give you an idea what will happen in the next 12 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 have a very strong visibility and that gives us the ability to plan efficiently and that also allow us -- you can see that -- our margin is even improving because we are able to deploy and deploy them in a more efficient way, and that gives us also some benefits.

Okay. Awesome. Turning to U.S. 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 about where we are in the U.S. So agencies in the U.S., very similar problems that other agencies as 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 to the U.S. needs. We discussed in previous calls that we started certain local, we were able to acquire new customers. We got also follow-on orders and already have a lot of confidence on customer that there is a very good fit.

In terms of the Federal lira agencies, First of all, we started later, and then the showdown came, of course, shutdown disrupted the engagement for a certain amount of time. But having said that, it doesn't change the fact that those agencies are facing challenges, new technology. And for that reason, I believe that and they'll come back to the table. Some of the federal customers that we were engaging with it already came to us after the shutdown relief and asked to resume discussions.

I can also tell you in the U.S. that regardless of the shutdown, we continue to do a lot of effort 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, the example is Natia. We are expanding our partners' network. We signed with LexisNexis in Q3. So we have a lot of activities running with federal agencies in the U.S.

So if I have to summarize it, I really believe our useful 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 1 for me. I believe you had said in the prepared remarks that you've delivered structured training to Lexus Nexus are they ready to start selling now? Or where are you in that training process?

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

Our next question comes from the line of Imtiaz Koujalgi with ROTH Capital.

I just want to follow up on the U.S. market. I know you're -- this is very early for you guys in terms of the U.S. entering the U.S. market, but just a little bit of color on how the U.S. market differs from other possible word in terms of competitive landscape? And who do you guys see in makeups. When you look at the U.S. deals in the U.S. market, what does the competitive landscape look like? Who do you guys normally see in those scenarios versus other parts of the world.

Yes. So the -- first of all, the challenges are similar. In the U.S. 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 solutions similar solutions globally. But in the U.S., we do see [indiscernible], for example, and [indiscernible] as companies that are focused in the U.S. territory.

Got it. Very helpful. And 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 CRP, it looks like the duration probably went down year-over-year slightly. Maybe just clarify if that was the case. And when you think about the duration contract duration trends going forward?

So 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 go 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 flow, we are very comfortable with this RPO.

Got it. Just a few more for me. So strong numbers for me 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 that -- to kind of help us understand why that services line seems a little bit lighter than what it 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 the [Technical Difficulty]

Ladies and gentlemen, please stand by, your conference will resume momentarily. Once again, please stand by, your conference will resume momentarily.

Speakers, you may resume your conference.

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

No, no. David, you mentioned that you gave us a guide of 13% of full year revenues with the services, right? So that's where, I guess, we got cut off.

Okay. So where we -- so I would just remind everyone like what is going to is the professional services or professor services, it could be deployment services. It could be some development work, training or order selling. And we actually deliver it because that's creating a faster adoption by the customers and also allow us to bring to the table faster the -- I would say, the core sell and the upsell.

So overall, the fluctuation within professional services between quarter is mainly related to revenue recognition criteria. And actually, I'm very pleased with where we are. We are in line with our target to be in 30% of total revenue on 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 software and software services grew by 18%.

If you look at our -- the way that we acquired customers, most of the customers are once we acquire them, they are staying with us for a long period. Usually, the acquired perpetual licenses with support contract. This is the, I would say, the majority of them. And if you think about it, it's reoccurring in nature behavior, so meaning that the customer continue to buy with you on a regular basis. So we do have certain cases that the customer do an upgrade of existing license which was under support and it's moved to be a softer.

So from our perspective, the right metrics to look at the business is the total software, which combined the software and the software services. And when you look at that, you can see that it's also growing very good.

Got it. Very helpful. One last one for me, David. I know you gave us a guide of -- 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 the mix between software, software services and PS because I know last -- if I look at the -- 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 revenue. So 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 priority on how to think about the mix of the revenue between software services and NPS?

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 means 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. So if you look at our guidance, you can say that out of the $400 million, 87% will come from the software and the software services.

[Operator Instructions] Our next question comes from the line of Charlie Jo with Evercore.

