Good day and thank you for standing by. Welcome to the Cellebrite Q3 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Sabrina Mathews, Investor Relations. Please go ahead.

Thank you. Welcome to Cellebrite's third quarter 2022 financial results earnings call. Joining me today are Yossi Carmil, Cellebrite's CEO; and Dana Gerner, Cellebrite's CFO. This call is being recorded and a replay of this recording as well as the presentation that accompany this call will be made available on our website shortly after the call. A copy of today's press release and financial statements, including GAAP to non-GAAP reconciliations, as well as supplemental financial information for the third quarter are available on the Investor Relations website at investors.cellebrite.com. Statements made during this call that are not statements of historical facts constitute forward-looking statements. All forward-looking statements are subject to risks and uncertainties and other factors that could cause matters expressed or implied by those forward-looking statements not to occur. They could also cause the actual results to differ materially from historical results and/or from forecast. Some of these forward-looking statements are discussed under the heading "Risk Factors" and elsewhere in the Company's Annual Report on Form 20-F filed with the SEC on March 29, 2022, as amended on April 14, 2022. The Company does not undertake to update any forward-looking statements to reflect future events or circumstances. With that, I'd like to turn the call over to Yossi Carmil, Cellebrite's CEO.

Thank you, Sabrina, and thank you all for joining us today. I'm pleased to share that we had a solid third quarter and in particular, I'm happy with the results we delivered in the U.S. federal sector, which I will talk more about later. In Q3, our ARR grew 35% year-on-year to reach US$232 million. Total revenue in the third quarter was up 9% to reach $71.7 million. Additionally, our net retention rate for the quarter came in at 129%. As this represents the 15th consecutive quarter that we've delivered NRR of greater than 120%, we are proud of maintaining best-in-class retention rates, proving that our go-to-market strategy is bearing fruits and our existing customers continue to spend on our technology resulting in 25 large deals closed in the quarter. I would like first to spend time outlining what we are seeing in our market and some go-to-market updates. Then I will go through a few exciting deals we closed in the third quarter, before providing an update on our recent technology innovations, and then we'll hand over to Dana to discuss the financials in more detail. So we continue to operate in an environment where the public safety gap is rapidly growing as digital evidence continues to be of growing importance to law enforcements efforts. As criminal cases become more complex and digital evidence volume grow, agencies are under an enormous strain to sort through the massive amount of data and ultimately solve cases. To combat this issue, Cellebrite suite of solution and services offer an integrated experience for the entire digital evidence lifecycle from Collect & Review to management and analytics. Additionally, we offer training and certification for our platform to give law enforcement agents insights and best practices to properly fight crime with digital evidence. Our growing…

Thank you, Yossi. As Yossi mentioned earlier, ARR grew 35% year-on-year reaching $232 million by September 30, 2022. As we mentioned last quarter, we continue to move customers to a subscription model from our traditional perpetual licensing model. This manifests itself in an incremental ARR growth in the quarter that reflects our transition effort. Revenue for the third quarter was up 9% from the third quarter of last year and reached $71.7 million, whereas subscription services revenue were up 31% and continue to be a primary driver of total revenue. Total subscription revenue grew 8% year-on-year in the third quarter off a strong compare from our Q3 of last year, in which we had some outsized deals with large upfront revenue recognition that benefited term license revenue. As we saw the U.S. dollar significantly strengthened against European and other major currencies, then relative to Q3 2021, our total revenue and total subscription revenue were favorably impacted -- in favorably impacted by changes in ForEx rate of approximately $3.1 million and $2.5 million respectively, representing adjusted year-over-year growth of 13% on both total revenue and subscription revenue. I would also like to highlight that our transition from perpetual to subscription has seen continued success with more than 98% of our software revenue is now subscription. Total subscription represented 78% of the quarter's total revenue in line with the same period of last year. We saw good performance in professional services revenue, which was up 9% compared to a strong Q3 last year, contributed by the Cellebrite advanced services executing on large contracts, supporting law enforcement agencies overcoming digital device backlog. This growth in professional services remains important to us as it helps drive larger deals and retention. Our GAAP gross margin was 80% in Q3 as compared to 82% from the…

[Operator Instructions]. Our first question comes from Jonathan Ho with William Blair. Your line is open.

