Cognyte's Q3 2026 Earnings Call: Contradictions Emerge on RPO Recognition, U.S. Federal Market Sales Cycles, and Strategic Investments

Date of Call: Not specified in transcript

Financials Results

• Revenue: $100.7M, up 13.2% YOY
• EPS: Non-GAAP EPS of $0.03; GAAP EPS loss of $0.07
• Gross Margin: 73.1%, expanding 297 basis points YOY
• Operating Margin: Non-GAAP operating income of $9M, nearly triple the $3.4M YOY

Guidance:

• Revenue for FY26 expected to be approximately $400M, representing ~14% YOY growth.
• Annual non-GAAP gross margin expected to be 72.3%, up 130 basis points YOY.
• Adjusted EBITDA expected to be approximately $47M, representing ~60% YOY growth.
• Non-GAAP diluted EPS expected to be $0.24 at the revenue range midpoint.
• Operating cash flow expected to be $45M.
• Long-term target: Revenue of about $500M, gross margin ~73%, adjusted EBITDA margin >20% for FY28.

Business Commentary:

* Revenue and Profitability Growth: - Cognyte reported revenue of $100.7 million for Q3, up 13.2% year-over-year, with non-GAAP operating income nearly tripling from $3.4 million to $9 million. - This growth was driven by strong demand for AI-powered investigative and Decision Intelligence solutions, resulting in significant increases in both revenue and operating income.

• Software Revenue Expansion:
• Software revenue was $41.9 million, an increase of 39.6% year-over-year, while total software revenue (including software services) reached $88.7 million, a 17.9% increase.

• The expansion was due to a combination of perpetual licenses, appliances, and term-based subscription licenses, reflecting strong customer demand and repeat business.

• Strong Cash Flow and Financial Leverage:

• The company reported cash flow from operations of $25 million and free cash flow of $23.2 million for Q3.

• This was supported by efficient working capital management and the absence of debt, allowing for a robust cash position that supports future growth and shareholder returns.

• Increased Gross Margin:

• Non-GAAP gross margin for the quarter was 73.1%, expanding by 297 basis points year-over-year.

• This improvement was attributed to the loyal customer base paying a premium for Cognyte's differentiated technology and ongoing efficiencies in cost of goods sold.

• U.S. Market and Partnership Developments:

• Cognyte is expanding its presence in the U.S. market, supported by a new partnership with LexisNexis Risk Solutions and increased field activities.
• The U.S. market presents a significant opportunity, with continued investments in expanding the partner ecosystem and strengthening the team to drive growth in this region.

Sentiment Analysis:

Overall Tone: Positive

• CEO: 'Cognyte delivered another strong quarter... Momentum continues to build. We are raising our full year guidance...' CFO: 'We continue to make strong progress and have exceeded our business expectations with the support of healthy demand and good visibility.'

Q&A:

• Question from Matthew Calitri (Needham & Company): 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.
  Response: Large deal timing varies from 2-4 quarters (sales cycle) to a few months (conversion). Signed deals immediately go to RPO; portions within 12 months also go to CRPO. Only non-cancelable elements of subscription deals are included in RPO.

• Question from Matthew Calitri (Needham & Company): 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?
  Response: The LexisNexis partnership is progressing well. Training has been conducted for their sales force, and some are already engaging with customers. Joint meetings and events are ongoing.

• Question from Imtiaz Koujalgi (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.
  Response: Challenges are similar globally. The U.S. competitive landscape includes companies like [indiscernible] and [indiscernible], but the technology fit is strong. Focus is on state/local and federal law enforcement agencies.

• Question from Imtiaz Koujalgi (ROTH Capital): 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?
  Response: Short-term CRPO grew ~10% YOY. Overall RPO is strong, providing confidence. The demand environment supports continued visibility.

• Question from Imtiaz Koujalgi (ROTH Capital): 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.
  Response: Professional services fluctuates quarterly based on revenue recognition. The full-year target remains for professional services to be ~13% of total revenue.

• Question from Imtiaz Koujalgi (ROTH Capital): 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.
  Response: Total software revenue (software + software services) is expected to be ~87% of the $400M annual revenue guidance.

• Question from Charlie Jo (Evercore): 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.
  Response: Gross margin strength (73.1%) driven by customers paying premium for differentiated technology, R&D investment, and COGS efficiencies. Annual guidance of 72.3% reflects continued improvement. Adjusted EBITDA margin is on a path to the long-term target (>20% by FY28), with gradual improvement expected.

Contradiction Point 1

Deal Conversion and RPO Recognition Criteria

This is a substantial contradiction concerning the definition and reporting of a key financial metric (Remaining Performance Obligation). The Q3 2026 statement establishes a blanket rule for immediate RPO inclusion upon signing, directly conflicting with the Q1 2026 clarification that **only the first year of multi-year deals qualifies**. This impacts how investors model future revenue visibility and contract value.