This is Charlie for Peter at Evercore. Just a quick 1 from 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 3% by FY '28, which you guys have already achieved this quarter. Could you please just help us to maybe just 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. So actually, we are very pleased with our 73% gross margin this quarter. And as you can see, there is different dynamics are taking place over a quarter. So this 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. We do see within our mix, few things that taking place.

Overall, when you look at the software, which is the software and software services, we are above 80% of total sorry, gross margin. And if you look at the professional services, we're also improving the professional services. Actually, Q3 was above 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 on the high mid-teens.

What's the dynamic behind its first customers are willing to pay premium prices for our solution. We have 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 on R&D because we believe that once you acquire a customer and you provide the customer with premium solution and addressing their evolving needs, they will continue to stay with you and willing to pay the right level of pricing.

So it's all about the value and that drives incremental gross margin. And also, there is 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 drive better profitability. So overall, it's driven by the value we provide to our customers.

About adjusted EBITDA, we are guiding for this year for it to be a $47 million. It's almost 60%, 60%. I think let's talk 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, to deliver leverage in our model. We believe in profitable growth. We structured 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 to 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.

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 '26 and you guys have provided a 20% -- greater than 20% target for fiscal '28. Should we think about the 800 basis points expansion from here is more linear, like 400 basis points and 27 and maybe 400 basis points in '28. Is that the correct way to think about it?

Actually, I think we shared the target for FY '28 in April, and we are very pleased with where we are getting. We are progressing towards our targets. Obviously, it will 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.

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.

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Cognyte Second Quarter Fiscal Year 2026 Earnings Conference Call.

[Operator Instructions] 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.

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 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, 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 would like to turn the call over to Elad.

Thank you, Dean. Welcome, everyone, to our conference call for the second quarter of the fiscal year ending January 31, 2026. Before I get started, on behalf of the Board and management team, I want to thank our shareholders for their trust and support at last week's Annual General Meeting.

Turning now to our Q2 results. Our Q2 performance reflects solid execution against our strategy and constant demand for our solutions. In the second quarter, we grew revenue by approximately 16% year-over-year to about $98 million. Non-GAAP gross profit increased by about 17% year-over-year. We generated approximately $11 million of adjusted EBITDA for the quarter, growth of about 33% compared to what we generated in Q2 last year. And cash flow from operating activities was a negative $6 million, primarily due to expected seasonal expenses.

These results reflect how our technology is not only mission-critical, but increasingly indispensable as global threats grow more complex. We proudly serve 4 agency types: law enforcement, military intelligence, national intelligence and national security agencies, each facing rising data volumes, more sophisticated adversaries and a constantly evolving technology landscape. Our solutions help them stay ahead of these challenges, enabling them to protect people, secure borders, disrupt criminal internal networks, defend against cyber threats and ensure public safety every single day.

This quarter, the commitment was reflected in 2 significant wins for military intelligence customers. In Asia Pacific, we signed a $10 million follow-on deal with a longstanding customer. They operate in a complex border environment and use our border intelligence solutions to stop infiltration attempts by hostile actors, clear proof of the ongoing trust they place in us and the tangible operational results we deliver.

In EMEA, we won a competitive deal worth about $10 million with a new Tier 1 military intelligence organization, beating several global vendors, including the regional incumbent. They chose Cognyte for our proven tactical intelligence capabilities to modernize operations and address emerging threats. The anticipated impact of our solutions has already led the customer to place a follow-on order, demonstrating confidence in our technology and the potential for a broader and long-term partnership.

Taken together, these wins reflect the broader reality we see every day. Around the world, governments and agencies are confronting rising levels of complexity and uncertainty. The global environment is marked by heightened security challenges from digital to physical domains, creating an urgent and sustained demand for advanced intelligent solutions. This growing demand not only underscores our commercial momentum, but also the effectiveness of our differentiated technology.

As we shared at Investor Day, our technology stack is built on 3 layers: signal processing, insight mining and investigative analytics. Within this framework, this quarter, I want to highlight our operational intelligence suite of solutions, also known as tactical intelligence, which is where our technology meets the field.