Hi, good morning. I just wanted to maybe start out with some of the strength that you're seeing in the U.S. federal government vertical and can you give us some additional color on really what's driving that that success, what types of agencies, what types of opportunities you see ahead? And maybe help us understand how you can target that market a little bit more effectively with your go-to-market?

I will take and I will start. The strength on the federal markets from the Cellebrite's perspective is based on few components. First of all, very strong position within the account and a very well experienced and group of account managers and account executives. The second one is strong penetration and stickiness with relationship for several years by now. Combined, I would say with the ability to address and understand the specific way businesses being down over there. It's a very unique segment. It's actually a dedicated segment within the Cellebrite customer segmentation. The federal in North America with the ability to build the right personnel not only in sales, but also in pre-sale and customer success, including cleared personnel on the ground. And I would say that as for the future, based on that stickiness and strong position that we have right now, we can see that we are being or we are capable to approach, I would say larger budgets and also specific projects to expand the offering, our current offering and even beyond. As for the -- I will not go into specific names of customers, but one can say that in that area, we are working with most of the three letter agencies and in the areas of the DOD and the civil, we cover things something like 130 accounts today in North America. Would you like to add something?

No.

Okay. I hope I answered that question.

Yes. And then, just as a follow-up, can you give us a sense of how much impact from FX there was on your full-year guidance? I think you quantified it for the quarter, but I just wanted to get your assumptions on the full-year impact relative to FX?

So I -- the reason that we have referred to the quarter is because we have provided a guidance, an updated guidance last quarter. And as such, we have looked at how much was the change since that. The guidance that we have provided last time took into consideration or already some of the ForEx impacts at the beginning of the year. So this is why we have focused on Q3.

Please standby for our next question. Our next question comes from Tal Liani with Bank of America. Your line is now open.

Hi, this is actually Tomer Zilberman on Tal Liani. Thanks for taking the question. Just two quick ones from me. Last quarter you talked about some lengthening sales cycles as well as some deal slippage. So on the first one, is that something that you're currently seeing? And is that something that's still impacting the full-year guidance? As well as on the deal slippage, I think you mentioned last quarter that you expected most of them -- most of those delayed deals to close in Q3. Have those deals [ph] been closed? Thank you.

So maybe I'll take it and Yossi you can follow-up. I think that the challenge of closing new deals is still something that is becoming part of a go-to-market processes and capabilities. We did have some slippage last quarter more than we usually have because of the size of these deals. We will always have some slippage from one quarter to the rest. But I think it is becoming more of a normal course of business and indeed, we close substantially most of the deals that have been split -- slipped, sorry, last quarter between Q3 and early Q4.

I will add that in principle we see still longer sales cycle. This is one element, especially in the large deals. And yet, I would like to emphasize that we currently do not lose any deals due to these longer sales cycles. And there is, for example, one to the question, are they all being closed? Some of them, yes. And I have in mind at least one, which was relevant for Q2 and will be closed in Q4 for sure.

Awesome.

Please standby for our next question. Our next question comes from Mike Cikos with Needham. Your line is now open.

Hey guys, you have Mike Cikos here. Thanks for taking the questions. I wanted to make sure that I was clear on the guidance. I think that was the thing that I wanted to drill into first with you guys. So if I'm looking at the slides that you have posted on the webcast, I think it was Slide 16 showed your updated guidance expectations for 2022? And the reason I'm bringing that up is when I look at what's changed, it looks like only the ARR guidance has been taken down versus what we had last quarter. And I just wanted to make sure that I was interpreting this properly. So when you're talking in the press release, I know that there were some commentary that you expected come in at the lower end of your previous range. Is that comment only for ARR or is that across the Board when we think about revenue or gross margins or adjusted EBITDA? Can you just clean up that that that question for me? Because I do want to make sure I'm thinking appropriately about what the rest of this year looks like for you.

So first, Mike, thank you for the question. The ARR -- the guidance that we provide on Slide 16 is actually exactly the same as we have updated last quarter both on ARR revenue, gross margins, and EBITDA. So we did not change these guidance numbers. What we are saying during the call is that we will find ourself on the lower side of this guidance on the ARR; I would say revenue and adjusted EBITDA. And I hope this answers your question.

It does, it does.

Thank you.

