Cellebrite DI Ltd. (CLBT) Earnings Call Transcript & Summary

All right, everyone. We're going to get going here. Thank you very much for joining us. My name is Steve Pettigrew. I lead the software investment banking practice at UBS and pleased to have with me the executive team at Cellebrite. To my left, Dana Gerner, Chief Financial Officer. Beside her, Andrew Kramer, who runs Investor Relations and at the far end, Tom Hogan, Executive Chairman. Thank you, everyone, for joining me.

I'm not sure who wants to start us off, but for everyone in the room, could you maybe give a little bit of an overview of Cellebrite, the background and kind of mission of the company?

I'll take a stab at it, although Dana is the 10-year veteran, I'm the 18 month or so she can jump in if I miss some spots, but I was just telling some of the guys in the back. I've been in the history for 43 years. It's all been pretty good cool stuff, but at the end of the day, it's not really. And this is the first company that I've had the privilege to work with that I think is unbelievably cool in changing the world. And the short version is we put bad people in jail and legitimately, not arm's length. So we've been in business for roughly 20 years, roughly $400 million in ARR, roughly $4 billion market cap on the NASDAQ, 1,100 people, very much a global company. 55% of the business is in the U.S. and the rest is spread around the world, but we sell to every major police department you know in the United States from LAPD to NYPD and everybody in between, to all the 3-letter agencies in the federal government, DEA, FBI, et cetera, but also to sister organizations in democratize allies around the world. So I think people like MI5, MI6 and help with a range of issues from Internet crimes against children to sexual predators to murders, to terrorists to you name it. And the reason is, just like everybody in this room has a phone on their body and couldn't live without it. Guess what? The bad guys use their phones and digital assets just like you and I do. So the percentage of bad things that happen with the digital device is north of 90%. And so if you're an agency trying to prosecute bad people, having intelligence to extract, decode, store, collaborate and analyze digital DNA is sort of -- and I'm going to age myself, the old days, it was Perry Mason or Columbo with the thumbprint on the scotch glass at the murder scene. In this day and age, it's digital DNA from mobile phones, laptops and social media. So that's sort of what we do.

Perfect. And -- when I've known Cellebrite for a long period of time throughout the history of the company, I think Yossi has been a driving force and really kind of North Star driving just the evolution of the company, you had a big announcement recently with Yossi deciding to step down. Can you kind of share some color on the transition?

Yes. So he was one of the -- essentially founders. He's been with the company from essentially day 1 employee number 3, early-stage revenue, very -- to his credit, and again, been in the industry a long time, you don't find a lot of founder/CEOs that get to revenue and then fewer group that get from revenue to $100 million in revenue, who then get from $100 million to $400 million. And so kudos to him for navigating that journey successfully. After doing it for 19 years, it's a pretty long time to be in any job, let alone a CEO job. He just decided that the company is in a really good place right now. And after 19 years, decided it was time for him to just take his foot off the gas for a bit, and get a little bit of balance back while he figures out probably over the course of the next 6, 12 months, do I become an angel investor or a Board member, do I find something else. But in the meantime, I'm going to take a really long vacation with my family and reflect on an amazing career. So that was sort of -- and he would also say to take the company from $400 million to something north of $1 billion in ARR, the company would benefit from a different set of eyes and experiences and perspectives and a different set of skills because there's -- it's a different skill set to run Amazon than it is to run a startup. And so the timing for him was perfect. The win for the company, one of the benefits, Steve, me coming in as Exec Chair, I'm 50% committed time operator. So been deeply involved with Yossi and Dana and the rest of the team. And so there's good continuity in the transition as we go identify a world-class CEO sometime, hopefully, in early '25 to kind of take the company to the next level.

Perfect. Can we dig down a little bit into the technology and just talk about the differentiation of your technology platform and why you win?

Maybe I'll start.

Sure. Take it away, yes.

So we put ourself as a target to serve the entire investigation flow, taking into consideration that today investigation, as Tom mentioned before, being based on and sourced by digital information. And if you think about it, the only or the main testimonial to people's mind is the people mobile. It shows what you've been doing, when you've been doing this with whom, what were your thoughts through your searches and history and the ability to be the #1 vendor that can access most of the mobile phones around the globe, whether it's the rest iOS, Apple phones or Android phones to the burners and the legacy phones. If you think about it, they will tell you that they are set up right in the phone because Cellebrite has been in this market since 2008, and we actually have the widest coverage. Now it's very important to take information outside of the phone, but what are you going to do with it? How are you going to make sense of it, and our experience throughout the years is not only the ability to extract, but also to make sense out of the data. And again, think about it, this is the most diverse source of data. It includes chats and mails and voice messages and videos and pictures and social media and Wi-Fi location, GPS locations, tokens of your social, it's enormous amount of data, which when you extract it from the phone, a lot of it is an unstructured data, you need to make sense. We are a master of this -- in the ability to do that, leading the market on mobile forensics with 50% market share in a multi-vendor environment. And this deep knowledge and understanding of what a mobile phone is and mobile being the #1 source in more than 95% of the investigation, allows us actually to serve the entire digital investigation flow. So extraction, review of the data, collaboration between the examiners in the digital forensics labs and the detectives and prosecutors and the ability to take more than one phone, if you think about high crimes, gangs, trafficking, drugs, in most cases, they are seizing more than 1 phone, it can be 5, it can be 20 in each investigation, merge all these data to 1 case narrative, requires expertise that are very, very unique to Cellebrite. And I think that between the technology and the go-to-market approach of -- we are going to cater the entire digital investigation and not do like most of our competition be a point solution only for the extraction or only for the analysis, only for this sharing, but providing a workflow that's our biggest strength in this market.

Interesting. I think over the last year or so as well has been a new focus on the case to closure platform strategy. Can you share a little bit of color about how you brought that together and how investors should think about that strategy?

Well, it's not unlike CRM or ERP or the categories that we've all come to know over the last 20 years, the goal here isn't just to find artifacts of evidence and drop them into a black hole. The goal is to use those artifacts, to put the bad guy in prison. So if you think about the life cycle of extract and decode and interpret evidence, then put it into a repository, a digital repository that enables collaboration. So think about prosecutors and investigators across state lines or across organizational boundaries that we want to see and collaborate on that information. In the old days, they would walk around with thumb drives or disk drives, and then guess what would happen in the end, the defense attorneys would say, well, who touched that thumb drive? And who watched it while I was sitting in that car or in -- or gotten mailed via FedEx. " And so maintaining strong chain of custody, while enabling collaboration, a key middle step. And then on the back end, there is so much digital data now that no human being, no investigator, no prosecutor, no cop, no detective, can sort through petabytes of information to get to the right answers to convict or conclude somebody's guilty. So creating an AI-driven engine to drive algorithms and analytics against that mountain of data helps bring that puzzle together to ultimately put that bad guy behind bars.

Great. And then to extend this platform, you had a lot of innovation over the last couple of years. Can we drill down into a couple of the kind of the key new products that you have, Inseyets. Can you share a little bit of background about what that technology is and the momentum?

So we are trying to help our customers to deal with their major pains. And one of the largest pains that they are dealing with is the fact that the number of head count in police forces is not really growing. You can think about 2% to 3% growth of examiners in the digital forensics labs annually. Based on our research, digital resources are growing 15% to 30% annually and each digital source, whether it's computer, mobile or whatever is holding much more information. . So how do you deal with this huge backlog that they are actually generating year-over-year and increasingly growing, you need to become much more efficient. Inseyets is our new platform, which we launched in January this year, which actually replaces our current platform for allowing access extraction, decoding and review of digital evidence. It's doing it twice as fast and extract 50% more data compared to the legacy, but this is not sufficient. We are introducing also automation that would allow them to run in the background, whether on servers and soon enough harnessing the cloud, the backlog itself, and introducing automation and AI capabilities to generate reports and highlights what's relevant and not relevant to the investigation. Another thing that we've introduced through Inseyets is the ability to triage. Think about it, if you have 10 phones in the investigation, where do you go to first. So you're triaging, then you're prioritizing, again, reduced backlog. So for us, Inseyets is just being able to cater our customers much better than we've been able to do before. And this platform is also cloud enabled. So it is connecting very well with our other pieces of the solution, which are a part of the case to closure in our web-based solutions or SaaS solution. And if we look on other innovations, so we are, by the way, innovating constantly, with the ability to access the mobile devices. The OEMs are not waiting for us. They have vouched to their customers to increase their privacy and safeguard their information. We are doing what we need to do to support law enforcement to make all of our lives safer and solve crime and put the predators behind bars. So this innovation is an ongoing, I would say, force of Cellebrite since the first encryption has been introduced with iPhone 4 many years ago. Another piece of innovation is coming through our Pathfinder. A Pathfinder is an AI, machine learning, large language model platform. We introduced its journey to the cloud this year for the first time. Customers who used to buy it on -- an on-prem solution can now use the [ VPC ] . And we are following suits in the coming quarters also introducing some of these solutions as a cloud-based full SaaS solution. So this is a new innovation on our behalf that we are very proud on top of introducing new AI engines into this offering.