[ CTI ] is a foundational layer of signal processing. It transforms chaotic signal feeds into clean, usable data as to help field units operate in real time. Whether in complex city environments or remote terrain, our best-in-class suite of tactical intelligence solutions enable missions from early threat detection to planning and operational response. And when you combine that offering with our top layers, insight mining and investigative analytics, culminating in our decision intelligence solution, NEXYTE, you get the full power of the Cognyte's technology platform.

What sets us apart is how these layers and solutions work together as one integrated platform, creating a complete and differentiated intelligence capability powered by advanced AI. That's why intelligence and security agencies continue to choose Cognyte: to detect threats faster, act with precision, protect communities and respond decisively to the full spectrum of criminal, terror and national security challenges.

We regularly hear from both current and prospective customers about the real impact our solutions are having. Just last month, during a weeklong proof of concept in the field in a large U.S. city, a prospective customer used one of our solutions to work more efficiently. The customer noted that the solution performed better than what they had relied on for years from incumbent providers. That pilot led directly to the arrest of several fugitives, individuals wanted for murder and armed robbery, clear proof of how quickly our solutions make an impact.

Beyond customer feedback, our innovation is recognized across the industry. In Gartner's 2025 Hype Cycle for Public Safety and Law Enforcement, Cognyte was named a Sample Vendor for our AI-powered predictive analytics. Gartner called the benefit of predictive analytics transformational as broader data sharing and richer data sets unlock new insights.

Across all regions, agencies are being asked to do more with fewer resources while facing adversaries who are more agile and technology sophisticated. This dynamic is driving increased investment in modern, AI-enabled intelligence platforms, reinforcing the strategic importance of our offering.

The U.S. remains a cornerstone of our growth strategy, and further penetration into this market is a key priority. We continue to strengthen our reach through expanded presence and strategic partnerships. To that end, we entered into an alliance with LexisNexis Risk Solutions, a Tier 1 partner with deep specialization in the federal market. This partnership expands our footprint and sales power in the region, providing access to a highly connected team with strong relationships across U.S. agencies. This is particularly strategic for our tactical intelligence portfolio where federal customers represent an important growth opportunity.

At the same time, we continue to operate against the backdrop of atypical U.S. agency procurement delays that limits near-term visibility into budget timing. While this environment presents what we believe are temporary challenges, we are confident that the state and local and federal spend normalizes, Cognyte will be well positioned to accelerate customer acquisition and reinforce our competitive position in this region.

Direct engagement with customers and prospects is also central to advancing our strategy. Recently, we participated in NATIA, a leading U.S. event for federal and state local enforcement, where we had an opportunity to showcase our capabilities and connect with key decision makers.

Looking ahead, we are actively preparing for key upcoming conferences, including Milipol Paris, the leading global event for homeland security and safety; Asian Defense & Security in Bangkok, a premier exhibition for difference, security and disaster response in the Asia Pacific region; and IACP in Denver, Colorado, the premier gathering for U.S. police chiefs and public safety leaders, as well as other important forums. These events give us the opportunity to showcase our latest capabilities, strengthen relationships and create new opportunities.

In today's environment when threats are becoming more diverse and harder to predict, our technology provides agencies with the speed, accuracy and insights they require to stay ahead. Looking ahead, we are encouraged by how current and prospective customers continue to respond to our technology. Our ongoing execution combined with a clear focus on innovation position us well to drive long-term growth and continue to meaningfully expand profitability.

We have a clear path to our financial targets for the fiscal year ending January 31, 2028: $500 million in revenue, gross margins of about 73% and adjusted EBITDA margins above 20%. These goals are grounded in our strategy, deepening relationships with our existing customers, winning new customers and expanding our footprint in the U.S. market. We remain confident in achieving these targets because the market need is growing, our technology leadership is proven and our execution is delivering results quarter after quarter.

For our current fiscal year ending January 31, 2026, we are updating our guidance and now expect revenue of approximately $397 million, plus or minus 2%, representing about 13% year-over-year growth at the midpoint of the range, and adjusted EBITDA of approximately $45 million at the midpoint of the revenue range, representing approximately 55% year-over-year growth.

Before I hand it over to David, I want to share why we do what we do. A core challenge our customers face is the imbalance between bad actors and those working to stop them. Bad actors, whether criminals or terrorists, move fast, adapt quickly and exploit a single weakness with devastating impact. By contrast, law enforcement and security organizations must react and respond to a wide range of evolving threats in real time and with absolute precision.