Thank you for clarifying that. And I did want to come back, I think it was Patrick who had asked the first question, but one of the things that we're trying to do on the outside is figure out what the FX impact has been as we think about Q4 and the reason for the adjusted guidance. I think we're aware that your previous guidance probably incorporated some of the FX impact that you guys had been faced with. We're trying to get maybe a snapshot of what that delta has been or what that change has been in the last three months. Is there any way for you to size up what that impact has been on a -- from 2Q to 3Q where we stand today?

So if I look from -- I would say from the early of Q3 to the end of Q3, from an ARR perspective, it was about between $2.5 million to $3 million impact on ARR. So we would've expected our ARR to be instead of $232 million, more towards the $234 million -- $235 million I would say, if there were no ForEx, if we would look at the ForEx impact as of the beginning of Q3. And I would say around $750 to $1 million more on the revenue on Q3 compared to early Q3 ForEx numbers.

Okay. And thank you for that. I also wanted to make sure, like if I'm thinking about Q4 and its rough numbers here, right? But if I think about that $2.5 million to $3 million impact on ARR in at the end of Q3 versus the beginning of Q3, is it safe to think that it's probably a similar $2.5 million or $3 million impact on the 4Q ARR or is it more or less have -- how do I think about the guidance for the rest of the year now?

So I would say that the impact will be unless the exchange rate will dramatically change upward and down or the Euro-Dollar [ph] behavior towards the European main currencies will change dramatically, I would say that it will be similar and slightly -- might be slightly higher.

Okay. Okay. And then one more question if I could, I apologize. But I did want to ask about the subscription gross margins. So I know that you guys have spoken about you're investing in the hosting capacity and these the SaaS based solutions, which obviously have an upfront cost associated with it when I think about the infrastructure. Is there a way for us to start thinking about when those gross margins should start expanding and it -- I don't know if it's Q4 or more of a calendar 2023 event, but how should we think about those gross margins playing out over time?

So I would say that our leading setting SaaS solution that really started to show top-line impact in Q3. We'll see them in Q4, but this is still an early stage of launching these solutions. I wouldn't look at expanding the margins on them before 2023 and maybe even half two of 2023. We are still working on that. So it's work in progress.

Thank you for that. I'll turn it over to my colleagues, but I do appreciate the additional color. Thank you.

[Operator Instructions]. Our next question comes from Louie DiPalma with William Blair. Your line is now open.

Cellebrite reported a very strong net revenue retention. How much of the NRR growth is coming from the existing base upgrading to premium and premium enterprise versus cross-selling like newer products like Guardian and Pathfinder?

Want me to answer?

Yes, go ahead.

Yes. Most of our revenue are still coming from the Collect & Review and as such also the expansion between customer are coming from the more advanced Collect & Review solution. So it's mainly the premium -- it's various flavors, premium, premium enterprise solution, and also premium-as-a-service, which we launched end of Q2 and was very, very well accepted by our customer base in Q3. We did see some expansion on the Pathfinder. And we are seeing as we reported that even deals of Guardian in Q3, which also provides some expansion. But again, most of the expansion is coming from Collect & Review solutions.

Thanks, Dana. And are we still in the early innings of penetration for premium enterprise? On past calls, I think you quantified a number of specific target accounts that you're looking to upgrade to premium enterprise. Do you have any sense of what's the penetration of premium enterprise within those target accounts?

First of all, I would like to say that we are in an early stage that for sure. You have the number?

I don't have the number out of my head, but we are at an early stage. We have few tens of customers on premium enterprise with a lot of opportunities in growing pipeline. The introduction of premium-as-a-service had allowed us to introduce premium to additional customer base that initially could not have participate or enjoyed the premium due to the pricing of the offering. But Yossi, please.

Okay. But Louie, I would say that, well, I would say, I don't have the exact, but since we are monitoring it all the time, the good news is that we are first, again in an early stage. And if I look at the strategic accounts and the mid-prime accounts, which are the most relevant for the premium enterprise, we are lower than 20% penetration.

Perfect. Exactly what I was looking for. Thanks, Yossi, and thanks, Dana.

Welcome.

At this time, I show no further questions. I would now like to turn the conference back to Yossi Carmil for closing remarks.

So thank you everyone for participating and for the questions and thank you. Have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect.