Good day and thank you for standing by. Welcome to Cellebrite's Fourth Quarter 2022 Financial Results Conference 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 with Investor Relations. Please go ahead, Sabrina.

Thank you. Welcome to Cellebrite's fourth quarter and full year 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 accompanies 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 fourth quarter are available on the Investor Relations website at investors.cellebrite.com. Also, unless stated otherwise, our fourth quarter 2022 financial metrics as well as the financial metrics provided in our outlook that will be discussed on today's conference call will be on a non-GAAP basis only, and all historical comparisons are with the fourth quarter of 2021, unless otherwise noted. In addition, please note that 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 forecasts. 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. Slide number 3 provides the agenda for today's call. 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. So I'm pleased to report that in 2022 we've made significant progress advancing our mission to help our customers modernize investigations by digitizing their workflows. Our results and achievements in the fourth quarter and throughout the past year reflect four important things. The first, the market for investigative digital intelligence solutions remains healthy. Second, our leadership position is strong. We have a long broad runway for profitable growth in a market that remains highly underpenetrated. Third, we executed well on our development road map and go-to-market initiatives. And fourth, thanks to our progress in 2022. We are well positioned to deliver strong results in 2023. And before I cover each of these area in more details, I'd like to quickly review our Q4 results and select KPIs that are critical to the health and success of our business. First, our ARR grew 33% year-on-year to reach US$249 million. Our quarterly net retention rate was 130%. We closed 29 large deals, greater than US$0.5 million in the quarter. We reported Q4 revenue growth of 9% to $74 million, largely attributed to subscription revenue growth of 24%. We delivered Q4 adjusted EBITDA of $16.1 million, and we also further strengthened our financial foundation, ending the year with cash and investments totaling US$206 million and no outstanding debt. A little bit about the healthy market environment. So we continue to operate in a healthy market with significant growth opportunities in front of us, thanks in large part to Cellebrite's industry-leading technology. Against this backdrop, we continue to implement our growth strategy of expanding business with existing customers through upgrades, upselling and cross-selling, and by winning new logos in both public and private sectors. Cellebrite solutions are increasingly attractive today with strong demand…

Thank you, Yossi. As Yossi mentioned earlier, ARR grew 33% year-on-year, reaching $249 million for 2022. This growth reflects our success on a number of fronts with the biggest driver being continued expansion with existing customers through subscription licensing. Over the past several years, we have made tangible incremental progress every quarter to convert customers to a subscription model from traditional perpetual licensing. As a result, this transition is now largely complete as we enter 2023. Total revenue for the fourth quarter was up 9% from the fourth quarter of last year and reached $74 million. This was driven primarily by strong subscription services revenue growth of 24%. 84% of total quarterly revenue came from subscription services up from 67% in the same quarter two years ago and 74% in the same period last year. With software subscription services now generating a substantial majority of our revenue, we believe that 2023 will be a year in which the power of our subscription-based business model will become increasingly apparent. Our gross margins rose 84% in Q4 as compared to 82% from the fourth quarter of last year, benefiting from the increased portion of subscription sales, which carry a lower cost of goods sold. In terms of operating expenses, I will discuss these on a non-GAAP basis, excluding share-based compensation, amortization of intangible assets, acquisition-related expenses and onetime expenses. Q4 2022 non-GAAP operating expenses were $47.8 million in the quarter. As you may recall, the fourth quarter of 2021 was the first quarter carrying full public company costs and was further impacted by the cost from the acquisition of Digital Clues. Our fourth quarter 2022 operating costs reflect prudent spending aligned with our commitment to deliver sustainable EBITDA improvement as well as lower-than-anticipated annual incentives and quarterly variable compensation costs totaling approximately…

Thank you. [Operator Instructions] And our first question comes from Jonathan Ho with William Blair. Your line is now open.

Hi, good morning. And congratulations on the strong results. I just wanted to maybe start out with a couple of questions around guidance. Could you maybe unpack for us the 2023 guidance a little bit more and help us quantify how to think about the growth in revenue or ARR for the specific categories? I think it would be helpful to maybe understand how each of those is going to contribute to your current guidance.

Yes, for sure. I'll take it, Yossi. So if you remember, in 2022, we've seen a continuous reduction in our perpetual and onetime revenue from licenses, especially towards the second half of the year. We expect also in 2023 to see continuous weakness winding down of this business to a very marginal at a very lower percentage of revenue. And as such, when we are talking about our growth expectation on our top line, if you take into consideration comparing our 2022 financials, they are around 20% or, I would say, 18% of the business came from onetime activity whether services or licenses. The part associated with the onetime perpetual will be very marginal. So, most of the growth will come from subscription business. In principle – okay, sorry.

