Cognyte (CGNT) Q2 2027 Earnings Call Transcript

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DATE

Wednesday, Sept. 9, 2026 at 8:30 a.m. ET

CALL PARTICIPANTS

• Head of Investor Relations - Dean Ridlon
• CEO - Elad Sharon
• CFO - David Abadi

TAKEAWAYS

• Revenue -- $109.2 million, an increase of 12% year over year driven by consistent demand for software.
• Total Software Revenue -- $100.8 million, up 20.9% year over year reflecting increased demand for core intelligence solutions.
• Recurring Revenue -- $56.2 million, growing 18.4% year over year and representing 51.4% of total revenue.
• Software Revenue Mix -- 92% of total revenue, an increase from 86% in the prior-year period as the business shifts away from professional services.
• Non-GAAP Gross Margin -- 73.7%, an expansion of 154 basis points reflecting revenue mix improvements and operational efficiencies.
• Non-GAAP Operating Income -- $12.2 million, an increase of 52.5% year over year representing significant operating leverage.
• Adjusted EBITDA -- $14.9 million, growing 35.7% year over year and outpacing total revenue growth.
• Non-GAAP EPS -- $0.15, nearly double the $0.08 generated in the same period last year.
• New Logos -- 40 new customers added during the first half of the year, compared to 31 in the prior year.
• U.S. Sales Target -- $20 million in signed deals for fiscal 2027, with momentum building in federal and state segments.
• Total Remaining Performance Obligations (RPO) -- $470.2 million, reflecting the consumption of multiyear support contracts.
• Short-term RPO -- $313.4 million, providing a base for revenue visibility over the next 12 months.
• Revenue Visibility -- 85% for the next 12 months, supported by short-term RPO, expected renewals, and contracts signed after quarter-end.
• Billings -- $76.3 million, which management noted can vary quarterly based on specific contract trends.
• Operating Cash Flow -- $1.1 million, an improvement from a loss of $6.3 million last year due to stronger collections.
• Cash Balance -- $102.2 million at quarter-end with zero debt, providing financial flexibility for organic and inorganic investment.
• Share Repurchases -- $13.5 million for approximately 1.5 million shares during the first half of the year.
• Fiscal 2027 Revenue Outlook -- Approximately $448 million, representing 12% growth at the midpoint of the narrowed range.
• Fiscal 2027 Non-GAAP Operating Income Outlook -- Approximately $56 million, expected growth of more than 50% year over year.
• Fiscal 2028 Revenue Target -- $500 million, which the company confirmed it remains on track to achieve.
• Foreign Exchange Impact -- $7 million net unfavorable impact on operating profitability during the first half of the year due to currency fluctuations.
• Professional Services Revenue -- $8.4 million, declining to less than 8% of total revenue from 15% last year.

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RISKS

• Abadi stated, "the timing and the level of cash generation this year is expected to be affected," noting that the company is making a deliberate working capital investment in inventory to support customer deliveries.
• Sharon indicated that a portion of recurring revenue comes from term-based licensing recognized at a point in time, which can cause recurring revenue figures to fluctuate between quarters.

SUMMARY

Cognyte Software Ltd. (NASDAQ:CGNT) reported a shift toward higher-margin software and recurring revenue as government agencies prioritize sovereign intelligence platforms and integrated AI capabilities. Management stated that software revenue now accounts for more than 92% of total revenue, reflecting a strategic move away from lower-margin professional services. The company is focusing its global expansion on NATO member nations and the United States, where it expects to reach $20 million in signed deals this fiscal year. While short-term performance indicators like RPO and billings reflected contract timing and multiyear consumption, management confirmed its long-term revenue targets for fiscal 2027 and fiscal 2028 based on strong visibility and high demand for investigative analytics.

• The company secured a win with a tier 1 national security agency in a NATO member nation, which was referred by an existing customer.
• Adam Philpott joined the company as chief revenue officer last month to lead the global commercial organization and accelerate growth in the U.S. federal market.
• Management reported two significant expansion deals in Asia Pacific focused on network intelligence and border security, including mitigating unmanned aerial threats.
• Sharon noted that intelligence agencies are increasingly seeking "sovereign" solutions to keep data and infrastructure under their own control.
• The company is increasing inventory levels to mitigate potential supply chain disruptions and ensure it can fulfill growing customer demand on time.
• Management indicated that AI capabilities are being embedded directly into operational workflows to help analysts uncover hidden connections in fragmented data sets.