That means the bad guys only need to succeed once while agencies need to succeed every single time. This asymmetry put immense pressure on investigative teams to work faster, smarter and more accurately than ever. Every day our customers stand on the front lines protecting citizens, safeguarding borders and preventing harm. Our purpose is clear: to give them the technology to generate the insights and the confidence they need to stay ahead of those who would do harm. This is the mission that drives every innovation, every partnership and every decision we make at Cognyte.

Now let me turn the call over to David to provide more details about our Q2 results. David?

Thank you, Elad, and hello, everyone. As you just heard, we are making strong progress across the business. In Q2, that translated into solid financial performance supported by healthy demand and good visibility. This performance reflects the consistency of our execution and reinforces our continued confidence in the outlook.

Revenue for Q2 was $97.5 million, an increase of 15.5% year-over-year. Software revenue was $36.6 million, an increase of $9.7 million or 35.9% year-over-year. Software revenue is comprised of perpetual licenses, appliances along with some term-based subscription licenses.

Software services revenue was $46.7 million, up $1.4 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 was approximately $83.3 million, representing 85.5% of total revenue. We continue to expect software revenue to be about 87% of total revenue on an annual basis.

Professional services revenue in Q2 was $14.2 million, an increase of $2 million over last year. Professional services revenue is expected to fluctuate between quarters due to revenue recognition timing. We continue to expect professional services revenue to be about 13% of total revenue on an annual basis.

Recurring revenue for Q2 was $47.4 million, representing 48.7% of total revenue. Recurring revenue, driven primarily by support contracts and some term-based and SaaS subscription offerings, enhances our visibility in both the near and the long term.

Non-GAAP gross margin for the quarter was 72.1%, expanding by 81 basis points year-over-year. Gross margin may fluctuate between quarters based on our revenue mix. Gross profit in the second quarter grew faster than revenue growth and was $70.3 million, an increase of 16.8% year-over-year. We believe the steady improvement we have made in gross profit is the result of the significant value customers derive from our innovative solutions, our competitive differentiation and our improved cost structure.

The combination of revenue growth and our business model continues to deliver meaningful year-over-year improvements in profitability, showing our ability to drive operational leverage. Once again, non-GAAP operating income and adjusted EBITDA both grew significantly faster than revenue.

In Q2, we generated $8 million of non-GAAP operating income, nearly twice as much as the $4.4 million generated in Q2 last year. Adjusted EBITDA for the quarter was $11 million, about 33% higher than the $8.3 million generated last Q2, resulting in second quarter fiscal '26 non-GAAP EPS of $0.08. Q2 GAAP net income for the quarter was $2.7 million, versus a loss of $0.9 million in Q2 last year, resulting in second quarter GAAP EPS of $0.02.

Looking at our H1 results, our revenue was $193.1 million and grew by 15.5% year-over-year. Our non-GAAP gross profit grew faster, by 16.8% year-over-year. The leverage we have in our model helped us generate meaningful improvement in profitability year-over-year.

Our H1 GAAP operating income was $4.9 million, versus an operating loss of $3.7 million during the same period last year. Non-GAAP operating income was $15.6 million, more than double versus $6.3 million during the first half of last fiscal year. Our H1 adjusted EBITDA was $21.3 million, versus $13.3 million in H1 of the previous year. Non-GAAP EPS was $0.15 in H1 this year, compared to $0.02 in the same period last year.

Turning to our balance sheet. Our short and long-term contract liabilities, commonly referred to as deferred revenue, remain robust at about $114.3 million at the end of Q2, up slightly versus the July 31, 2024 balance.

During Q2, we had negative cash flow from operations of $6.3 million and a negative free cash flow of $8.9 million. Historically, we have had negative cash flow from operations in Q2 due to the timing of certain expenses, including bonus payments. For the full year, we continue to expect cash flow from operating activities to be about $45 million.