Got it. Yes, I think my question is more along the lines of what is the contribution from either the core premium products, Pathfinder, collect and review? Like how should we think about the growth rates on a product basis as opposed to the revenue mix?

So, most of the revenue from subscription in 2022 came from the collection review. So I would say around 90% plus of the revenue from subscription came from collection review. We expect collection review to grow and be very similar also from the subscription business in 2023. This is because we are seeing a very good acceptance and a huge potential with our advanced collection capabilities that have been distributed in 2022 through not only the standalone premium, but premium enterprise and in the second half is very good attraction of the Premium as a Service. We do expect the investigative analytics and management solution to grow marginally as a percentage of this pie in 2023 compared to 2022.

Great. And then just as a follow-up. I guess, what is giving you the most confidence that the growth will accelerate in 2023? And can you maybe help us understand what's changed versus 2022 or what investments you've made in 2022 to make you more optimistic about that opportunity? Thank you.

Yes. I always said that comparing 2022 to 2021 was actually comparing apples to pears because 2021 was so heavily weighted to onetime revenue recognition of perpetuals. And as such, it was very difficult to show the true growth through revenue, and the mainly true growth was presented itself through the ARR growth. Moving into 2023, and especially from Q2 of 2023, where the business is expected to be from what we are standing mainly comparing the right mix of revenue types, Q2 of 2022 to Q2 of 2023 and onwards, we will actually be able to see the growth rates also on the revenue side.

There was also level of acceptance of the solutions that we brought in, I would say, Q2 and Q3 2022 into the market and how the resonates and how they grow. As you know, we always have the mix of growing with, I would say, existing products within existing logos, but to additional buying centers that we clearly identify and then adding new logos, which will become something which is much stronger, especially if I look at the U.S. markets and if I look at, what we call, the long tail sector of thousands of customers in the state and local government. Adoption rates of the Premium as a Service were pretty strong in Q3 and Q4. The premium enterprise, well accepted the number of end points due for which are equipped and connected to premium enterprise are growing. I'm pretty confident also about the fact that we feel very comfortable right now when it comes to the investigative analytics with a much more focused, I would say, go-to-market and relying – or lying on the success of Q4. We see it as a very solid growing business engine in 2023. So combine basically the targeted amounts of new logos that we are aiming, combine it with our well-identified buying centers within the existing, the adoption rate of the collection review so far in the second half of the year, we feel very confident, confident and comfortable with the target and the guidance that we gave.

That’s very helpful. Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Mike Cikos with Needham & Company. Your line is now open.

Hey guys. Thanks for taking the questions here. The first question I had for you is really more macro in scope, and I believe it was in Yossi's opening remarks around how law enforcement agencies in Americas have historically demonstrated continued growth of budgets, and that helps give you the confidence that these law enforcement agencies in the Americas can continue to grow their budgets in calendar 2023. Can you, I guess, discuss that a little bit more? And really, what I'm curious is to hear how you've been communicating with your agencies and your various customers and how deep you've gone in your conversations with them to ensure that budgets are continuing to grow. And then the second question, I think, is probably more for Dana, but it's with respect to the sales headcount growth. I know that you guys had said that the sales organization grew 10% year-to-year in calendar 2022. I think that part of the reason why you guys are talking to these EBITDA margin improvement in 2023 is based on a leverage you've spoken about. But can you help us think about what more investment needs to take place in that sales organization, how you guys are thinking about growing headcount in that organization as we look to calendar 2023? Thank you very much.

You are welcome. And thank you for the question. And I hope that you can hear me well. The conversations – we've got today only in the public sector alone more than 5,000 agencies, 5,000 agencies, 5,000 customers. I think that the number of meetings that we have done, and I'm very glad post-COVID here was something between 15,000 to 18,000 meetings that we had with customers. And I'm talking about only those accounts worldwide that we manage with a dedicated account executive, with a presale and, let's say, visit an engagement with customer success. And I can also say that we are, in those few hundreds of accounts that we are managing directly with dedicated sales force and presale, there is a very good dialogue on different levels on a DFU, Digital Forensic Unit management level, on the INI, Investigative and Intelligence level and also on decision-makers even on commissioner level. In all those dialogues, we hear the same thing, more funding. It's not overblown in terms of something that we haven't expected, but it pretty much correlates with the way we anticipated the allocation of budget to digital intelligence in that specific section because if you read our customer survey or our industry survey, you can see clearly that, and we published that by the way, the meaning of digital data within investigations is the most critical analogue of investigations in general. I'm also glad to say that the go-to tool is the mobile, but almost double in percentage than any other aim of digital source. So basically, it's clear that if the meaning of digital data grows by more than 80% in the last three years, when it comes to investigations, investigations are basically digital, we're pretty confident about that motion, and we also see the increase in the budget by ourselves. So this is to that, and I hope that I help. As for the sales force, maybe I'll hand over to Dana, but before that just saying we are well equipped. We shared with the market the fluctuation that we had in Q1 and especially during H1 last year. We said already in Q3 that we are recovering. And in that motion, we continue with the plan in a mix of sales force, which will manage multiple or a respectable number of accounts directly on the SNG side, on the federal side. And we have also sales force, which is making sure that we get, I would say, new business and recurring coming from what we call the Southern long-tail climb. Dana, would you like to add something on the sales force?

