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

Guys, thank you for joining today. My name is Steve Pettigrew. I lead the Software Investment Banking business at UBS. Pleased to have with me today David Barter, Chief Financial Officer; and Tom Hogan, Chief Executive Officer of Cellebrite. For those of you who don't know Cellebrite, digital investigations market leader, and we'll talk through a little bit more about what that means today. Tom, maybe you can start us off. Can you share for kind of people who aren't as familiar, a little bit of background about Cellebrite and your history?

Yes. So the company, roughly 20 years old, obviously, public, NASDAQ listed. The genesis of the company is in Israel, where the core of our research and development still sits today, but we have a huge presence around the world, operate very internationally, do 55% or so of our business in the United States and 45% in the rest of the world. And what we do, we're a force for good for all of you. Whoever is here, whoever is listening, we help both exonerate innocent people, but in most cases, we help put bad people behind bars. And that ranges from terrorists to murderers, to pedophiles, to human traffickers, to fentanyl rings. We're the technology engine that works closely with municipalities and police forces and democratized nations around the world with -- we help private enterprise, and we also work closely with virtually every intelligence agency and defense departments in countries that have high standards for human rights and privacy. So we make the world a better, safer place. And if you like a mission-driven story, this is about as good as it gets.

Well, perfect. I know you joined us here last year, and I think you -- your role has transitioned a little bit since you've taken over as permanent CEO. I think last year, when you were here, you had shared with a lot of investors that you had your own journey and that you had beaten cancer. So quite a kind of quite an evolution. But can you share a little bit with everyone here about why you decided to take on this role and why you're excited to join Cellebrite?

Yes. So I joined 2.5 years ago as the Exec Chair and decided that my operating days were behind me but wanted to be more engaged than just the sort of the traditional Nonexec Chair or Director, the drive by shooting approach of going to quarterly Board meetings. I wanted to be more engaged. And so that's what led me to join as Exec Chair in the summer of '23. And then life threw me a curveball that I won't dwell on. Out of the blue got diagnosed with Stage IV cancer 18 months ago, went through 6 months of intense chemotherapy at MD Anderson in Houston. So if anybody in your network of friends or family has cancer, can't say enough good things about Anderson, they cured me. And at the end of '24, the current CEO who reported to me in my Exec Chair role, who've been at the company for 19 years, decided it was time for him to move on. Then the Board asked me to step in, and I was literally just finishing my treatments and said, I'll step in as interim, but until I get 100% of my health back, consider me interim. And then fast forward 6 months, I had clean scans, my strength, my immune system, everything was all systems go. And the Board said, now will you do it? And my answer was yes. And to your question, why, it really is -- it's 2 things. It's 80% the mission. And when you see a company that's helping either rescue a 12-year-old girl that was kidnapped and is enslaved in a sex trafficking ring. And these are hard things to say publicly, but some 12-year-old girl who's being forced to have sex with 10 strangers a day and all she wants to do is get home to her family and her mother and you help make that happen, not a lot of things in life that are more rewarding than that or a guy who shoots his wife and 3 children and cooks up some excuse or story or alibi and you use the digital evidence to convict and put that person behind bars. I've never experienced anything like that in my career, and it's so important to making the world a better, safer place. And then the other piece of it, which is the 10% is I looked at this company and said, wait a minute, this is the global leader in this and crime is not going away. And the use of technology is going up, and the sophistication of using technology is going up in an equal trajectory. And if we do our jobs, there's a huge economic opportunity here for the stakeholders in the company to grow and build enterprise value while you're making the world a safer place. And when you put that cocktail together, that was enough for me to say you raised both hands and say, I'm in. So that's what triggered the transition from interim in the summer to full time.

Perfect. Maybe we can jump to a bit of kind of topic old news that you just announced earlier today about the closing of Corellium. Can you share a little bit of background first about the acquisition and why you're excited about having this technology on board?

Yes. So we've been a customer of Corelliums for, I think, over 5 years. And I won't get -- it's kind of techno jargon, so I won't get into the detail of it. But what they do is they're able to virtualize any device that's Arm-based. And if you're not into chip architectures and technology, Arm is at the core of almost everything you touch and deal with every day, whether it's an Apple phone, an Android iOS phone, obviously, laptops, IoT sensors, drones, it's ARM-based. And what Corellium does is they have a very unique, completely unique ability to emulate and virtualize any Arm-based device. And so we used it to help us identify vulnerabilities to provide our access and unlock capability. But that was just a portion of their business. They provide very rich DevSecOps and pen testing capabilities that apply to both the private sector and in the public sector and within the public sector, specifically in the defense and intelligence arena. And so we sort of -- when they decided, hey, if we want to be all we can be, we need to be in a bigger channel. We're a company of 70 people with some of the most powerful technology in the world that's used by every 3-letter agency you know in the U.S. But we can do so much more in the hands of a bigger company, yet a company that shares our passion for public safety and agility and innovation. And so when they ran a process, we jumped on it. We announced the deal in June. It took us until this week to get to clear CFIUS because we're viewed as it's a foreign-owned asset of IP that's mission-critical to people like the CIA. So it was a rigorous process that Dave and our General Counsel helped navigate. Good news is we got the thumbs up this week. We closed last night, was announced this morning, and we're hugely excited about the TAM and the growth layer that this will inject in the Cellebrite story as we look toward 2026.

Well, congrats and that's a nice expansion of the platform. I think a lot of people know you as the leader in digital forensics. I know you have bigger ambitions. Can you share a little bit of detail about where you want to take the company over time? And will steps like Corellium more strategic acquisitions be a part of that journey?

Yes. So 2 questions and if I lose track, bring me back to the second question, which is how do we think about M&A. But the current big play for us is the company was born, call it, 20 years ago. And we clear -- we became the clear leader from a forensics perspective, meaning somebody just shot their wife or somebody was just busted dealing fentanyl in a neighborhood. And the person is arrested in charge and they say, "Hey, Bob, give us your phone," and Bob gives the police their phone. And then they say, Bob, give us your password. And Bob says, "I'm not giving you my password" because as you know, your life is captured in that phone, and there's a lot of damning evidence that they know will surface. And that was the genesis of the company. We established a clear leadership position. We're deployed in roughly 85-plus percent of law enforcement agencies and intelligence agencies around the world. The big play for us now is, okay, you've got all this forensic data, great. That's really hard, so kudos. But now let's extend the value proposition to then help the detectives, the investigators and the prosecutors leverage and take that forensic information and drive it all the way through closure of that case, which, in some cases, to be clear, could exonerate somebody and say, actually, no, we thought it was Bob, but it was actually Ted. And based on the data we found, but let's help that world. And by the way, the thing that's exciting from a TAM perspective and growth opportunity for Cellebrite is the number of detectives and investigators and prosecutors as an orders of magnitude more than the number of examiners in a forensic lab. So the big push for us now is to extend our leadership from the classic forensic world into the investigative world to help leverage that data and bring cases to closure. So that's sort of the big strategic thrust. Your other question is sort of, I think, was sort of how do you think about M&A? And you just closed the deal last night. Is there more coming? And I would tell you that in this business, in software, you either grow or you die. There's no such thing as a successful software company that, in my opinion, that's not growing. I don't care what your bottom line margins are. And to grow in this world that we live in today with the advent of things like AI to grow, you've got to innovate constantly. And so when we think about innovation, we think in 3 paths. One is organic innovation. And we spend more on innovation in this category, we're pretty convinced by a wide margin, anybody else on the planet. So we spend heavily, and we have people that are really good at this stuff with the genesis or the history of the company from an R&D perspective in Israel. The second piece is partnering, which we have historically not been strong at, that we are doubling down on and making great progress. So you don't always have to build it and you don't always have to buy it. There are places where partnering is the optimal path. And the third path, to your point, Steve, is M&A. The good news is this company has never been goldfish.com where we raise $1 billion and do Super Bowl ads. We've been pretty disciplined stewards of the P&L and have a -- for our company our size, our balance sheet is sort of the Rock of Gibraltar and our free cash flow, which Dave can talk about, is very healthy, which gives us the firepower to be smart if we don't want to -- typically, the decision between build and buy is not about money, it's about time to market, because we can build almost anything in this space if you give us time, we have the smarts and the people. It's really a speed-to-market issue. And so we will continue to -- we are active every week in evaluating moves that maybe we could or should make on the acquisition front to complement the things we're doing partnering and to complement what we're doing organically.