INDUSTRY GLOSSARY

• Actionable Intelligence: The brand name for Cognyte's platform that processes fragmented data to produce insights for investigations.
• Agentic AI: Artificial intelligence capabilities that can perform specific tasks or workflows autonomously within an investigative environment.
• Remaining Performance Obligations (RPO): The total value of contracted revenue that has not yet been recognized, including deferred revenue and non-cancelable amounts.
• Sovereign Intelligence: Technology that allows a government agency to maintain full control over its data, infrastructure, and operations without external dependency.
• POC: Proof of Concept; a demonstration used to prove the operational viability of a software solution for a potential customer.

Full Conference Call Transcript

Operator: Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Cognite's Second Quarter Fiscal Year 27 Earnings Conference Call. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press 1-1 on your telephone. You will then hear an automated message advising your hand is raised. 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.

Dean Ridlon: Thank you, operator. Hello, everyone. I am Dean Ridlon, Cognite's Head of Investor Relations. Thank you for joining us today. I am here with Elad Sharon, Cognite's CEO and David Abadi, Cognite's CFO. Before getting started, I would like to mention that accompanying our call today is a presentation. If you would like to view these slides in real time during the call, please visit the Investors section of our website at cognite.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 2000 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, Cognite 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 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 would like to turn the call over to Elad.

Elad Sharon: Thank you, Dean, and hello, everyone. Q2 was a strong quarter for Cognite. We are growing, executing the best of 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 are 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 insights that would otherwise be missed, taking the routine work off analysts, so their expertise goes where it counts.

But the 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 a 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 cannot afford to depend on systems they do not own and control. They want the data to stay with their data, the systems to run with their data, 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 Cognite 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 are 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 14 new customers in H1, compared to 31 in the same period last year. 1 of them is a tier 1 national security agency in a NATO member nation who referred to us by another agency we serve. We extended within our customer base. Among our expansion this quarter, 2 in Asia Pacific stand out.

1, to expand its network intelligence capabilities another, to secure its borders, including mitigating unmanned aerial threats. In The US, 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 US this year. That momentum across our growth pillars has continued since quarter-end with several additional significant agreement signed. We will 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 span the range of intelligence missions including law enforcement, military intel, and national security. In The US, the largest law enforcement event, ATIA, inbound interest was high. In addition, agencies are approaching us directly after reading about Cognite 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 the future plans and think through what a next-generation intelligence solution 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 go-to-market teams in the security industry globally. And he joins Cognite at an important time. 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 am 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, Cognite 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 and through long term relationships with customers around the world. Our strategy is working, Our momentum is global. 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 a platform the expertise, and the trust this market now demands and we are moving forward with confidence and ambition.

With that, I will turn the call over to David for a deeper review of our results and outlook.

David Abadi: 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 $109 million up 12% year over year. Total software revenue grew 20.9% to $100.8 million and represent 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's overall growth rate. But recurring revenue also grew significantly faster. The 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 going 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 detail. Breaking down the revenue mix, software revenue grew 34.5% year over year to $49.2 million Total 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 represents 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 US dollar against the Israeli shekel. We continue 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 4 times 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, Cognite 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 consumption of large multi year agreements. Reported RPO excludes the cancelable portion of subscription contract.

At July 31, approximately $42 million of future revenue associated with those arrangements would 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 1 of the reasons we believe we remain on track to achieve our FY 2027 outlook And FY 2028 revenue target of $500 million Q2 billings were $76.3 million As billing can vary significantly quarter-to-quarter based on contract trends, we believe the trailing 12 months 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 activity 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 FY27, Out of the $60 million authorized across the company's repurchase programs. Our capital allocation priorities remain unchanged. We will 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 when we believe they represent a compelling use of capital. Turning to our outlook. Our first half performance remained 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 remained 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, 1 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 is about building a more durable, more predictable, and more profitable Cognite 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 2028 targets. Operator, we are ready to take questions.

Operator: Thank you. As a reminder, Please stand by while we compile the Q&A roster. First question in queue coming from the line of Eric Martinuzzi with Lake Street Capital Markets. Your line is now open.

Eric Martinuzzi: Yes. A couple of questions. First off, Elad, for The U. S. Federal pipeline, you talked about there is good success there. You have 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 is something that is further out on the horizon.