During Q2, we completed the repurchase program previously authorized by the Board of Directors. The company repurchased about 2.1 million ordinary shares for a total of $20 million. In July, the Board has also approved a new share repurchase program of up to $20 million in ordinary shares over the next 18 months, through January 14, 2027, as part of our capital allocation strategy. Following the required 30-day notice period under Israeli law, share repurchases could commence on Friday, August 13.

Our cash position remains strong at $84.7 million, with no debt.

Let me walk you through our execution against some of our key performance indicators. RPO, or remaining performance obligations, represents contracted revenue to be recognized in future periods, influenced by factors such as sales cycles, deployment time lines, contract plans, renewal timing and seasonality. While fluctuations are expected in total RPO, current levels support our growth expectations.

At the end of Q2, total RPO was $574.5 million, versus $567.7 million at the same period last year. Total RPO is the sum of deferred revenue of $114.3 million and backlog of $460.2 million. Short-term RPO at the end of Q2 increased to $355 million, which we believe provides solid visibility into revenue over the next 12 months. These healthy RPO levels validate the strength and resilience of our business model and support our expectations for $500 million in annual revenue for the year ending January 2028.

Q2 billings were $93 million, an increase of about 20% versus the same period last year. Q2 non-GAAP operating expenses were $62.3 million, in line with our expectations. We remain focused on driving continued financial improvement and sustained margin expansion.

Today we are updating our guidance for the current fiscal year ending January 31, 2026. We're expecting full year revenue of about $397 million plus or minus 2%. This represents approximately 13% year-over-year growth at the midpoint of the revenue range. We expect total software revenue to be about $345 million, representing approximately 87% of total revenue; and professional service revenue to represent about 13% of total revenue, in line with our strategic goals.

We believe that our strong short-term RPO of $355 million and the favorable demand environment supports this outlook. We expect Q3 revenue to be slightly higher than the Q2 levels we are reporting today, and Q4 to also grow sequentially.

We now expect annual non-GAAP gross margin to be 72%, reflecting an improvement of 100 basis points over last fiscal year. Gross margin may fluctuate between quarters based on our revenue mix. We expect annual gross profit to increase at a faster rate than revenue growth. We expect adjusted EBITDA to be about $45 million for the year ending January 2026, representing approximately 55% year-over-year growth.

We have made progress with our strategic tax planning and now expect non-GAAP tax expenses to be about $11 million, an improvement from our initial estimate of $13 million. With this updated, improved outlook, we now project annual non-GAAP EPS to be $0.23 at the midpoint of the revenue range.

Turning to cash flow. We remain confident in our ability to generate $45 million of operating cash flow in FY '26, reflecting both strong collections discipline and expanding profitability.

Before I summarize, we are pleased to report that the class action lawsuit was fully dismissed, with no additional appeals possible.

To summarize, we continue to execute against our strategic priorities with a strong focus on delivering results. We have good visibility into our business supported by healthy demand, which gives us confidence in our momentum and our outlook.

The fundamentals we have built, recurring revenue, operating leverage and targeted investment in strategic growth areas are durable and support our confidence in the long-term value we are creating. This is also reflected in our strong balance sheet and is especially evident in our capital allocation approach. With strong fundamentals, we believe we are well positioned to sustain our momentum and continue delivering profitable growth this year and beyond.

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

[Operator Instructions] And our first question coming from the line of Matthew Calitri from Needham & Company.

This is Matt Calitri over at Needham. Nice to see that the revenue outlook raised again. Can you help us think through your updated assumptions there around the U.S. federal environment, the GroupSense contribution and any contributions from the large deals signed during the quarter?

Matt, so when we look at the guidance, we look at our existing customers as well as new opportunities. The U.S. represents a significant opportunity for us given that it's a large territory with many security agencies. And we continue to make investments in order to expand presence, increase market reach, to increase the -- expand the partner network and invest more in marketing.

Having said that, in the shorter term, U.S. presents a small portion of our business. So we're not relying in our guidance heavily on the U.S. But we do believe that U.S. will become a more significant portion of our business over time.

In terms of the federal agencies, we do have lots of traction with federal agencies. We run POCs and demos, very successfully actually. LexisNexis partnership is also a tailwind for us in order to access faster and more efficiently more federal agencies, and actually they started working with us already.