When you think about the heavy compute requirements of certain applications across our platform, cloudifying those capabilities not only is beneficial in terms of leveraging and harnessing the power of the cloud, but it allows us to be much more nimble, agile, flexible in terms of how we price and package. It's really democratized the solution. So if we support 5,300 customers, we can see this in the digital forensic side of the business, that it's open the aperture to all 5,300 to be able to subscribe to some of the most advanced technology that we've brought to market so that outsourcing or waiting in line for a larger agency to unlock a device when they can now do the entry point is much more reasonable, so that the smallest agencies can really afford that as well. That's helped drive a lot of our growth over the past couple of years. We expect that we'll continue to underpin our growth as we move forward.

Great. That's really helpful. Can we dive into competitive dynamics a little bit? You've got a differentiated end-to-end platform, who else out there is competitive? And can anybody else actually offer the same end-to-end capabilities that you have?

So if you look at our competition across the case to closure, we see competitors in different parts of the journey. Currently, we are the only vendor that actually provide the entire workflow that is required to solve an investigation. When we look at where the competition is and we look into digital forensics lab, we see the largest competitor is a company called Magnet. They provided same solutions for computer forensics and added a part that actually can access a iPhone by mergering Magnet with a company called Grayshift. They are less than half of our size between the digital forensics unit. And I want to emphasize again, it's a multi-vendor environment. No one -- if you look at most of the agencies midsize and higher they would acquire at least 2 vendors, if not more, because of the wide range of phones, cloud applications, computers that are out there because they needed for verification purposes in cases that are high profile and go to court and so forth. And there are many other smaller vendors that deal with specific source phones, like Chinese phones, which we don't -- don't put a lot of effort, a specific cloud application or vehicle forensics or [ co ] detection records and so forth. If you move throughout the case to closure into case management, you can see companies like NICE Public Safety doing evidence management, not so much of case management, and it's source agnostic on 1 hand, but on the other hand, it can provide mostly storage and I would say, management capabilities, but not the ability to actually review and collaborate over the data. And when we go into the investigative units and look at who is actually playing as an investigative analytic player in this market, you would see companies specializing in computers like Nuix, an Australian company. You would see companies like [indiscernible] who are doing some [indiscernible] and call records, but most of the vendors are actually source specific, so they can analyze a specific source of data and provide analytics solution. Being the one that generates most of the digital evidence in an investigation, the ability of our Pathfinder is a critical component of an investigation. And we feel the Pathfinder, we are digitally working on being able to introduce more sources being produced by others, but still can be analyzed [ with us ] to provide 1 holistic view of the investigation.

Are there any emerging vendors that you view as disruptive in the market?

That didn't really change in the past 2 years.

And I think that the challenge, especially when you look at the digital forensic space, that breadth and depth of coverage is a major barrier to entry because it's not enough to just be able to do the iPhone 16 and iOS 18, but you've got to have a back catalog because criminals are just like you and me. They have a range of phones. And what matters most is for law enforcement to be able to access the device that's involved in the crime. And so we're very fortunate, as Dana said earlier, I mean we're both a noun and a verb with our customers. You Cellebrite a device, you need to Cellebrite report. And that type of ubiquity is both unique and reflects a lot of diligence and investment over the years.

How much of an impact is AI having on the market? And -- do you -- have you been making investments around that theme?

We've been too humble throughout the years, and we didn't flesh out the fact that both the Pathfinder, but also our physical analyzer -- examiner tool within the forensic labs are actually backed up by a lot of machine learning and AI engines, because to drill into this huge amount of data and create -- make sense out of it, you cannot do it manually and you do require to introduce capabilities that are sophisticated and can actually deal with this complex data. On top of that, we are very cautious in one hand, but very aggressive on the other on how to continue introducing AI into our solutions. If you think about GenAI, you cannot generate evidence. So when we are introducing AI, we need based on our customers' request to be able to show them where the information is coming from. But AI is not only to introduce and flesh-out evidence, it's actually, if you think about it, investigators spending more than 40% of their time on admin. If we can help them take the data that is being corrected and baseline search warrants writing, a summary of investigation, summary of [ courts ], everything around reducing the workload that they have and giving them time to do more investigation, this is something that we are looking at. So it's really improving their ability to deal with the huge amount of data and again, simplifying and efficienizing their work processes.

When I think about your market, I think about just a market with long-term opportunity to modernize a lot of the investigator processes, which has had pretty nice tailwinds over time. How do you look at the kind of the growth drivers and the spending environment at the moment for your business?

