CogNight (CGNT) Q3 2026: Software Revenue Jumps 40% as Margin Expansion Outpaces Top Line
CogNight’s Q3 saw software revenue surge nearly 40% year-over-year, driving gross margin to a company high and supporting a guidance raise for fiscal 2026. The business model’s operating leverage is now translating into accelerated profitability and cash flow, with recurring demand from government intelligence and law enforcement fueling durable growth. Investors should watch for continued U.S. federal traction and gross margin sustainability as the company targets $500M in revenue by FY28.
Summary
- Software Mix Drives Profitability: High-margin software and services now account for 88% of revenue, accelerating operating leverage.
- Government Demand Underpins Visibility: Recurring, multi-year deals with intelligence and law enforcement agencies provide stable backlog and RPO.
- Margin Expansion Sets Up FY28 Targets: Gross margin hit the FY28 goal three years early, positioning the company for further EBITDA gains.
Performance Analysis
CogNight delivered a robust Q3, with total revenue up 13% year-over-year and software revenue climbing nearly 40%, a step-change that outpaced overall top-line growth. The company’s business model, which blends perpetual licenses, support contracts, and a growing mix of SaaS subscriptions, is now yielding clear scale benefits. Software and software services combined made up 88% of total revenue, while professional services continued their planned reduction as a share of the mix.
Gross margin expanded by nearly 300 basis points to 73.1%, reflecting premium pricing power for CogNight’s AI-driven decision intelligence platform and operational efficiencies in cost of goods sold. Non-GAAP operating income and adjusted EBITDA both grew substantially faster than revenue, with adjusted EBITDA up 81% year-over-year. Free cash flow and operating cash flow strengthened, and the company ended the quarter with $106.6 million in cash and no debt, aided by disciplined working capital management and a modest share repurchase program.
- Software Revenue Acceleration: Software revenue grew nearly 40% year-over-year, with perpetual licenses and recurring support contracts driving the mix shift.
- Margin Expansion: Gross margin reached 73.1%, surpassing the FY28 target three years ahead of schedule.
- RPO and Backlog Stability: Remaining performance obligations (RPO) reached $576.6 million, with short-term RPO up 10% year-over-year, underpinning near-term visibility.
Professional services revenue declined as planned, now representing about 13% of total revenue, in line with the company’s focus on high-margin software. The recurring nature of government contracts, despite their perpetual structure, continues to drive durable, multi-year revenue streams.
Executive Commentary
"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. 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 31st, 2028."
Elad Sharong, Chief Executive Officer
"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. ... The sustained improvement in our gross profit demonstrates the willingness of our loyal global customers to pay a premium for our differentiated technology."
David Abadi, Chief Financial Officer
Strategic Positioning
1. Decision Intelligence Platform as Differentiator
CogNight’s AI-powered decision intelligence platform, which fuses structured and unstructured data across silos for investigative and tactical workflows, is increasingly recognized as foundational technology by government customers. This platform-centric model enables premium pricing and high retention, with use cases spanning financial intelligence, border security, counter-terror, and hybrid threat detection.
2. Recurring Demand from Government Agencies
Despite a perpetual license sales model, CogNight’s contracts with intelligence and law enforcement agencies exhibit recurring behavior through capacity expansions, new use cases, and cross-agency adoption. This repeatability is supporting multi-year revenue durability and strong RPO visibility, especially as customers expand within and across agencies.
3. U.S. Market Penetration and Partnerships
The U.S. remains a key expansion vector, with recent partnerships such as LexisNexis Solutions aimed at accelerating access to federal, state, and local agencies. Structured training and joint events have begun to yield sales-ready teams, while the federal pipeline is recovering following recent government shutdown disruptions. U.S. market entry is still early, but management views the opportunity as inevitable given similar demand drivers to international markets.
4. Margin Expansion Through Product Mix and Efficiency
Gross margin expansion is being driven by both product mix and operational efficiency. Software and software services, which command margins above 80%, are now the overwhelming majority of revenue. Meanwhile, professional services are being managed to low double-digit margin contribution, and cost of goods sold is benefiting from internal AI-driven process improvements.
5. Capital Allocation Focused on Shareholder Value
With a clean balance sheet and strong cash flow, CogNight is executing targeted share repurchases and evaluating strategic acquisitions. Management maintains a disciplined approach, prioritizing organic growth and product innovation but signaling readiness to deploy excess capital for strategic advantage.
Key Considerations
CogNight’s quarter demonstrates the compounding effects of a platform-centric, recurring revenue model in a high-stakes vertical. The company’s ability to translate product leadership into both margin expansion and backlog growth is central to its long-term thesis.
Key Considerations:
- Software Revenue Mix Shift: The accelerating transition to high-margin software and services is driving both profitability and predictability, reducing reliance on lower-margin professional services.
- Recurring Government Demand: Despite the appearance of perpetual contracts, repeat expansions and renewals create an annuity-like revenue stream, supporting multi-year planning.
- Margin Sustainability: Gross margin now exceeds long-term targets, but sustaining this level will depend on continued pricing power and cost discipline as the company scales.
- U.S. Federal Pipeline: The pace of U.S. government adoption and partnership activation remains a key variable for growth acceleration, with recent disruptions highlighting potential volatility.
- Capital Deployment Discipline: Share repurchases and potential M&A are balanced by a commitment to organic growth and innovation, with no debt and ample cash reserves.
Risks
CogNight’s reliance on large, complex government contracts introduces timing variability and potential for delayed deployments, especially in the U.S. federal sector where shutdowns and procurement cycles can disrupt momentum. Currency volatility and tax structure complexities also impacted results this quarter, and any weakening in perpetual license renewals or pricing power could challenge margin sustainability. Competitive dynamics, particularly from entrenched U.S. players like L3 Harris and Octasic, remain a watchpoint as market entry ramps.
Forward Outlook
For Q4, CogNight guided to:
- Revenue of approximately $400 million for FY26, representing 14% year-over-year growth
- Adjusted EBITDA of $47 million, up 60% year-over-year
- Annual non-GAAP gross margin of 72.3%, up 130 basis points from last year
For full-year 2026, management raised guidance and expects:
- Software and software services to comprise 87% of total revenue
- Non-GAAP diluted EPS of $0.24 at the midpoint
Management highlighted continued operating leverage, strong RPO visibility, and confidence in reaching $500 million revenue and 20%+ EBITDA margin by FY28, driven by core customer expansion and U.S. market traction.
- Margin expansion will be gradual, with gross margin expected to fluctuate but remain above prior targets
- U.S. federal pipeline is expected to recover and accelerate post-shutdown, with new partnerships maturing
Takeaways
CogNight’s Q3 results reinforce the company’s ability to convert technical and market leadership into durable, high-margin growth, while maintaining a disciplined capital approach and expanding visibility through robust RPO and backlog.
- Profitability Inflection: Margin and EBITDA acceleration are now outpacing revenue growth, validating the operating leverage of the business model.
- Strategic Expansion in U.S.: Early signs of U.S. federal and state traction, plus partnerships like LexisNexis, could unlock the next leg of growth if execution continues.
- Watch for Margin Durability: Investors should monitor whether current gross margin levels can be sustained as the mix evolves and U.S. business scales.
Conclusion
CogNight’s Q3 marked a decisive step forward, with software-led growth and margin expansion supporting a raised outlook and long-term targets. The company’s platform approach, recurring government demand, and capital discipline position it well, but execution in the U.S. and margin durability remain key watchpoints for investors.
Industry Read-Through
CogNight’s results signal intensifying demand for AI-powered decision intelligence in government and defense, with recurring, multi-domain use cases driving premium pricing and long-term contracts. Platform-centric models that enable data fusion and actionable insights are gaining traction, especially as agencies grapple with cross-border and hybrid threats. For industry peers and adjacent sectors, the quarter highlights the importance of recurring revenue, operational leverage, and deep customer integration in navigating complex, mission-critical markets. Competitive pressure is likely to intensify as incumbents and new entrants target the expanding government intelligence opportunity.