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

All right. Good morning. I'm joined today by Dana Gerner, CFO of Cellebrite; and Andy Kramer, Head of IR. Thank you all for attending this presentation.

Maybe kicking it off a very high-level question, what is Cellebrite? What do you guys do? And maybe if you can take us through the transition of the business over the last few years since you went public?

So, I'll start. So Cellebrite is a leader provider of investigative solutions to mostly law enforcement agencies, but also within the private sector as well. What we are doing is we are actually providing the right technology and a very advanced technology that help our customers collect digital evidence throughout their investigation. And today, with 90% of the investigations, they are relying with digital evidence to be able to solve the case. And not only collect the data, but also make sense out of the data, maintain chain of custody, collaborate, enhance and allow both the examiners in digital forensics labs, which are very tech-savvy people and require deep technological solution and the investigators who are, I would say, less layman with technology, but still have great challenges, think about each and every one of your phone and how many text messages, applications, videos, photos and so forth. How can you take this information for multiple devices in a large case and make sense and build the case narrative and comes to be able to actually identify the golden evidence that will help them close the case. So we've been doing that in the last 15 years. Before that, we've been working in adjacent business to the mobile operators, which we've sold in 2018. But we've been focusing on the law enforcement public sector specifically since 2008. We are also supporting private sector customers whether they are larger enterprises or service provider to enterprises who requires very similar technology to collect and analyze data for e-discovery purposes and internal investigations. We went public on August 31, 2021. We went public through SPAC despite the fact that we could have done an IPO, and that was for very various reasons. But we've been, for our entire history, very -- growing our top line very nicely year-over-year, but also growing our bottom line and very profitable and cash-generative business. We grew bootstrap, very, very unique in the high-tech industry. We never raised cash to build our business and to grow our business. Since we went public, we've been concluding our transition from an old business model of perpetual licenses and moved our entire installed base of licenses and customers to a subscription model. We've introduced -- some of our portfolio is cloud-based and full SaaS native. And we are continuing our penetration globally. I would say that since we have taken a decision to go public, we have tightened dramatically more than ever before our ethical guide and our decisions on compliance and where to do business. We've been doing it since day 1, but we have introduced more, I would say, structure and processes into this decision-making to whom to sell our business and stepped out to more than 40 countries in the last 4, 5 years. You would see that still in some of the churn that we are sharing with the market of our licenses. And we have introduced more governance around it by having our own ethical Advisory Committee that advise the Board on what is the -- how to actually execute business with such powerful tool that actually access people's personal data in a very complex world when you have always the tension between public safety and the rights for privacy. Moral codes have changed before us...

I think the only other thing that I'd add is [indiscernible] so besides that monumental change, I think the only other thing I'd add is that we've gone from being really a point product specialist in digital forensics and a market and technology leader there, still a lot of growth left in that part of our business, but have really come to market with a full platform end-to-end, so to support the life cycle of a digital investigation from the time crime is committed, a device or devices are obtained through to managing that workflow of the intake of the device, storing, sharing all of that digital evidence with investigators and giving the investigators much better tools to drill down into a single device or, in the case of a large-scale criminal enterprise, correlate and synthesize data across multiple devices. And so I think there are new legs, new growth engines attached to that platform.

Got it. A lot of great color. Hopefully, we can get as much through there as we can in the next 30 minutes. I want to go over the platform, the portfolio and whatnot. But maybe going to a different avenue first. It feels like you almost can't have a conversation today without talking about federal, tariffs and AI. We'll talk about the AI with the product and the platform, but you guys are on the public safety market. What changes in the demand environment are you seeing as it relates to federal policy changes, tariff impacts and whatnot?

So maybe I'll start with the easiest thing, which is the tariff, although it's a very volatile and very fluid current stage. We hardly rely on hardware. Most of our sales are software, the vast majority of them. We do provide with our digital forensics capabilities in software to some small adapters and that is because we are doing it forensically. We are not offensive cyber. A customer needs to get the search warrant and hold on a device, whether it's computer or mobile phones in order to extract the data and we do it via cables. The impact of tariffs is de minimis, like it almost have no impact on our financial statements for '25. And based on the last changes that have been shared, almost will be very minimal also in future years. So not material whatsoever. DOGE and the changes to the Federal Government actually did have some impact, which we believe these headwinds that is impacting our business at the Federal Government is 17% of our total business currently will become in our perspective, a tailwind in the end. What DOGE introduced is -- impacted the people and the confidence of people in spending their budget. We've seen the largest agencies that we've been working for, whether it's the FBI or others have change of directors, change of personnel in the second and third layers, change -- or the procurement processes and so forth and also instability about what is going to be their budget. So also delayed decision-making. Nevertheless, if you look at the current bill that is waiting for approval by the Senate, and you look at the 8, 9 main spendings on a public safety, we can and we will be integrated almost in each and every one of them because the challenges that our customers are facing is not diminishing. On the contrary, it's growing year-over-year. And the only way for them to deal with that is to introduce more and more technology into their business. Do you want to say more?

