Welcome to the Cellebrite Fourth Quarter and Full-Year 2023 Financial Results Conference Call. At this time, all participants have been placed on a listen-only mode, and the floor will be opened for your questions following the presentation. [Operator Instructions] I would now like to turn the call over to your first speaker today, Mr. Andrew Kramer. Mr. Kramer, the floor is yours.

Thank you very much, Angela. And good morning, everybody. Joining me today from Washington, DC, are Yossi Carmil, Cellebrite's CEO; and Dana Gerner, Cellebrite's CFO. Tom Hogan, Cellebrite's Executive Chairman, is also with us today and will be available to participate in the Q&A portion of our call. There is a slide presentation that accompanies our prepared remarks. Please advance the slides in the webcast viewer to follow our commentary. We will call out the slide number we're referring to in our remarks. This call is being recorded and a replay of this recording will be made available on our website shortly after the call. Starting with slide number two, a copy of today's press release and financial statements, including GAAP to non-GAAP reconciliations. This slide presentation and the quarterly financial tables and supplemental historical financial information for each quarter of 2023 and 2022 as well as 2021 data are available on the Investor Relations website at investors.cellebrite.com. Also, unless otherwise stated, our discussion of our fourth quarter and full-year 2023 financial metrics as well as the financial metrics provided in our outlook on today's conference call will be done on a non-GAAP basis only, and all historical comparisons are with the fourth quarter of 2022 or the full-year 2022 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 April 27, 2023. The company does not undertake any obligation to update any forward-looking statements to reflect future events or circumstances. Slide number three provides the agenda for today's call. As you will hear, we closed 2023 with another strong quarter. As a result of our accomplishments today and the near-term opportunities we see, we are excited about our prospects to build on our momentum in 2024, which is reflected in our financial expectations. And with that said, I'll now turn the call over to Yossi Carmil, Cellebrite's CEO.

Thank you, Andy. And thank you all for joining us today. So Cellebrite delivered an outstanding performance in 2023 and we closed the year with another strong quarter. Our team did a great job executing on our plans throughout the year. We delivered impactful, customer-centric innovation, we expanded our customers' relationships, built our brand, and thoughtfully managed all aspects of our operation. Our accomplishments and strategic progress enabled us to exceed our original and upgraded 2023 financial targets. We also surpassed Rule of 45 status in 2023 with ARR growth of 27% and adjusted EBITDA margins of 19%. We move into 2024 as an even stronger market and technology leader. Now we began 2024 by announcing Cellebrite expanded Case-to-Closure, our C2C software platform. Our C2C platform is trusted by 1,000s of public and private sector customers in support of their efforts to close more cases faster. Now every day, our customers see that Cellebrite's solution deliver on our brand promise of Justice Accelerated throughout the entire digital investigation life cycle. Our solutions play an important role in helping our customers transform their investigative workflows and make digital evidence more accessible, more intelligent and more actionable. And as a result, we have built a strong foundation for us to continue thriving as a market and technology leader going forward. But before I dive into the details, I want to say that it is definitely an exciting time for Cellebrite and Cellebrite shareholders. And we want to share more about how exciting our development is. And over the past years, we've taken important steps to upgrade our investors' communication and we are building on this effort in two additional important ways. First, I'm happy to inform that we'll be holding our first-ever Investors Day next month, which will be great opportunity for…

Thank you, Yossi. Hi. At a high level, 2023, as Yossi said, was an excellent year. Cellebrite outperformed its original targets and exceeded the Rule of 45 milestone with strong ARR expansion and a significant increase in our adjusted EBITDA margin. I will begin the financial review on slide nine. Fourth quarter revenue of $93 million grew 26%. Our top-line growth was fueled by a 26% increase in subscription revenue, complemented by growth in other non-recurring and professional services revenue. We exceeded our top-line targets primarily due to the combination of strong overall demand, favorable product mix, and higher-than-expected demand for training. For the full-year, revenue increased 20% to $325.1 million, due to subscription revenue growth of 30%. The 30% growth in subscription revenue was partially offset by a 36% decline in other non-recurring revenue associated with lower perpetual license revenue and a 7% decrease in professional services revenue, which saw reduced demand for Cellebrite advanced services as more customer adopted our advanced lawful access solutions. With subscriptions revenue representing 85% of total full-year revenue, we move into 2024 with the transition to subscription now in our rear view mirror. Slide 10 details our ARR growth, which we believe helps investors better appreciate our prospects for the future revenue growth over the coming year. Our ARR grew 27% year-on-year to $316 million at the end of ‘23. Looking closer at the bridge details provided on this slide, you can see that existing customers continue to fuel ARR expansion. This is largely attributable to ongoing success in cross-selling and upselling into the digital forensics units of our customers, complemented by our progress in driving adoption of our Pathfinder solution within investigative units. In terms of our geographic mix, the Americas continue to be our single largest geography at 53% of total…

The floor is now open for questions. [Operator Instructions] Our first question comes from Brad Zelnick with Deutsche bank. Please go ahead.

Great. Thanks very much, and congrats on a strong finish to the year. I've got one for Yossi and then one for Dana. Yossi, the innovations that you talked about with Inseyets driving the speed of investigation sounds really powerful. And I picked up on your example of the agency that saw a 65% increase in what they were spending. But can you talk a little bit more in terms of how it's priced? And if we look forward a year from now, you know, what percentage of new and expansion coming from Inseyets will make you pleased? And maybe also as well, what's the risk that it makes investigators so much more productive that your customers actually need fewer units?

I would ask you to repeat the last part of your question. What was the add-on at the end? I didn't hear it properly.

If it makes investigators that much more productive that they're able to achieve what they're trying to do at, you know, at 2 times the speed, that the customer needs fewer units, because they have fewer people doing the same job.

Okay. So first of all, you know, I have to say that, and in a bigger scheme, Inseyets is a part obviously of our value proposition and a really differentiated Case-to-Closure platform. And with the Inseyets, everything starts. All the attractive elements of collect and review with special capabilities in a way that we didn't offer before. The Cellebrite Inseyets is a leading collect and review piece, offers, first of all, more value than any other legacy software that we are providing in the past. It brings higher value because it combines capabilities that were pretty much spread in several, I would say, standalone solution that were offering only part of the entire scheme; either a collection as standalone, or the review as standalone. It combines everything under one roof. This is one. It's definitely -- the good news, by the way, it brings higher value to the customers, and a higher value can be translated to a higher price tag. And we anticipate, and you were asking about the price, that we can offer that part in a range of 20% to 25% higher than what we used to price the former solutions in the past. And obviously part of the scheme is that we are coming with additional models as part of it. There are models and capabilities, and I've mentioned a few of them in the past, like for example, automation, that can basically increase the value and justify basically value pricing. And on top of that, the element of the unlock. I'm glad to say, by the way, you know, we launched it two months ago in a private sector, one month ago in a public sector, and there is a huge interest, okay? And we believe that right now, in a phase of, let's say, probably three-year cycle, we can basically cover most if not all of our current install base. As for the need, the pain by our customers, and we talk about it a lot, is clearly about the huge amount of data quantity and the amount of data per digital source. But to your question specifically about the increasing need, there is an element of a backlog of, I would say, old way or inefficient way, the way investigations and data has been managed. And that obviously increase the need for more licenses in that spectrum.

Very, very helpful. And I appreciate all the color you've shared. Maybe just for Dana, it's great to see the ARR guidance in excess of what we expected, reflecting the confidence that you guys have and all the good things happening in the business. Can you maybe just give us a little bit more insight into the key assumptions that -- underlying the ARR guidance? And specifically, the assumption that you have for net retention, which I'm not sure we saw for Q4, but any insight there would be helpful. Thank you.

Great. So if we look at the ARR growth expected for '24, it actually follows exactly what Yossi discussed in his prepared comments about the three main offering contribution to the growth of the company. So when looking at a market, and a market is healthy, we continue to see demand for our Inseyets offering to the digital forensics unit. We've been growing it substantially in ‘23. We'll continue to grow it by the introduction of Inseyets in ‘24. Pathfinder and Guardian are increasing -- getting increasing traction in the market. We believe that they would grow faster than our collection and review Inseyets offering will grow. And both of -- all three of them together will provide the ARR growth in ‘24. When we look at net retention rate, our increase of ARR related to new customer ranges from 2% to 3%. So if you look at an ARR growth in '23 of 27%, the net retention rate is around 125%.

Okay, thank you.

The next question comes from Mike Cikos with Needham.

Hey, guys, thanks for taking the questions here. And I did just want to double-check on the revenues in this quarter as well. I know that Dana, I believe you opened up your remarks by calling out some of the strength seen in, let's say, perpetual or pro-serve, which were both stronger than we had modeled? And I'm just trying to get a better sense, like for the pro-serve and the training dynamic specifically, is this in any way underscoring the benefit of the learning management system that Cellebrite unveiled as part of its customer portal back in mid-October, or is there something else to think through, as far as the strength in training that we are seeing there?

I think all together, Q4 was a very strong quarter. We grew our subscription business very highly 26%. And we grew the entire rest of the offering, as well at the same rate. Training was outperforming. The LMS launched in October actually supported the ability to better deliver the training that is being required by the customer. And we believe that it attributed to some of this growth with a better platform. I hope this answers your question.

It does. It does. And I guess a bit of a two-parter, wanted to build off that last one with the training, but maybe you or Yossi could touch on this. It's more of an industry dynamic, but I'm trying to get a better sense. Is training considered a gating factor to broader adoption of the technology? And what I mean by that, like I don't expect -- let's say, the NYPD as an example. I don't know if they are an agency or not, but just because they are readily available. So if the NYPD is going to make cuts to its budget somewhere, I imagine the budget cuts might be more in training, because that's considered a soft skill and may be a hang-up for having technical expertise to use Cellebrite, whereas I don't expect the NYPD to maybe making cuts around, let's say, patrol cars or bulletproof vests as an example. Can you talk about that training element as far as what it means for a feeder system into Cellebrite's demand? I hope that makes sense. I know it's a bit of a long-winded question.

No, no, no, that's cool. That's fine. At least I'll try. And I'll take it, first of all, from the customer's point of view and the element of training in our customer's life. It is an essential element, especially in the United States, imperative. At the end of the day, our game in the quality of our C2C platform is to enable customers, we're talking about law enforcement and I'm talking about public sector, to go to court and stand behind the evidence. And as such, training is an essential element, was, is, and will continue to be. I'll touch in a minute what we are going to do with it. When it comes to Cellebrite, I see the training as, I would say, something with two heads. One is a base to educate the customers in order to sell more software. And by the way, that dynamic and trend is something that exists, that was existing this year and throughout the years. And second, it's a revenue source. That's obvious. As for the budgets, I am less concerned. First of all, in a generic statement, you mentioned NYPD or others, we do not see any change in a trend of healthy budgets related to what our customers are offering. I also want to say that while the budgets are growing and the part of budgets for digital investigations, Cellebrite, with what we do, it represents -- or what budgets which are related to us represent a fraction of the overall budget of police forces. So I'm less concerned about any mega development. We are not going to be disturbed. And the budget factor is going to remain healthy. Last word, we see training as part of a much bigger scheme of investment in post-sale customer experience and customer engagement in order to educate and push the C2C. By the way, customers are requesting for that. This is why I mentioned earlier that as part of the new structure under the new CRO, we are building or started to build a dedicated post-sale customer experience and the training is part of it. So we see lots of value, customers see a lot of value. And I hope that I gave you a full perspective here.

No, very clear, Yossi, very clear. And I appreciate you calling that out. And I know it's just -- it's a small piece when I think about the revenue pie. I'm not trying to take away from that at all, but just wanted to highlight that as I'm trying to piece together this broader industry dynamic and what the training means to Cellebrite specifically. So thank you for all that. I do appreciate it.

Thank you.

The next question comes from Tal Liani with Bank of America.

Hey, guys. It's actually Tomer Zilberman on for Tal. Thank you for the questions. My first one, you know, you talked a little bit in your prepared remarks about the success you're seeing on Pathfinder and Guardian. Just wondering what the overall contributions are of your analyze and manage solution? I think in one point in time, we knew that analyze was, I think, roughly 5%, 6% of your revenue. Manage was close to 0%. So curious how that's trending now and, you know, where you expect that to go to in 2024 and beyond.

Okay, so first of all, I would like to say, you know, I go back to the Case-to-Closure platform. And one need to understand that we went in this direction and we went in the direction of streamlining our entire portfolio. Because today, you talk about one standalone without the others, doesn't make much sense from our perspective, but I'm glad to say also from the -- our customers' perspective. The entire element of integrating or looking at one integrated platform which serves one integrated flow in the investigative world is critical for the success of our customers. And obviously as a result, as we look into the future, the Pathfinder and Guardian both will have a much bigger room in our total top line and portfolio. I can say that we had for both Pathfinder, again, investigative analytics, and Guardian, our evidence management, pretty much strong growth in Q4 and throughout entire 2023. And as I said, we are serving an emerging need. At the moment, the volume of both solutions is around 10% of our entire result in 2023, and we expect basically, I would say, greater pipeline and potential to accelerate both solutions. The Guardian, specifically, the meaning is not mostly in the volume of business. Clearly, it's something that it's about to grow 50% and even more year-over-year. But it's the fact that this is an integrative component that combines together the entire C2C on the digital forensic unit side and on the investigative unit side. And it has, I would say, a strategic meaning. So I'll stop here and see if I answered your question properly.

Yes, absolutely. And then just as a follow-up, you know, you talked about subscription now being 85% of revenue and, you know, the transition to subscription being largely in the rear view mirror. But question, should we assume that 85%, give or take, is the benchmark for where subscription will sit? I mean, your perpetual grew much stronger than anticipated this quarter, and I assume that you will have some level of government customers that will still require perpetual. So the question is really around where do you see the benchmark for subscription going forward?

So maybe I'll take the answer, and I'll start -- this is Dana. First, we are very glad to see that customers all around the globe are actually accepting the subscription business, and our perpetual business in the last half year was almost null. So that means that even at the strongest part of our selling portion of the year, they have to, we federal government and with larger agencies, they all accepted our subscription offering and the advantages that are coming with it. 85% is a good point for our subscription business to be out of the total revenue. Considering what Yossi said before on training and the importance of training, professional services, that will be attributed also in the future to our enterprise solutions, and the fact that we still have some hardware components in our product mix.

That's great. Thank you, guys.

The next question comes from Jeff Van Rhee with Craig-Hallum. Please go ahead.

Great. I'd echo my congratulations. Obviously, with Hamas and the conflict, you guys are in the center of just really impressive performance by the team. Three questions from me. One, on the sales motion, Yossi, where would you grade yourself in terms of your efforts to get from the DFU to the IU? You know, how dialed in do you have that motion? Just maybe put that in a little context.