I think we are very proud by the sales team members joined in the second half of 2022. And when we say that we are well equipped, that means that they are now fully boarded. And we expect them to be able to monetize their experience by bringing the right deals in place. We do not expect to grow substantially or in any manner, the team from a number perspective, it was really about getting the right people and the right quality to generate the revenue that we expect for this year.

Thank you. [Operator Instructions] And our next question comes from Tal Liani with Bank of America. Your line is now open.

Hi guys. First, I never say it on calls, but I want to congratulate you on much better tone this quarter versus two previous quarters. And I would like to ask you about the change. Last quarter, so 2Q was weak. 3Q was mixed on foreign exchange, and you reduced the guidance for 4Q by $4 million. And now you're beating the numbers by around $3 million. So what changed from the previous guidance that you gave, that you're beating the numbers by $3 million versus the $4 million reduction before? How much of it was foreign exchange? I know it was a tailwind for Israeli companies. Can you just talk about basically the environment and the delta from last year – last quarter? Thanks.

Sure, Tal. And first, thank you very much for the kind words. Well, we reduced our guidance during the Q2 earnings call. And indeed, Q3 was very mixed with the devaluation of the dollar to the European currencies, the Israeli currencies that had some impact on our forecast. And when we said that we'll be under our end, we assume that this trend will continue. Luckily or unfortunately or whatever it was, the currency mix remain pretty much the same until the end of the year. And as such, we have been able to meet our targets and even exceed the lower end of the targets. As we said, we might be in the end of Q3. So from a top line perspective, on our ARR, we've been slightly better than what we expected. This was a direct result of the very well acceptance of our Premium as a Service, which contributed mainly to the ARR, lesser to the revenue because of it being a SaaS solution. And as I said on my script, we took a very hard look into our OpEx, and we have tried to execute a caution approach towards OpEx expenses, including some adjustments and the true-up of variable compensation to the actual results compared to our beginning of the year initial targets.

And how do I think about the difference in trends? Two things. First, can you repeat your targets – your long-term targets that you gave it 1.5 years ago? Just repeat them, so we have it in front of us? And second, how do I think about the difference between the trends in ARR and the trends in revenues? Revenues are accelerating. ARR, you grew in 2022, about 33%. You're guiding to about 1,000 basis points below that, so it's decelerating. What's the difference in the trends?

So out of memory, our long-term ARR targets were 22% to 27%, while our revenue targets were 20% plus. What we have said is that during this transition from perpetual to subscription, we'll first see the growth coming in the ARR and later in the revenue. And for the mid-long term, we'll see revenue and ARR trending the same. So for that reason, we are expecting our revenue growth to be on the 20% plus towards the end of next – the end of this year 2023. We would see ARR getting closer to the revenue target from a growth perspective is; it will reflect basically the growth in the revenue, which is mostly subscription.

Great. Thank you.

Welcome.

Thank you. [Operator Instructions] And our next question comes from the line of Douglas Bruehl with J.P. Morgan Chase. Your line is now open.

Hey. Good morning and thanks for taking my question. Since you had about 15 points of operating margin expansion quarter-over-quarter, can you talk about the biggest drivers and maybe some commentary on timing for those OpEx cuts?

Can you repeat the question? I wasn't sure I heard you properly.

Yes. So you had about 15 points of operating margin expansion quarter-over-quarter. Can you talk about the biggest drivers behind that and maybe some commentary on the timing for those OpEx cuts?