No. I mean I think that -- just to build on that maybe and add a little bit more color, I think that the timing is uncertain for exactly when the current spending inertia turns into a catalyst for spending, but it is -- it's not an if, it's a when. And the things that are priorities for this current administration, whether it's border control, whether it's getting drugs off the streets, whether it's removing the part of the illegal immigrant population that's here now, whether it's human trafficking and trying to stop that, those are all -- those are global issues to a large extent, and we're seeing that also drive demand across the globe. But I think that within the current legislation, the things that aren't making the headlines, right? You see Medicaid and tax rates and all of those things dominate the headlines, and that's where there's a lot of scrutiny. But the things that I think there's good uniformity around and support for are the earmarks for both Department of Defense and civilian agencies around those priorities. And so I think that -- provided that there is good progress on that package, that should serve as a very beneficial catalyst for us.

Got it. And I wanted to follow up on the comment you made that you said it's not if, it's when? Your 1Q results, your 2Q guidance was a little bit light of expectations. Is there a risk that -- you mentioned [indiscernible]. Is there are a risk that the spending doesn't come back? Or do you think that this is just a matter of a quarter or 2 delay before the tariffs start picking up again?

Well, we cannot commit on behalf of the current government, right? But we can say what we see. And what we are seeing aside for that bill is we are seeing our larger customer preparing for the money to come. So if we look on our opportunities and backlogs that we had when we released our Q4 '24 financials mid-February, and where we've been when we released our Q1 financials in mid-May, we are seeing more programs and larger programs that we've seen before entering -- entered into our pipeline and into our opportunity management, which means that our customers expect to receive their money, and they've already started reallocating it to projects and programs that we can participate. We've taken strides with the Federal Government in the past 1.5 years and heavily invested in the potential growth of that regardless of any administration. We have introduced our Cellebrite Federal Solution legal entity, which allows us to work and be part and around the table with larger programs and projects that requires clearance, which we couldn't do before. We could sell through system integrators, but we weren't around the tables and we weren't able to provide them services and [indiscernible] of this proxy-like company. We have invested heavily in introducing our FedRAMP to our SaaS solutions. And we have been announced SaaS -- FedRAMP ready a few months ago. And what DOGE has impacted us is our ability to close the sponsor in the last 90 days that required to launch and get the FedRAMP approval. It will come. We are very close to that. So we have great belief in the ability to monetize more around Federal Government, not only in the U.S. but also globally. If you think about what's happening in Europe, I mean the challenges that European have with border control, who entering who, right? There is a lot of immigration that the European countries, especially the Western European country would prefer to avoid, right? If you think about gang-related crime, think about what happened to Sweden, I don't know if you know, but it's beaten by organized crime coming from Eastern Europe. If you think about Ukraine-Russian war and the impact on the safe -- the feeling of safety. And as such, we see more and more funds are actually being allocated to intelligence and defense organizations, government organization in Europe as well. All that we are doing in the federal -- with the Federal Government in the U.S. will, we expect, replicate itself also in Europe because it actually answers the same problems and challenges.

Got it. Maybe right before we go to Europe, just to touch back again on Federal. As much as you can put it into numbers, you talked about FedRAMP certification. You talked about the new federal separate entity. What are your goals there? You talked before that federal entity gives you TAM expansion, and if we can size that out, I think before you've discussed federal ARR growth of 25%. How are we tracking within that goal?

So I would say that with regards to the FedRAMP, most of our current customers in the Federal Government are working offline, because this is their mode of operation. But we want to be able, one, to support the smaller agencies; second, to support the field offices of those larger agencies and actually to be able to continue presenting and allowing federal government agencies who do choose to subscribe into our SaaS platform to enjoy the really advanced AI capabilities that we introduced there. We don't assume -- we didn't assume any business in 2025. We assume very small business, if at all, in 2026 because we know that it requires them to change their mode of operation, but we believe that it will allow us to, in the future, continue to introduce more solutions to the Federal Government. The CFSI, the proxy company does open new terms. As I said, it opens our ability to provide both software and services to programs and projects we couldn't do before. Most of the -- I would say, almost the entire sales that we are doing -- business we are doing now with the federal government is to the digital forensics labs and our digital forensics solution. We did not almost spend it to our investigative solutions. Being a proxy company and the processes around ATO approval tests, operational, on-prem solution and enterprise solution is much easier [indiscernible] and we do believe that it will expand substantially the spending. If we would have stayed only with digital forensic units and digital forensics solution, it would be hard to continue growing the Federal Government at the pace of the average of the company. With the investments that we are doing now, we do believe that we will be able to maintain this market.

