Will the appointment of Nadav Argaman boost this security company?

Last week the defense technology company surprised Cognate when it announced the appointment of Nadav Argaman, former head of the Shin Bet, as a senior advisor to the company. Cognite expects Argaman to leverage his expertise, contribute operational insights, help with connections and promote the company’s activities.

Argaman served as head of the Shin Bet in 2016-2021, and Cognate CEO Elad Sharon said upon Argaman’s appointment that “Nadav’s deep understanding and dedication to preventing crime and terrorism makes him a valuable addition to our team.” Argaman, for his part, said that Cognite is at the forefront of innovation in intelligence solutions, at a time when the fight against terrorism and crime requires the most advanced and adapted technology.

Who is Cognite and what will the addition of Crimson do to her?

The company from Herzliya defines itself as a world leader in the field of investigative analysis software for government bodies and organizations in the security field. It develops artificial intelligence-based technology. According to Cognite, its software is designed to help customers speed up investigation processes and improve their effectiveness and decision-making processes. The company states that hundreds of customers rely on its solutions to derive insights with which they identify, neutralize and deal with threats to national security, terrorist and criminal activities. According to estimates, after October 7, the IDF also began purchasing Cognite systems and was among its customers.

Until 4 years ago Cognite was an activity within the Verint company, but then Verint decided to split it into an independent company. This, following pressure from Verint’s shareholders to split its security activities, somewhat similar to the successful move made earlier by NICE (agb, Verint itself was split in 2013 from the technology company Combers).

The CEO of Cognite since the split is Elad Sharon, who came to it when it was part of Verint in 1997 and held various senior positions. As of January 2024, the company employed 1,613 employees (down from over 2,000 two years earlier), with 52% of them employed in Israel.

The Israeli Palantir, only with much less hype

Some compare Cognite to Palantir – one of the hottest stocks on Wall Street in the past year. Palantir, under the management of the founder Alex Karp, develops software for big data analytics and, among other things, it appeals to security agencies and armies in the world, with an emphasis on the US. The significantly smaller Cognite also appeals to a similar market segment, although it is active mainly outside the US – According to its reports in fiscal year 2024, over half of its revenues were in the EMEA region (Europe, the Middle East and Africa).

Another difference between the companies is of course the size and pricing: Palantir is traded at a value of 153 billion dollars, reflecting a sales multiple of 61, after a 340% jump in the stock last year. Cognite, on the other hand, is satisfied with a value of 628 million dollars and a modest sales multiplier of 1.8, after an increase of only 34% in 2024 – a tenth of the increase in Palantir shares.

The market estimates that Argman will help Cognate in opening doors and creating connections with new potential customers, and at the same time, they hope to see a more significant entry of the company into the American market where the big budgets are. Cognite recently won a number of significant contracts, including a follow-up order from an agency in EMEA for $20 million and a border guard contract with an agency in Asia-Pacific for $10 million.

Even in the US, it is likely that the company will not compete for huge contracts with Palantir and other large companies, but it will be able to apply for contracts of this size and thus expand its operations significantly. It is not impossible that the company is currently considering the possibility of adding as consultants or board members also Senior officials from the USA, who were in positions similar to Argaman’s.

From 1.8 billion dollars to 630 million

In the first three quarters ending at the end of October 2024, Cognite recorded revenues of $256 million, reflecting growth of 11.5% compared to the corresponding period. Revenues from the main field of activity, software services, grew by 10% to 135 million dollars, revenues from the most profitable field for the company – software, grew by 7.6% to 88.4 million dollars and revenues from professional services, which are the least profitable field, grew by 31.7%.

According to generally accepted accounting rules (GAAP), Cognite lost $10.8 million in these three quarters, a reduction compared to $13 million in the corresponding period, and on a Non-GAAP basis, excluding various accounting items, it went from a loss to a net profit of $2.7 million. According to the company’s forecast, it will register annual revenues of approximately 349 million dollars, a growth of 11%, and its annual EBITDA (earnings excluding interest, tax, depreciation and amortization) will grow almost 3 times to 26 million dollars.

Since the low to which the Cognite stock fell a little over two years ago, when its value reached only about 160 million dollars, the stock has risen by 271%. However, in a broader perspective, the stock is very far from the levels at which it began to trade after the split from Verint – when the company’s value was almost 3 times its current value – about 1.8 billion dollars.

The shuffling in the stock attracts activist investors

Against the background of the stock’s underperformance in recent years, Cognite attracted activist investors who sought to create change in the company. Last August, the VBF private investment fund of the Valio Base investment house reached a holding of approximately 9.3% in the company, requested 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 Sharon’s CEO. In the end, the director on behalf of VBF was not appointed.

Despite this, Cognite 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 Valio Base fund, under the management of Victor Schmrich and Ido Neuberger, purchased the Cognite shares in recent years for a total consideration of approximately $38 million, while today the value of its holding is approaching $60 million, so that it registers a profit “on paper” of over $20 million dollar from her investment. Other interested parties in Cognite are American institutional bodies, including Neuberger Berman, who used to be considered an activist investor but is now active. According to the latest report, he owns 5.2% of the company.