Let's put it this way. There is a clear growth engine for the company and this is the leading growth engines for years by now, and that's the DFU. And the digital forensic units with the relevant portfolio, which is around our entire offering of Inseyets as a flagship solution, and the Guardian, that motion will continue to grow. We continue to invest in that direction. And with a, by the way, dedicated salesforce in each one of our subregions: America, EMEA, and Asia-Pacific. And by the way, not to mention the collection piece as part of the private sector. The investigative units, the more we grow, we -- I'm glad to say that we see that and we take it very seriously as, I would say, another growth engine by itself. The KPIs over there for the end users are different. The budgets over there are impressive. And the pains and the needs of the customers force us basically to manage it in an upgraded way with a dedicated salesforce and, by the way, dedicated marketing and so on and so forth. So on the one end, one need to understand we are working with an agency. And as I said, there is a C2C platform. But when it comes to the investigative world, we will add more forces along the road in order to make sure that we are, I would say, fulfilling the potential. And just to remind, potential in that space only if I take the Pathfinder alone is a pace or anticipated growth pace of 35% to 50% year-over-year. I'll stop here just to see if my answer was in your direction.

It was. Thank you. And Yossi, then just shifting gears. M&A. You know, obviously real nice cash generation. I think as you look at the digital tools that are relevant to law enforcement and federal agencies and incorporating them into your platform, seems like a lot of opportunity. How should we think about M&A and the role it's going to play maybe in '24?

It's a great item, let's put it this way. In a wider context, one need to look at Cellebrite, and as you said, right now it is a platform company. And the C2C platform enable us basically to map much better our decisions regarding make or buy. There is also, if you look at our market, an impressive TAM that we are dealing with and there is a big growth opportunity over there. And on top of that, clearly there is the element of the Cellebrite balance sheet. And we have a very strong balance sheet, as you mentioned, and that enable us to make smart moves, but in the right target and in the right timing. I would like to say, clearly that inorganic growth is clear part of our long-term strategy, by the way, both technological tuck-ins and maybe some larger opportunities, if that would make sense. And clearly, as I mentioned, the TAM, doing an inorganic move while we are investing a lot on innovation will help us to build the market presence. Just to emphasize. All the numbers that you see right now do not include or include only organic elements. But clearly, we have some targets that we are looking at and if something will be relevant, we'll update.

Great. And if I could sneak in two last smaller questions then briefly. Dana, you touched on churn. I might have missed a little bit of it. I know you've had some intentional pruning of the customer base, but just give me a little more context. How do you see churn playing out during '24?

So if you look at our churn, which is slightly above 9%, around 2% was associated with customers that we've decided to stop our business with. This will dissipate over the next year and a half, I would say. And so we believe that our normalized churn should be anything between 7% to 8% on an ongoing basis. We work diligently to improve it on an ongoing rate.

Okay. And then I guess just lastly, overall backdrop, you talked about budgets, but in particular, you know, been talk from time to time of peers getting fairly aggressive on price increases. Just any observations on what the peers are doing? I mean, obviously Inseyets puts you in a different value proposition. I get what you're doing, but I'm just kind of curious what the competitors have been doing.

Generally speaking, I'll take at least for a start, I'm glad to say that this is a value-based market. Budgets are there, this is clear, and there is a clear readiness to pay more for value. If we look, and based on what we know, our competitors are doing the same. Some are increasing prices on an annual basis as part of a systematic approach, sometimes per version. And some are increasing prices as part of a, I would say, long-term strategy. So, one, we are no different. We are different in the fact that we bring a differentiated offering that basically justify higher pricing. But I would say that's applicable for the entire industry.

Got it. Thank you.

Welcome.

The next question comes from Doug Bruehl with J.P. Morgan.

My question, maybe one around your FedRAMP authorization announcement. Any sense of how large of an incremental market you expect at eventual approval to unlock?