Perfect. I know a big focus for investors lately has been the federal budget, the kind of the funding side of things with a lot of the headlines this year. It's been very topical. The last quarterly announcement, you had expressed confidence about the future in a few different ways. I think you had said the flywheel in the U.S. federal has begun to move. You expect a resurgence of growth in calendar 2026 across the federal sector. Can you elaborate on the dynamics you're seeing?

Yes. So we do expect a renewed resurgence of growth in the U.S. By the way, I want to be clear, the federal space, so think defense and intelligence outside of the U.S. has actually performed well. So this was really a specific statement about U.S. federal, given all the -- I'll just call it the change with the new administration, created some headwinds for the U.S. federal business. So what's changed is -- and it's not DOJ, it's been -- there was a significant amount of change in leadership. And if you follow the news, for the last -- especially the first 6 months of the new administration, every night, it was here's the new leader for the FBI, the new leader for DOJ. So you had a massive change in leadership that was a bigger impact than cost cutting in DOJ. And so that just caused sort of a freeze. Now our renewal business did not suffer, but the new business that we have enjoyed the last 4 or 5 years in that space, that basically stopped during all the transition of the new administration. And so that has now settled down. And the new leadership is in place. The administration's priorities are pretty clear. Now you layer in the BBB and a big chunk of the big beautiful bill has been earmarked at initiatives that are right in the crosshairs and sweet spot of this company, whether it be things like fentanyl, border control, the ICE initiatives, you go on the list of just general safety in cities across the country. And I'm not -- these aren't political statements. This is just a reality of the new administration's focus. We are critical to efficiently prosecuting those agenda items. And so the second thing past stability and leadership is the amount of money that's been earmarked for initiatives that depend on technology that we provide. And then the last thing that I'd point to is a big part of our new strategy in the investigation world our cloud-based products. And for us to sell the cloud-based technology into the U.S. federal space, we had to get full Level 4 FedRAMP certification and authorization to operate. We've been at this for 2 years. About 3 months ago, the last mile is to get a sponsor to be your godfather or godmother. And we couldn't have been more pleased to have -- it was actually the Department of Justice, the DOJ said, we support and embrace the strategy. We will be your sponsor. We expect to get that final ATO in the first quarter, which then opens the door for all of the cloud-based products in the federal space to complement the legacy forensics.

Great. We can't have a presentation without talking about AI at this conference. And I know you've invested heavily in AI across the portfolio. Can you talk a little bit about how AI is impacting digital investigations?

Yes. It's -- so I mean, it's so topical for everybody. I would tell you, first, we're doing a lot with AI internally to drive our own productivity. And Dave has been a champion of this as our new CFO and doing a fantastic job. And we've identified in every function initiatives to be more efficient, which helps the P&L. But then the other piece of it is how do you monetize and elevate the value proposition of our solutions to the external market. And there, I see a sort of a bifurcation of capabilities that we're going to just embed in the core products that improve and elevate the value prop of what we currently ship. And then there's going to be another thread of more agentic applications. And to give you an example, an agentic app that's targeted at cold cases or an agentic app that's targeted at CSAM and ICAC for those of you don't know, like Internet crimes against children and bad Internet child pornography and things of that nature. So we think there's a near-term opportunity to build agentic apps that stimulate workflow and drive faster resolution of important either workflow things like warrant returns or specific cases like homicide or Internet crimes against children as an example, that we will monetize. And so it's a chunk will be things like chat summarization and media classification and the filing of standard reports, we'll leverage AI to make everything we currently sell more powerful. But then we're going to layer on top of that agentic things that we can discretely SKU and monetize that will take productivity to another level and be -- and by the way, I want to be clear, in this world, if you go to a courtroom and you're trying to put somebody away for life or in some cases, the death penalty, the courts have no patience for a sole or pure AI-driven case because you don't want a hallucination to put somebody in an electric chair. So in our world, unlike the corporate world, you really have to have traceability, you have to have the human in the loop to corroborate and link with that AI data, but it can still be a hugely powerful tool because I'll just give you one data point, pick a networked crime. And when I say network, think drug distribution or human trafficking that might involve 50 people in nations around the world. And you start to crack that ring and collect digital devices and artifacts, you can have, in some cases, 500 million pieces of evidence associated with that ring. So leveraging an AI engine to find patterns, correlation, affinity analytics to guide steps in the investigation, no human on the planet can process that breadth of information. And so AI is going to be a huge enabler to solving and cracking crime to the point that I believe in 10 years, everything but crime is a passion. People are going to say, why bother? I'm going to get caught.