Elad Sharon: Hi. Good morning, Thanks for the question. Yes. Actually, we have a few posted federal agents. We had the POCs with few local and fed agencies. Very successful results. Very good feedback from customers. And I do expect some deals already in this fiscal year.

Eric Martinuzzi: 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?

Elad Sharon: Yeah. Sure. So, first of all, it is important to say that demand is very strong. And it aligns with our strategy. I think it is 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 shifts affecting the reported RPO. You know, RPO is important indicator for visibility. But given the market, you know, the business dynamics today, it does not set the full story by its own. And you need to look at it in a wider perspective.

This includes the RPO that excludes the cancelable portion of subscription contracts, as David mentioned earlier. That remains subject to cancellation. And About $42 million by the end of Q2. You have a large multiyear contract that I recognize on consumer over time. We shared a few times before that we have very large, renewals for 3 years. So every year we consume 1-third of it. So you see that the consumption takes the RPO down. And if you look at it specifically for this quarter of this year, it is about $30 million. The other 2 indicators that are related to RPO are the renewals. Renewals are not included in RPO until they are contractually committed.

So it is important to understand that it does not really matter whether the customers are buying perpetual or buying subscription. Still, the solutions that we deliver to them are integrated in their in their environment. Deliver a lot of value, so there will be renewal. But until it is committed by the contract, it is not part of the RPO. And, the timing of large deals, impact the quarter and the balance. So if you 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 will 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 is about 85% coverage for the next 12 months revenues, and we remain confident in our outlook for this year and also our fiscal 2028 target. So we are seeing a very healthy demand very strong market, and a very strong execution into this market.

Eric Martinuzzi: Understand. I appreciate the insight from the questions and congrats on the quarter. Thank you, Eric.

Elad Sharon: Thank you.

Operator: Our next question coming from the line of Taz Kajolgi with Roth Capital. Your line is now open.

Taz Kajolgi: A couple of clarification. So number 1 for David. If I look at the CRPO bookings, I think you made, David, it accelerated was strong this quarter again, similar to last quarter, I think. If I am doing my math right, your CRP bookings grew 16%. You are guiding to revenues growth of percent this year and 12% next year. We know typically that CRPO bookings are a good leading indicator of revenues. So given the gap between your revenue guide and CRPO bookings that we have seen for the last 2 quarters, Are you just being conservative, or there is something else that we should be mindful of? Given, you know, the CRPO bookings are growing at 60%?

But you are guiding to revenues, revenue growth of only 12% for this year and for next year. David Abadi: Thank you, Taz.

David Abadi: So, actually, we are seeing a few things that are happening in the business, and we are actually very pleased with that. So we are still doing the call about the quality of the revenue. You see that we have more and more subscription revenue that is coming and much more software. If you look at the overall mix, software is becoming very significant portion, and we have the growth of 21%, and it is 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 hand, it gives us lots of confidence into the end of this year and, and, also, when we enter into the next year. The visibility is high. You know, you mentioned percentage, 1.22 thousand%. The way that we look at that is that we are working with our customer to see deployment and what can be done. And based on that, we think our guidance. And we are feeling comfortable with the guidance, and if we need to update, we will be more than happy to do it.

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

Taz Kajolgi: Yeah. 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 the I know last year, 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?

David Abadi: Yeah. Thank you, Taz. So cash flow in Q2 was strong. What we see in Q2 that we were able to generate the positive cash flow from operation and actually, at least from the quarter Q1 to Q2, actually, is the quarter that we had some specific expenses that are related to annual bonus and stuff like that. it is taking place usually in Q2. And although these seasonal expenses and seasonal payments, we were able we were able to drive a strong cash conversion. Actually, if you look at this, we were generating $1.5 million cash from operation last year. Q2 was negative 6.3.

So, actually, if you look at Q2 versus q 2 last year, you are seeing a strong cash from operations. On that perspective, given the trends that we have seen in the business and given what we see in hardware and the need for inventory and supply chain that required the planning and different planning, we are making a deliberate decision to increase the level of inventory and mainly to support what we see as customer demands and deliveries. And we do not want to have any risk related to execution. And deliver those.

So, we made a decision to increase the levels of the inventory So that also impacted the way that we are 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 the inventory level to support future growth and execution and customer delivery.