How much of the $65M+ in customer wins year-to-date is currently impacting RPO and revenue? What is the typical timeline from deal signing to deployment and revenue recognition? - Matthew Calitri (Needham & Company)

20251209-2026 Q3: Once a deal is signed, it immediately appears in RPO. If revenue recognition is scheduled within the next 12 months, it also lands in the Short-term RPO (CRPO). - Elad Sharon(CEO) and David Abadi(CFO)

Why isn’t the remaining two years of the 3-year dealer contract reflected in the total RPO? - Michael Joseph Cikos (Needham & Company, LLC, Research Division)

2026Q1: Only the first year is included in RPO because the terms and conditions within the deal qualify only the first year under our RPO definition. - David Abadi(CFO)

Contradiction Point 2

U.S. Federal Market Sales Cycle and Challenges

This involves a material shift in the characterization of a core operational metric (sales cycle length) for a strategic growth market. The Q3 2026 statement provides a specific, shorter timeframe (2-4 quarters), whereas the Q4 2025 explanation attributed longer cycles to a **fundamental market penetration challenge**. This change in narrative affects expectations for deal progression speed and near-term revenue impact.

What portion of the $65M+ in announced customer wins year-to-date is currently contributing to RPO and revenue? What is the typical timeline from deal signing to deployment and revenue recognition? - Matthew Calitri (Needham & Company)

20251209-2026 Q3: Deal sales cycles typically last 2-4 quarters. - Elad Sharon(CEO)

Are U.S. sales cycles lengthening, and is there a potential impact from customer contact attrition? - Mike Cikos (Needham)

2025Q4: Sales cycles in the U.S. are naturally longer because the company is still in a penetration mode, building brand awareness. - Elad Sharon(CEO)

Contradiction Point 3

U.S. Market Contribution to Near-Term Guidance

This represents a substantial contradiction in forward-looking financial guidance and market strategy. The Q3 2026 statement explicitly downplays the U.S.'s immediate contribution, framing it as a "small portion" of near-term results. This contrasts with the Q2 2026 statement, which, while forward-looking, expresses a more confident expectation that the U.S. will **"become a more significant revenue portion over time"** through a "logical progression." This shift influences investor expectations for regional revenue mix and growth drivers.

How has the recent government shutdown impacted U.S. federal market dynamics, and have activities resumed since? - Matthew Calitri (Needham & Company)

20251209-2026 Q3: The U.S. is a significant long-term growth opportunity, but it currently represents a small portion of near-term guidance. - Elad Sharon(CEO)

Given the U.S. is not a major contributor to this year's guidance, will it need to become a significant portion of revenue to achieve the long-term $500M target? - Imtiaz Koujalgi (ROTH Capital Partners)

2026Q2: Yes, the U.S. is expected to become a more significant revenue portion over time. The product-market fit is excellent... Growth will follow a logical progression... - Elad Sharon(CEO)

Contradiction Point 4

U.S. Federal Market Competitive Landscape

This is a substantive contradiction regarding market strategy and competitive positioning. The Q3 2026 response names specific, **U.S.-focused competitors** in the operational units segment, providing a concrete competitive reference. This contrasts with the Q4 2025 response, which, while acknowledging the U.S. as a growth opportunity and citing positive engagement, did not name competitors and instead highlighted **positive revenue growth**. The shift from reporting growth to detailing a competitive landscape without mentioning that prior growth could signal a change in market perception or strategy.

How does the U.S. competitive landscape differ from other regions, and who are the typical competitors? - Imtiaz Koujalgi (ROTH Capital)

20251209-2026 Q3: In the U.S., the company is focusing on operational units within law enforcement (state, local, and federal). The competitive landscape includes companies like [indiscernible] and [indiscernible], which are U.S.-focused. - Elad Sharon(CEO)

How is demand in the U.S. market trending amid current policy uncertainty? - Mike Cikos (Needham)

2025Q4: The U.S. presents a significant long-term growth opportunity... The company has increased investments, successfully acquired new state/local customers, and achieved positive engagement with federal agencies (including proof-of-concept demonstrations). U.S. revenue grew year-over-year in FY25... - Elad Sharon(CEO)

Contradiction Point 5

U.S. Federal Market Investment and Partnership Strategy

This involves a significant shift in the characterization of the company's strategic investment approach in the U.S. The Q3 2026 statement frames the strategy as a **multi-faceted, ongoing effort** (new partnerships, conferences, sales/marketing). In contrast, the Q1 2026 statement, when asked about a key acquisition, positioned that deal as a **singular, key element** of the U.S. strategy. This evolution from attributing growth to a single event to a broader, sustained effort is a substantive change in narrative regarding strategic execution.

How have conversations in the U.S. federal market evolved since the recent government shutdown, and have they resumed? - Matthew Calitri (Needham & Company)

20251209-2026 Q3: The company continues to invest in the U.S. by expanding its partner network (e.g., the new LexisNexis partnership), participating in conferences, and enhancing sales/marketing activities. - Elad Sharon(CEO)

Are all 50 GroupSense customers in the U.S. or just the majority? Is there overlap with Cognyte's traditional customer base? - Michael Joseph Cikos (Needham & Company, LLC, Research Division)

2026Q1: This acquisition is one element of our strategy to increase our footprint in the U.S. market. - Elad Sharon(CEO)