Got it. Maybe one last question on the topic. 90% of your business is public sector. Earlier, you sized out federal 17%. Is there any downstream impact to the remaining portion of the public sector, state and local?

Yes. I mean -- so the U.S. is roughly 50%-ish, America is 54% of the ARR mix. And so state and local is a very meaningful component within that mix with federal being 17%. We have not seen any meaningful deterioration or weakness within state and local. There has been and continues to be incremental funding made available by the Federal Government to support state and local. Within the current legislation, there's $0.5 billion of incremental funds that will support state and local for their support on things like border control. So we aren't seeing that impact the strength of our state and local business, which continues to perform very well.

Understood. Same question now on EMEA. Last quarter, you talked about some weakness there. What were the trends you saw in that region of the world? And now that we're in June, what are you seeing in that region now?

So as I mentioned before, we do -- we did take a decision to invest in the defense and intelligence market in Europe as we have done it very intentionally in the U.S. because we've seen funds moving away from other use cases into the defense and intelligence, part of it also on account of the law enforcement. If you think about the met police in the U.K., they are expected to cut around 8% to 10% of their headcount in the coming year or so. So that means that especially the Northern countries and the Eastern countries are moving more and more funds into defense and intelligence. And in our salespeople, we are moving for the money, but this -- we don't believe it's sporadically for the sales organization to manage it. We are doing it very strategically. Also, we're trying to better understand, can we tailor-made our capabilities to their end use cases, which are slightly different than our enforcement use cases. So enforcement you vet a case, you open a case, you start collecting evidence, you have search warrants, et cetera. In defense and intelligence use case, think about border control. The first -- the only thing you want to know if somebody is coming to your border is where did they come from? You can identify by geolocation on the phone, the languages and maybe is he or she is in contact with people of interest from a public safety perspective, that's all. So the use cases are slightly different, and we will be able to adjust our solutions to tailormade it to their use cases. For that reason, we've seen some slowdown in Europe. We started seeing the ability to close deals on the defense and intelligence already in Q2. We believe that we'll be able to catch up more in the second half of the year, and we see some recovery in the EMEA business performance.

Got it. Shifting gears a little bit. We talked about 90% of your business is public sector. Of that, you already sell to 90% to relevant agencies. You disclosed before that within your ARR growth, usually net new logo land is between 2% or 3% of that growth. Where is the opportunity to grow? If you can give us more of a practical example when you think about your opportunities with your various agencies?

Do you want me start? Sure. So -- and when I think about the growth dynamics for this business, you're right, the vast majority of our growth each and every quarter comes from doing more with the installed base. And so why is that, right? There are 3 big challenges that they have as it relates to the public safety gap. And the public safety gap is largely -- look, crime isn't going down, unfortunately. Technologically, there is increased sophistication of criminals who use just like everybody here who has a cell phone, you do a lineup of potential suspects. They all have cell phones. And so you combine that with budgetary pressures. Budgets don't grow much and headcount is not growing. And so that leads to a couple of different knock-on effects. One, data volumes and complexity are increasing; two, operational inefficiency is way too high; and three, ethics and accountability matter. Think about all of the different issues where the public wants more confidence in how law enforcement does their job. And so as you think about that overlay, what that means for us is our customers need better tools, better technology to work through the backlogs they have, not only in cases, but in devices. They need better tools to -- as the phones themselves, security increases, they need better tools for access. They need to extract all of the data off the phone, not just what's on the operating system. And so then they need more efficiency in terms of how they all collaborate together. And so what we see is there are multiple transitions underway. We covered some of them at the outset, but we're seeing our customers upgrade from legacy product to our newest solutions. We're seeing higher attach rates for more powerful add-on modules that help them with access and automation. We're seeing cross-sell and upsell for storing, sharing and collaborating and for the analytics piece. And so as you think about the impacts of that, I think the end result is much more of a modernization or a transformation of their workflows around the investigation. What used to start as dusting for fingerprints and putting yellow tape around a crime scene, it still happens, but that's very costly and it's a time-consuming process. And so we're seeing more and more of the investigations start digitally and advanced digitally.

Right. Maybe also to add and to also ask, outside of the opportunity of just upgrading and going more sophisticated solutions, I think you also have an opportunity to grow within, say any 3-letter agency. You mentioned before going from the digital forensics units to the investigative units. Can you describe more what that means, what that entails? If you take any agency, can you grow -- are you growing just from one unit to another or also the number of offices that you participate in that agency?

I think, in our Investor Day 1.5 years ago, we had someone from the DA that came and speak from the investors. And the DA has around 40 field offices. They have Cellebrite Solutions and they have digital forensic labs in less than 20. They are going to continue introducing more forensics lab into their entire field offices because they cannot afford not to think about what happened with the second assassination of Trump. You better tell this. You're technically better than me.