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

David Abadi: So in this case, what we are planning is that, we would like to increase the inventory level. We as you can see, the balance is in the end of Q2, and we will continue to be with this kind of decision. We believe that this is the right thing to do in this time of the year. It allow us to better plan, better support the future demand. We see a 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 to direct now what we view as the right decision to increase inventory and we will, you know, we will not know, we will invest in the right thing to make the growth into the future.

Taz Kajolgi: Okay. Yeah. Thanks. 1 last 1. I think about last quarter, you had expected you mentioned that you expect about $20 million of bookings from US for fiscal 27. Are we still on track for that, or is that -- you know, could we be slightly better than what you had expected last quarter? for The US.

Elad Sharon: Actually, yeah, we are on track. Yeah. We are on track to achieve the $20 million signed deal this year. I expect this to come from State Local and also from federal, contracts should land there this fiscal year. Yeah. We are doing good progress in The US. Thanks, guys.

Taz Kajolgi: Elad Sharon: Thanks, Taz.

Operator: Thank you. And as a reminder, to ask a question, please press 1-1 on your touch tone telephone. Our next question in the queue coming from the line of Matthew Calitri with Needham and Company. Your line is now open.

Matthew Calitri: Hey, guys. This is Matthew Calitri over at Needham. Thank you for taking our questions. David, I want to stay on the cash flow for a second there. So I understood what the inventory purchases and, obviously, that is 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?

David Abadi: Matt, I will start, and then I will let David continue.

Elad Sharon: I think it is 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 1 is related to demand, and the second 1 is related to the supply environment. Supply environment today, the delivery times are long, and the prices are going up. We want to be in a position that we are able to fulfill the demand, the growing demand of the customer.

So that is the rationale behind it, and it is quite difficult to predict how far we will go with inventory increase, but, we will do it, of course, in a cautious manner in a way that balances the cost, the level of inventory we have in stock, but also the ability to fulfill the demand on time and to fulfill the and to be able to deliver to customers as contracted. So that is the logic behind the rationale behind it. Now I will let David do the answers specifically to the question.

David Abadi: So given that we cannot quantify in this phase the impact of incremental inventory and what we see changing in this area and taking into consideration that we are seeing much more subscription, we are not quantifying what would be the cash flow from operations. But overall, we think that the it will be significant and positive. And the question of, you know, how much exactly will we invest in the inventory level It will be based on what we see in the market. And, currently, what we see in the market we see strong demand and can see that we already increased the level of inventory in the first half of the year significantly.

And against this inventory, we had actually a strong demand, and we have the customer planning to, to be delivered for this inventory. So, actually, we are in a very good situation that allow us to satisfy our customers to plan ahead and avoid disruptions that are related to the supply chain that is not in our control.

Matthew Calitri: Got it. Okay. That makes sense. And then the other parts of 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 am just trying to square away, like, the strong results and underlying currents here with and the visibility with you guys keeping the guide and some of this RPO and billings. Dynamics that you spoke about earlier.

Elad Sharon: Yes. So, Matthew, I will first of all, I am sure why some customers want the subscription, and then I will give you our view of how it would be different if it would be perpetual. So first, moving quickly, we said that earlier in the call, agencies need the latest capabilities. When a government goes to perpetual license and buy a solution, later on to upgrade, it is 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 1. Second, We continue to sell both perpetual and subscription, and perpetual is still the dominant portion. Okay? So we are pulling to subscription faster than expected, but we have heavy portion that is still perpetual. it is also important to understand that regardless of contract structure, whether it is subscription or perpetual, our solutions are deeply integrated and embedded into customer's operational environment.

If you heard earlier in the call I mentioned AI and sovereignty, some of it means that customers want on prem deployment So it could be that they will go for a subscription agreement, but still it will be on prem. that is 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 is the rationale of moving to subscription for the customer.

Our view is that if we would be in the same pace as last year, for example, selling perpetual versus subscription or mix is not changing, we would see a few percentage more in growth rate. So I think that it is great news. That we, maintain the top line growth outlook while more of the revenue is coming from recurring. And 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 is reflected in the recurring. it is reflected in the software and it is also reflected in the profitability levels. So I think that the business is improving.

Matthew Calitri: Great. Thank you, guys. Thanks, Matt.

Operator: Thank you. And I am 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.

Dean Ridlon: Thank you, Olivia, 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.

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

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