Last week defense-tech company Cognyte Software (Nasdaq: CGNT) announced the unexpected appointment of Nadav Argaman as a strategic senior advisor. Cognyte expects Argaman to leverage his expertise and contribute his operational insights and help with connections to promote the company's activities.
Argaman served as head of the General Security Services (Shin Bet) from 2016 to 2021 and Cognyte CEO Elad Sharon said of Argaman's appointment, "Nadav’s deep understanding and steadfast dedication to preventing crime and terror make him an invaluable addition to our team." For his part Argaman said that Cognyte is a, "Company at the forefront of innovative intelligence solutions, at a time when the fight against terror and crime requires the most advanced and adaptive technology.
Who is Cognyte and what will the appointment of Argaman do for it?
The Herzliya-based company describes itself as a world leader in the field of investigative analysis software, for government agencies and security organizations. The company develops artificial intelligence-based technology. According to Cognyte, its software is designed to help customers accelerate investigative processes and improve their effectiveness and decision-making processes. The company notes that hundreds of customers rely on its solutions to derive insights that help them identify, neutralize and deal with threats to national security, terrorist and criminal activities. According to estimates, after October 7, the IDF also began buying Cognyte systems.
Until 4 years ago, Cognyte was an activity within Verint Systems (Nasdaq: VRNT), which decided to spin it off into an independent company. This followed pressure from Verint shareholders to split its security activities, somewhat similar to a successful move made earlier by NICE Systems (Nasdaq: NICE; TASE: NICE) - (incidentally, Verint itself was split in 2013 from tech company Comverse).
Since the split, Cognyte's CEO since has been Elad Sharon, who joined the company when it was part of Verint in 1997 and held various senior positions. As of January 2024, the company had 1,613 employees (down from over 2,000 two years earlier), with 52% of them employed in Israel.
The Israeli Palantir with a lot less hype
Some people compare Cognate with Palantir - one of the hottest stocks on Wall Street over the past year. Palantir, managed by founder Alex Karp, develops software for big data analytics and, among other things, appeals to security agencies and militaries around the world, with an emphasis on the US. Cognyte, which is significantly smaller, addresses a similar market segment, although it is mainly active outside the US - according to its reports in the 2024 fiscal year, over half of its revenue was in the EMEA region (Europe, the Middle East and Africa).
Another difference between the companies is their size and market cap. Palantir is traded at a market cap of $153 billion, reflecting a sales multiple of 61, after a 340% jump in its share price last year. Cognyte, on the other hand, has a market cap of $628 million and a modest sales multiple of 1.8, after its share price rose only 34% in 2024 - a tenth of the increase in Palantir's share price.
The market believes Argaman will help Cognyte open doors and create connections to new potential clients, while at the same time, enable the company make more significant inroads into the US market, where the big budgets are. Cognyte recently won several major contracts, including a $20 million follow-on order from an EMEA agency and a $10 million border protection deal with an Asia-Pacific agency.
In the US too, it is likely that the company will not compete for huge contracts against Palantir and other large companies, but it will be able to apply for modest-sized contracts and thus significantly expand its activities. The company could be examining the possibility of adding senior US officials, who held similar positions to Argaman, as consultants or board members.
From $1.8 billion to $630 million
In the first three fiscal quarters of 2024 ending October 31, Cognate reported $256 million revenue, up 11.5% from the corresponding period. Revenue from its main area of activity, software services, grew 10% to $135 million, revenue from the company's most profitable area - software, grew 7.6% to $88.4 million, and revenue from professional services, which is the least profitable area, grew 31.7%.
Cognyte's GAAP net loss in these three quarters was $10.8 million, down from $13 million in the corresponding period, and on a non-GAAP basis, the company swung from a loss to a net profit of $2.7 million. According to the company's forecast, it will record annual 2024 revenue of about $349 million, growth of 11%, and its annual EBITDA (earnings before interest, taxes, depreciation and amortization) will grow almost threefold to $26 million.
Since the low point at which Cognyte's stock fell a little over two years ago, when its market cap fell to about $160 million, the share price has risen by 271%. However, from a broader perspective, the stock is a long way from the levels at which it began trading after the split from Verint - at that time the company's market cap was almost three times its current value - about $1.8 billion.
The stock's sluggishness attracts activist investors
Due to the stock's underperformance in recent years, Cognyte has attracted activist investors who sought to create change in the company. Last August, Value Base private investment fund VBF accrued a holding of about 9.3% in the company, sought to appoint a director on its behalf, opposed the extension of the term of chairman Earl Shanks and the approval of the compensation package for CEO Sharon. In the end, a director on behalf of VBF was not appointed.
Despite this, Cognyte acknowledged some of the fund's claims and stated that they are committed to taking steps to improve the composition of the board of directors and provide more disclosures. The Value Base fund, managed by Victor Shamrich and Ido Neuberger, acquired Cognate shares in recent years for a total consideration of about $38 million, while today the value of its holding is almost $60 million, recording profit of over $20 million "on paper" from its investment. Other stakeholders in Cognyte are US institutional entities, including Neuberger Berman, which holds 5.2% of the company.
Published by Globes, Israel business news - en.globes.co.il - on January 14, 2025.
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