So the biggest OpEx, there are two drivers of OpEx, I would say, control. In Q4, one of it was by the mere fact that as we said, we did not grow our head count between the end of Q3 to Q4. We've – as we said also when we've done the Q3 earnings call, we believe that we've reached the right number of people in the company to meet our targets to end the year of 2022 and to start 2023. And the second was relating to our variable compensation costs, which towards the end of the year, realize the final results of the company. We've aligned the variable compensation of bonuses and commissions with the actual top line and bottom line results, generating some reduction – one-time reduction of cost of $4 million in the quarter.

Okay. Great. Thank you.

Welcome.

Thank you. [Operator Instructions] And our next question comes from Jamie Shelton with Deutsche Bank. Your line is now open.

Good morning and thanks for taking my question. I wanted to get your view on the potential combination of Magnet Forensics and GrayShift by Thoma Bravo. What does this mean for Cellebrite from a competitive landscape perspective? Thank you.

I would say the following. First of all, I would say that currently potential merge, I would say, should highlight actually the opportunity in the sector. I would say it is a clear statement that our market is attractive, first and foremost. We probably or basically as a company, which is larger than the combination of these two businesses, again, and Thoma Bravo basically took two companies and I think collectively valued them in a $2 billion, that basically gives a sign or a clear mark of attractiveness to the market. So this is first. In many ways, I would add, we are not surprised. The two companies have collaborated for several years by now. And I would say that from that context or from that concept, this is for us a competition, which was good remain good. But we have, let's say our own way and our own path and our own road map. We as we look, I would say to the rationale, the way it was explained, it even strengthens basically our position because the rationale for the merger for one of them was about the fact that there is a mobile extraction capability, which is the reason, something that we have, shows basically how strong the mobile and how meaningful is the mobile. And they define it even as a rare strategic opportunity. And I would like to say that if I look at us at this stage, we are as a vendor, we combine in one house the offering that these two players bring right now together. We have in our house offering, which is extended to investigators and analyst, Investigative Analytics and OSINT. And as a clear solution provider, we continue just firmly with our plan and continue to invest more in our solutions. And maybe the last thing, also positioning expansion in the market. We've built an international footprint to expand our business in the U.S. and also outside of the U.S. And I would say already matured, I'm talking about us in terms of the expenses which are relating to that, something that we can create, at least on our side, more efficiencies. So all in all, I embrace the move because it is good for our industry, but we say assume with our direction.

Thanks very much.

Thank you. Our last question will come from the line of Louie DiPalma. Your line is now open with William Blair.

Yossi, Dana and Andy [ph] good morning.

Good morning or good afternoon Louie.

Indeed. Yossi, you announced 29 large deals in the fourth quarter, including that $14 million deal with the agency in Singapore. What does the pipeline look like for large deals in 2023? And in general, are your deal sizes increasing as more customers adopt your premium enterprise and your other investigative analytics services?

I will take it, and maybe there is some kind of a data in the mix, Dana, that I think that you can answer. First of all, Louie, thank you for the question. It's – the number of the larger or the larger size deal is growing and will continue to grow, and this is basically a reflection of the size of the go-to-market of Cellebrite, which focuses on increasing wallet share within existing accounts. This is mainly focused to the areas what we call the strategic accounts on the state and local government, and it is related to the federal side. And over there, it is expanding within the account, nurturing more, growing and as we offer more and as the solution, each one of them or the total digital intelligence suite of solution resonates, we see basically more budgets, larger deals. So again, stating again it will grow. Nevertheless, there is a dual effort here that we're doing because there is also the element of expansion within new logos, more related, I would say to what we call the 1,000 long-tail. We have them well identified. And over there side-by-side, I would say with the collection review, within the larger accounts, there is a rather transactional collection review business with a rather shorter sales cycle. And we are still relying and facing a large amount of deals which are, I would say small, reasonable and pretty much fits our go-to-market on that dual effort, okay. Large deals on on-site in expansion, and then basically having that transactional solid base. And this is good, by the way, because that spread the risks of Cellebrite we are not dependent on few customers, we are not dependent on a few large opportunities, and we have the ability to balance in that environment. Dana, would you like to add something regarding...

Hi, Louie. In principle, yes, we do see in the last two, three quarters that looking at the larger deals, those who are above – which are above $500,000, some increase in the average mix from a dollar perspective of those deals. So certainly, we do.

Excellent. Thanks everyone.

Thank you.

Thank you. At this time, I would like to hand the conference back over to Mr. Yossi Carmil for closing comments.

So first of all, thank you all of you for participating, and thank you for the interest and for the questions. Again, I would like to say we are committed both to the results and the creation of shareholder value and obviously to the industry we serve. I'd like to thank again the Cellebrite employees for all the efforts in 2022, and thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.