Yes, so is the first one. And they found -- it's actually -- think about the challenge there. They pick up the phone in Butler, Pennsylvania. It's taken to the nearest field office in Pittsburgh. They have some of our technology, but not all of our advanced capability. They can't open that phone. The phone gets shipped a few hours away to a different lab that had all of our most advanced technology. They opened that phone in 40 minutes. So I think that when it comes to the opportunities, there's multiple dimensions upon which we can expand, whether it's helping like the city of Chicago, which 2 years ago didn't have a single digital forensic lab. Today, they have 2. It could be expanding alongside of the DEA. It could be moving from the lab out into the field. Dana mentioned earlier the use case at the border and making sure that people are coming from where they say they're coming from, especially when they don't have all their paperwork. And so I think that those are different examples of just digital forensic growth. And then when you think about how -- there was an unfortunate murder of some co-eds in Idaho -- Moscow, Idaho, maybe 18, 24 months ago. right? The nearest FBI field office was a 9-hour drive away. So a product like Guardian, which allows for think down in the Florida Keys, how do you get digital pickup -- drop off a phone, couple of days later, you need to pick up the digital evidence and the digital evidence report on a USB drive. You're going to take 2 to 3 hours out of your day to do that commute. And so Guardian provides for a much more efficient replacement of conventional physical storage in a way that actually strengthens the chain of custody and provides the investigator and for every user in the lab, there are dozens of downstream consumers of that information, analysts, investigators, prosecutors, defense attorneys. And the ability to use the analytics inside of Guardian to slice and dice that information to support the investigation is incredibly valuable to the investigator. And then with a crime of scale, you could spend hours, if not days, looking at the average phone, 60,000 text messages, 30,000 photos, 1,000 videos, how do you manually review all of that data when you've collected a dozen or more phones at a nightclub shooting, for example.

And I think what we are trying to say is that the only way to close the safety gap is to provide technology. And more technology that is more efficient, more sophisticated and, in a way, also streamline the entire process, because crime is on a rise, unfortunately. Here, we are seeing maybe less home invasion or cars theft, but homicide, human trafficking and think about what's going to happen in the U.S. next year with the World Cup. You know how the authorities here are preparing to try to hold back on human trafficking that is going to flood the U.S. It's an enormous effort, right? And today's slavery is the highest peak of tens of millions of people are being enslaved in today's world. Number of police officers is not growing. Since COVID actually, it went down. You need to be able to do something with that. And this is why we feel so confident because when you are focused on your customers, and you have such good relationship with them and you work with them for years, you know where they need help. And you know what technology will have the most impact on their daily performance. This is where Cellebrite play the biggest game.

Got it. We only have a few minutes left. I've enough questions here to take us through the next hour. So maybe opening it up to the room to see if we have any question in the last minute or 2. Okay, I can continue on. Your stock had a [ modest ] performance last year. Where do you think Cellebrite goes from here? Where is the next stage of growth for the company?

Well, I don't want to speak about share performance. We can speak about company's performance and the investors and market decide how the share should perform. I would say that what impacted substantially last year's performance on top of the company's performance is that we shed away all marks for being a SPAC. We redeemed our [indiscernible] adjustment criterias and we took away most of -- except for [indiscernible] we actually cleaned our capital base. And I think this was very much appreciated by the market [indiscernible]. The company is looking for us. We work and we prepare ourselves to be a $1 billion company. This is our target. We'll do it organically, and we'll do it through acquisitions. We have a very solid balance sheet. We have more than $500 million in cash. We have 0 debt. We continue generating cash from operating activities quarter after quarter, so we can continue to invest back in the company, both on the organical, but also on the nonorganic. We have a very, I would say, passionate and intense effort around M&A. So both from a management level and the Board level, we have a Board Strategy and Technology Committee. We have Shadowing Management Strategy and Technology Committee. We have a finite number of targets in our markets, and we don't want to stay behind, and so we work very diligently to continue expanding our TAM, our reach to our customer base with newer technology and innovations and to enhance our current technology and reach out faster and stronger on the cloud base and AI capabilities, providing solution to our customers. So we are very, very intense on our intention to grow.

Yes. No. And I think that the opportunities in front of the business today are very tangible, very -- I'm more optimistic and encouraged by what's in front of the business. Yes, there is some near-term uncertainty. But I think some of those clouds are starting to brighten and lift. And I think that if we're thoughtful about how we deploy our capital to augment the organic growth that is still very robust, this is a very compelling growth opportunity in a cycle that is still very early innings.

Got it. We're out of time. Dana and Andy, thank you for your time. We'll bring you back next year for another set of questions.

Thank you.