Yes, you couldn't -- from a macro perspective, you couldn't concoct or dream up a better scenario. One, the world population is going up, which means just inherently, there's going to be more criminals. Crime, unfortunately, is not going away. It's going up. The use of digital and the pursuit of crime is going up. And then the last piece, which is going down is budget dollars to go hire arms and legs to go investigate and prosecute people. So whether you're a city PD or a federal intelligence agency, you can't hire enough people to go do this. And there's backlogs growing every day of crime and unsolved crime that people just can't get at. So those are the 4 macro sort of factors that are all huge tailwinds for -- unfortunately, for what we do. And so that's one. Then you say at the portfolio level, what gives you confidence in growth from a product and portfolio perspective. And there's sort of multiple ways to play for us. One is volume. And so we've migrated our pricing models from very user-centric to more volume and value and unit-based pricing, which then piggybacks off of the macro tailwinds I just talked about. So there's volume uplift. Two, we have pricing power. If you ask any of the agencies I rattled off and said, "Could you get by without Cellebrite? " Every one of them would say, H no, like we cannot do our business without Cellebrite. So as long as we don't get abusive, and we've been sort of running in the mid-single-digit price increase annualized, we could probably double that and easily get away with it, but we don't because we're in it for the long run, but we have pricing power. We have the volume tailwind. I think third is with the extension of the portfolio, that C2C portfolio to include Guardian and Pathfinder for the collaboration and analytics, now you take the franchise of forensics and you have the ability to cross sell into those new product sets, which gives you a third vector. The fourth factor, if you care about ARR is our renewal and churn rates, which are good. We're running renewals in the [ 91% ] range, but we think there's an opportunity to pack away at that over the next few years, which creates a bunch of growth opportunity in ARR. And then last, our balance sheet for a company this size is sort of the Rocket Gibraltar, and we have an opportunity in a fragmented market positioned as the market leader with a unique vision to start to pick off complementary assets and layer in strategic M&A. So there's really 5 ways to play and why -- as we look to the future, with confidence, we talk about being even in spite of our increased scale, a Rule of 45 to 50 company that's got a very robust balance of growth in EBITDA and cash flow.

You've got a big focus on the public sector, both better role and state and local, new administration coming in. What are the kind of dynamics that you think about with your public sector business?

Dana, do you want to take that?

Yes, we entered these markets in 2008. So we experienced a lot of change of administration throughout the years. As Tom said, crime is there. And public safety is always something that candidates and elected are looking at making people safer. And so, we don't see over the years any real shift in priorities in spending money on public safety. We don't think this will be the situation as well this time. Time will tell, but Trump said himself as well, public safety and when they are speaking about efficiency in the public service, that only opens doors for technology like ours to bridge the gap between the amount of crime, the complexity of crime, the digitization of crime and the less work in hand. So you need someone to step in and help close this gap. We believe that we're in the right position with our case to closure to cater this need.

And I would add, there's a huge gap between our impact in value and our percent of -- if you walked into NYPD and asked the commissioner, what's the total budget for NYPD, cars, buildings, cops, weapons, body cams, go down the list. And then you said, how much do you spend on Cellebrite? It's a fraction of a percent. And so when you change administrations, truth be told, it's not a major -- just -- we're -- in spite of our impact, we're coffee money to these agencies, especially given the fact that they'd say we'd be out of business without them. So it might help us, but it's certainly they're going to hurt us no matter who comes into office because of the value prop of the company.

You've had some pretty strong performance in the last number of quarters. Maybe can you just recap the long-term guidance that you've shared with investors earlier this year?

Andrew?

Yes. Sure. I'll start with it. We held an Investor Day earlier this year. We unveiled our long-term financial targets. Given the opportunities that we see, some of the drivers that Dana and Tom highlighted earlier, we see an opportunity to deliver a very consistent mid-20s ARR growth, 24% CAGR over the next 5 years. That translates into roughly 20% revenue growth on a compound annual basis. From a profitability perspective, something in the 20% to 25% adjusted EBITDA margin range. And as we look at how do you balance and achieve a healthy mix of top line growth and profitability. Ultimately, we're aiming to steer the ship with a Rule of 45 type -- Rule of 45 to a Rule of 50 baseline with ARR growth rate plus adjusted EBITDA margin.

And if you think about year-to-date, we delivered an ARR growth of 26% with EBITDA north of 20%. So we are very fortunate to be in our DNA, a company that is focused on both growth and profitability. We generate cash on an ongoing basis. Tom spoke before, we have a very solid balance sheet with a very healthy cash balance, no debt. We know how to do it. We will always prioritize growth over profitability, but we will not sacrifice our profitability and cash flow entirely just to generate a little bit more growth. So balanced growth, Rule of X, whether it's 45 or 50 is where we are playing and where we plan to continue playing with.

Great. I think we're almost out of time here, but any kind of closing words or key takeaways you want to leave behind for investors?

I would just say for the people that don't know, I mean, whether you're -- this is an interesting story to you or not as an investor. I want the whole world to know that this is a company that makes the communities you live, the schools your children go to, and the places in this world, we truly make the world a safer place. And if nothing else, one of my missions is to make sure everybody knows who Cellebrite is and what we do to accelerate justice.

Thank you, everyone. Appreciate you joining.

Thank you.

Thank you very much.