So, first of all, I would like to say that FedRAMP is a meaningful part as part of the expansion of our value proposition and making an even stronger differentiation in, I would say, our compelling C2C, Case-to-Closure platform. Specifically, that part of activity is more aimed to the area of the federal business in the United States. And clearly, we are investing in FedRAMP in order to open more doors in that space and practically increasing the total available market. By the way, I have to say that our federal business is very strong as it is right now, and that only strength that we have a very strong base in order to expand. Specific to your question, we assume that this is something that can even double the size of what we do today. Because with FedRAMP, it will enable the company to access definitely additional buying centers within existing logos that we have already today. And if we will be quick enough, and we intend to be, in the middle of 2024, we believe that we'll be in a situation that we will pass certain processes in order to talk about it. So in the second half of 2024. And with that we can guarantee or capture budgets of 2025. I have to emphasize as final statement that FedRAMP is not specifically to one or other solution, it's applicable to the entire offering of our Case-to-Closure platform. So both for Inseyets and Pathfinder and the Guardian, everything can be offered not only on-prem, but then also on the cloud. And FedRAMP will enable us, as a final role, to show level of security which meets the hard demands of this specific segment.

Great. Thank you so much.

Thank you.

The next question comes from Jonathan Ho with William Blair.

Hi, good morning and congratulations on the strong results. I wanted to start out with a little bit more detail into the Inseyets sort of a change here. Can you -- maybe help us understand what's changed with the product and how you're able to speed up investigations and sort of raise productivity with customers?

Sure. Inseyets is -- and I'll talk specifically about the Inseyets collection review. Basically brings to the table capabilities, which were, well, stand-alone disconnected within some -- few solutions. On the access part, it enables a much quicker access and it also enables to access via ways or in collection that used to be part of our high-end premium only. For example, full file system, and I remember we talked about that in the past. Then it's about the processing and review elements. We are talking here about Factor IV or Factor VI in terms of speed. At the end of the day, if you think about the major KPI in a typical lab of our customers, it's how to reduce backlog and how to access more devices faster as part of a piling element of digital sources as part of piling investigative open cases. So when we bring together methods, which were only on the premium, together with the higher speed, combine that with a much better UX UI that's the result that you get. And that's basically the value that it's going to bring to our customers. As I said, by the way, since launch, we are getting really terrific feedback about how Inseyets improve mode of operation within labs and within investigative units.

Excellent. And then with regards to the C2C platform, do customers today purchase these solutions as a bundle? And how do you think about the go-to-market motion and investments that you need to make to maybe shift this to be a bit more of a strategic discussion?

So I think it's important to understand that today, Cellebrite offers a real end-to-end platform. And not just, I would say, a pile of stand-alone because on the tactical level, clearly, a lab will continue to buy, collect and review, will continue to buy Inseyets as such. But as I said in the beginning or as part of an answer to another question, for the Commissioner or for the Head of Investigation and Intelligence within police, it makes less sense today to talk about collection as stand-alone because the reason need to see the entire scheme of things, how do I collect. But then with a streamlined platform like ours, how do I share and review as quick as possible? How do I improve speed and quality of discovery? How do I deal with chain of custody, something that we do with our streamlined Guardian, which connects both collected data from Inseyets and analyze data from Pathfinder. So this is not only something that we position. It reflects a thing and the entire direction of our customers is going into a streamlined environment, which forces basically or enforce and makes a necessity for an end-to-end platform and not just, I would say, pile of stand-alone solutions.

Great. Thank you.

This concludes the Q&A portion of today's call. I would now like to turn the floor over to Cellebrite CEO, Yossi Carmil, for additional or closing remarks.

All right. So first of all, thank you all for joining us, and thank you for taking the time. I would like to emphasize it was a very successful year for the company, especially from background of several challenges, it was really a very good year. The future will be even better. And I have to say that we are excited about the opportunity and about what is expecting us as part of the future of Cellebrite. I would like as a final word to thank again to all the Cellebrite employees for their professionalism, for their resiliency and for the engagement and obviously, for the great results of 2023. Thank you all. Have a great day.

Thank you. This concludes today's Cellebrite's fourth quarter and full year 2023 dinancial results conference call. Please disconnect your line at this time, and have a wonderful day.