2023-07-21 04:26:25 ET
Summary
- Accounting for Cognyte Software's SIS disposal, revenue development was actually pretty good. Concern with backlog conversion is dying down.
- CGNT stock did a lot to rein in costs and that has been narrowing losses meaningfully.
- New contract wins and stable receivables situations spell a more stable and trustworthy future for the company.
Cognyte Software ( CGNT ) is a small-cap company that provides investigative and analytics services mainly for governmental institutions and financial services companies. Working with public organizations slows down cash conversion, and receivables are perennially high for this company it seems. Still, it is managing to perform its job and is poised to win more wallet share with customers. Backlog conversion, an apparent problem some quarters ago, seems to be calming down now with revenue performance looking a lot better. End-markets seem healthy enough and the company has been successful in reining in costs. Things look good with CGNT, although given the current rate of growth and profit situation, as well as structurally higher WC requirements, the 1.1x P/S seems too high.
Discussing the Q1
Let's begin with some of the adjusted financials . Due to a disposal there has to be some adjustments, but in light of those, revenue progress is decent and particularly cost control has been impressive.
While backlog conversion issues some quarters ago meant more severe declines in revenue, those seem to have stabilized, and higher margin components in the mix seem to be taking over with gross margin growing dramatically. In particular, more professional intensive activities in SIS have been replaced in the mix by software revenues.
The big performance has come on the operating profit line, where meaningful reductions in fixed costs have improved profit outcomes. Operating margin is within -10% and losses have narrowed meaningfully. SG&A and R&D are both driving the declines in OPEX.
Receivables was something we worried about with the company, but it seems this is simply a result of working with more public institutions. Receivables are stable incrementally now, at least, although receivables days are still very long. It's unfortunate since it reduces incremental shareholder benefit from sales, but it is the consequence of working with CGNT's profile of customers as well as its smaller size. Narrowing losses have been helpful for cash flow figures, and the business is on much more stable footing especially with debts having been repaid last year.
Bottom Line
Let's focus again on backlog conversion. The issue last quarters was that there was a lot of hand wringing and delays that meant backlog converted slower into revenue to the detriment of CGNT's results. Apparently that has stopped now, with overperformance this quarter stemming from the fact that customers were more ready than ever to engage CGNT's businesses.
[B]ut we also see more and more customers that are more confident in the budgets and plans. And the - actually the Q1 results are derived by accelerated customer readiness and for us being able convert more backlog into revenue within the quarter. And that's what, what we see.
Elad Sharon , CEO of CGNT
It seems that customers are ready to move on with CGNT's solutions. New contract wins are pretty substantial as well. Contract liabilities are up by quite a lot, and as the backlog converts, revenue growth will resume. Ultimately, that's what management is guiding for, growth around 7% on an SIS adjusted basis.
The trouble is the multiple. Growth is forecast at a decent level, and profits are coming, but for enough of an operating margin on the current clip of sales you'd need a P/S lower than 1.1x for a company that is of CGNT's size. It's going to be a while before there's enough earnings to see a reasonable PE ratio on this business when buying at current prices. Pass for now.
For further details see:
Cognyte Software: Cost Control Meaningfully Improves Results