Having said that, I do not expect the numbers to increase fast given that, first, it takes some time to sell to the federal. But also we know that there are certain budget issues in the federal agencies, some of them are still in continuing resolution budget behavior. So it will take some time.

So to summarize, the U.S. is a significant opportunity for us. We do not rely on it heavily in the shorter term. We do believe that it will accelerate over time. And we see very good indication across the board in the federal and state and local in the U.S.

In terms of GroupSense contribution to this one, GroupSense is a relatively small acquisition. We want to increase the market access for cyber threat intelligence. We're actually on track with the integration of GroupSense into Cognyte. We're approaching their customers, and we are trying actually to push the LUMINAR technology into the customer base. It looks good. We are on track, and we will continue this effort as part of the many other initiatives that we are running in order to expand presence in the U.S.

That's great. With the U.S. specifically, how are conversations compared to expectations? I know you said budgets remain challenged, and that's consistent with what we're hearing. But are budgets starting to open up at all, or is it a lot of the same still?

So first of all, all our judgments related to budget headwinds coming from the U.S. is baked in our guidance. So we shouldn't be surprised, right? We do see the behavior all over, it's not just at Cognyte, but we hear it from others. So we know that there are certain headwinds that we have to take into account in the U.S.

Having said that, if you look at the few last quarters, we were able to acquire new state and local customers. We were able to have very strong POCs and demos. We pushed out incumbents. We already got follow-on orders from some of them. We engaged with federal agencies, we ran POCs. Earlier in the call, I gave you an example of a very successful POC where the customer was able -- prospect customer actually, was able to generate value very fast on our technology, that they couldn't do within the current technology they have.

So generally speaking, the strategy -- we believe that our strategy to expand service in the U.S. is the right one. Of course, we take into consideration that penetration more takes time, and the headwinds in the budgets now that we see in the federal agencies is also a temporary disruption. But it doesn't change our strategy that the U.S. should be a good opportunity for us over time. And that's the reason we continue to invest.

Understood, and great to hear. And then you noted you're still expecting an 87%, 13% split between software and professional services for the year. Is there any seasonality at play with that? Or what gives you confidence that the software revenue mix will increase in the second half of this year?

So there is no real seasonality that can take place on the professional services. But if you look at the -- first, the reason that we're doing professional services. Professional services we are doing in cases that we believe that this can allow the customer to generate the value faster from our solution and actually allow us to grow with the customer faster. You can see that professional services recognize, based on certain revenue acquisition criteria, so there is fluctuation between quarters in the professional services.

The reason that we believe that we'll continue to have the level of mix of 13% of professional services and 87% of software is actually -- is the visibility that we have. We do have visibility into our next 12 months and specifically in the next 2 quarters, which gives us the confidence that we'll be able to achieve it.

And if you think about that, you can see that our software revenue is growing fast and you can see that our gross margin is improving. So this is something that we are also very pleased. We now raised the guidance of the gross margin to be 72%, and it gives also the confidence that we'll be able to achieve 73% in the long term. So from an overall perspective, we are in a very good shape on achieving our financial targets.

Our next question coming from the line of Taz Koujalgi with ROTH Capital.

Can you guys hear me? Hello?

Yes, we can.

Yes, we can hear you.

Quick question. On the quarter, if you can just clarify, how much of the growth came from existing customers buying more products versus data growth? I know your growth is driven by data growth and new products being adopted by your customers. Can you just give us some color on how much of the growth this quarter was driven by data versus new products?

So when we look at our growth strategy, actually there are 3 pillars -- 3 main pillars. The first one is the current customer base, existing customer base. And we have a very significant asset, we believe. We have hundreds of customers around the world in nearly 100 countries that continue to buy from us, other expansions related to data capacity and diversity, or functionality upgrades or more use cases. The second one is related to acquiring new logos. Actually, we acquired about 13 new logos in H1 this year. And the third one is, midterm, is actually the acceleration of our performance in the U.S.

So if you look, in general, the main growth is usually coming from the existing customer base. And the reason is that when we acquire a new customer, usually they start small. And when they grow over time, they're already considered existing customers. So for that reason, usually you will see the growth coming from existing customer base.

And whether it's data or functionality, it's usually both. The reason is that we continue to innovate and actually release more capabilities and generate more value and uncover more hidden insights out of the same data set customers have. So the customer, in order for them to be successful in the mission, they have first to cover all data sources that they have and analyze it in a very efficient manner, but they also have to be able to get strong analytics in order to have the insights and get the decisions -- the right decisions on time.

So to summarize, mostly existing customer is the driver for the growth. But the reason is that the new customer starts small and grow over time, and by then, they are considered already existing customers.

Very helpful. And then, Elad, you mentioned that you had some displacements of incumbents in Europe, and I think even in the U.S., you said you displaced some of the existing vendors. Can you talk about what is driving that displacement? What is the -- what is your secret sauce or what is the functionality that you bring to the table that is allowing you to displace the incumbents, you mentioned, I think, EMEA as well as in the U.S.?

Yes. So actually, when we look at the market, we understand that the demand drivers are related to 3 dimensions. The first one is data. We just discussed it. The second one is adversaries are getting more sophisticated. They use advanced tools to evade detection. They also use new technology.

And the third one is technology that is running really fast. Technology running really fast means that actually it can be an advantage for our customers, for security agencies, if they implement it and use it sooner than the bad guys. But it also can be a challenge for them if they don't use it because the others are using it. For example, in order to use fake identities and to create or to encrypt their doing so, so in order for security agencies to be more successful, they have -- must stay ahead of the bad guys.

And for that reason, we invest in R&D, and actually our investment in R&D is relatively significant, in order to be able to keep our customers ahead of the adversaries. And we add more AI capabilities, analytics and GenAI. We improve the workflows of the users. We give them some automation inside the solution in order to be more effective. We maintain their solution to be able to be utilized by simple users and advanced users. And actually, the most important one is to be able to deal with data that is growing really fast, and the functionality, which is primarily analytics, that can generate more insight onto the same data set.

So actually, usually when we're push incumbents out, it's because we show, either by POCs or demos -- I gave an example earlier in the call. We actually encourage for the prospective customers to go for a POC, not just to get the proposal and see the compliance, because you know everybody is complying to everything, but we encourage customers to test the technology. Actually, we educate them. They try it. And after they try it and they see the results compared to incumbents, they choose to move to us.

It happened to us in many territories, and I gave 2 examples today actually. It happened in the U.S. and it also happened in APAC -- in EMEA, sorry, in EMEA this time. And actually, this is not new to us. It happens again and again. And the main reason is actually maintaining the superiority of the technology in a way that makes our customer's mission more successful.

I know the majority of the growth comes from existing new logos, it's still a small portion of the growth driver. But when you think about new logos acquisition, how much of that displacing an existing vendor versus completely greenfield? Is there a lot of greenfield out there or most of the new logos that you acquire is coming from the existing and incumbent?

It's a mix. So actually, some new logos are coming from new territories like in the U.S. We were not operating in U.S. a few years back. So every new logo that we get from the U.S. is a new territory. Actually, we haven't been there before.

In other cases, it could be other new departments at the same organization in a customer that we already have. Or it could be new agencies in the same country operating already. For example, we serve today the national security only, and then we are able to acquire also the law enforcement and the military intelligence. So it's a mix, I would say. It's not either this or that; it's both.

Got it. I just have a few more. Maybe for David. David, the billings number was very strong this quarter. I think if I look at the seasonal, the jump from Q1, it seems stronger than usual seasonality. Anything to call out in the billings trend this quarter?

I couldn't hear the beginning of the question. Can you repeat?

Yes. The billings number this quarter was very strong. I think if you look at the typical seasonality, you don't see a big jump from Q1 to Q2. But I think this quarter, we saw a big jump in billings. I believe last quarter was $78 million and I think you're doing $93 million this quarter in billings. That seems like a big jump. Anything to call out? Anything specific that drove that strength in billings this quarter?

Actually, billing is impacted from multiple things. It could be certain milestones of the billing per the contract. It could be based on new orders that come with the advances. So it could be a lot of things that impact.

If you look at the overall trend, you can see that in the level of the 12 months, we see that the billing is strong, is in similar level of revenue, which means that we have a quality revenue. There is nothing specific for this quarter to call out. We are very pleased with the number that we have this quarter because it was a strong one. And obviously, we want that this number will continue.

Very helpful. And then the recurring revenue mix of 48%, I think that's been pretty consistent. Do you expect that to trend up quite a bit? Or we should see that level of 48% sort of sustained in the next few quarters?

So recurring revenue consists from 2 major pillars. One of them is the support; this is the vast majority. And the other element is subscription.

Subscription is split into 2 things. One of them is the SaaS, which is very small number, and the other one is the term-based. So the term-based can play a role here with the fluctuation. If we look at the fundamentals of the recurring itself, what is recurring, if I would say support and SaaS, you see that they are growing over time. And looking ahead, we believe that, for example, in the beginning of next year, you will see some improvement in the recurring revenue because we closed some deals in subscription that will be active next year.

So overall, I would say that in the long term, you will see some improvement in the recurring revenue, but we are very pleased with the recurring. Because if you look at that, today we have 48% or 49% of our total revenue is recurring, while the vast majority of ours is perpetual. So the offering by itself is perpetual and we are able to drive recurring revenue, although we see customers that's still buying on perpetual. And given the fact that we want over time to increase our subscription offering, we believe that the overall trend that you will see that recurring is growing.

Yes. Well, last one for me guys. Elad, you mentioned that U.S. is still early. You're not assuming a lot of contribution from U.S. for your guide for this year. But we also have a long-term guide of $500 million. Are you assuming that U.S. becomes a sizable portion of your revenue mix to get to that $500 million, or U.S. doesn't have to inflect that much for you to reach your $500 million target?

Yes. So when we guide, of course, we have a few pillars that we work on and in order to be able to balance between risks and opportunities, et cetera. Having said that, we did take into consideration, and we have the baseline to do that, that the U.S. will grow over time because of a few data points. The first one is that we today know, it's not a question mark, but we know that the product market fit to the U.S. market is excellent. We know that. We know that because customers that either bought from us already or POC-ing or seeing demonstrations, they tell us that. This is one.

Second, we are able to get follow-on orders already. Third, we do see that partners would want to work with us more than before because they also recognize the strength of the technology. And we did see that we are able to acquire new customers over time, not yet in the federal, but you have to remember that, with federal, we started after we started state and local.

So taking all of those data points together, we do see the potential in the U.S. And I do expect the portion of the revenue coming from the U.S. to grow over time.

[Operator Instructions] Our next question coming from the line of [ Charlie Chou ] with Evercore ISI.

This is Charlie for Peter, Evercore ISI. I just have 2 quick ones. First, could you please help us to think about how the overall deal pipeline is trending versus 6 to 12 months ago, and if you have observed any incremental pressure from macro?

And secondly, just in terms of the overall threat landscape, have you seen any new trends in the public sector? Any color would be super helpful.

Yes. So Charlie, I understand that you're asking about the demand environment, right? That's what you're trying to understand.

Yes.

Is that correct? Yes. So if you look globally at the market, we all see that the world is not getting safer. The security pressure is growing all over. The borders are blurred between criminal activities and terror activities. They're actually cooperating. The technology is a benefit for the bad actors to evade detection. So the challenge for our customers is growing.

For that reason, we do see healthy demand environment. Customers need to modernize the solution. They have to deal with more data. They have to have more analytics in order to uncover insights, including hidden insights, out of the data that they have. They have to understand who is doing what, when, with whom, why, and also to have predictive analytics to actually to be able to predict what would be the next potential threat, in order to neutralize it before it unfolds.

So actually, the challenge on our customers and security agencies is growing dramatically. And for that reason, we believe, and we also see that, the demand is very healthy. We do see this in amount of POCs and demos we are doing. We do see this in the traction with existing customers that want to modernize and to upgrade and expand. We do see this in the industry conferences that we are participating in, actually many meetings, many demonstrations. Customers and also prospectives are keen to hear from us what's new, what we are going to have soon. So the demand drivers are very strong and the environment overall is very healthy.

Thank you. And I'm showing no further questions in the Q&A queue at this time. I will now turn the call back over to Dean for any closing remarks.

Thank you, Olivia, 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.

This concludes today's conference call. Thank you for your participation, and you may now disconnect.