Dave, I want to give you a chance to get involved here as well. We've been monopolizing the conversation a little bit. Last quarterly call, you talked a little bit about some of the drivers that you expect of future ARR growth. Can you share some of the highlights on what you expect to be driving growth into the future?

Sure. It's a great question. I think last time we called out about 5 drivers. And I think at the bookends, we talked about the continued expansion with new logos, feel very good about how we're going out to market, continuing to add to the portfolio. At the bottom end of the bookend, we also talked about the ability as we're really starting to sell as a platform, that ability that we're tightening up our gross dollar. In the middle, we really talked about 3 areas of excitement. Certainly, the element around Insights. This year, we talked about getting up to about 50% of our customer moving to Inseyets. And when that happens, we're seeing really good unit volume growth as people move into Insights. Still very excited about what's happening with Guardian and Pathfinder, where Pathfinder has been growing almost 1.5x the rate of Inseyets. Guardian has been growing about 2.5x the rate of Inseyets when you look in the last quarter. And then we look at Corellium and really kind of continuing to extend that whole platform motion that we have going on with customers. So we feel like that's a really great scaffold and you'd be looking at the company when you think about durable growth, looking not only at '26, but looking beyond '26 into '27 to '28 to really track the maturation of the company.

And you've been able to grow profitably as well, had a good year in 2025. Where do you think the bottom line can get to over time?

I think that's a great part about the business. I mean we're already running at a 30% free cash flow margin. I think on the call, we highlighted we've been building out the -- our headquarters here in Washington, D.C. and North America. We'll have a little bit of a refresh on our headquarters in Israel. And so we'll have 2 years where we have a little bit of elevated CapEx. And off of that, kind of being in the 30% to 31% free cash flow margin, we think it just naturally continues to climb. And so if you look back at the business a couple of years ago, we were back at 24% free cash flow. And so I think the business as it's scaled, I think we've thoughtfully found leverage. We've invested, and we'll find more leverage as we continue to prosecute and take advantage of our mission.

Great. And Tom, maybe a couple of quick ones. We don't have too much time left here, but market has been very fragmented historically. How do you think about the competitive landscape?

There are -- there's lots of pieces. I describe it as a puzzle. So you could have a puzzle piece that's ballistic information. You could have a piece that's sound in shot detection. You have fixed camera license plate readers. You have -- the puzzle is -- can be simple and a simple domestic violence case, but in a lot of cases, there's a lot of pieces to the puzzle. I think if you're the FBI or you're the CIA or you're NYPD, unfortunately, right now, they need to be what I call instead of systems integrators in the classic sense, they have to be evidence integrators. And my vision is the more we can bring the puzzle pieces into focus for those agencies and then leverage AI so that they don't have to go cobble together bits and bobs of information and evidence. That's what they want. And so our view is we don't have to have -- we don't have to own it all. But we want to have access to those different data sources so that we can put it in a consolidated place and then run the world's best AI-enabled analytics against it to help make their jobs better.

Perfect. You mentioned on the recent call, you talked about Sun's 40% stake. How do you see Sun's ownership evolving over time?

Well, they started with 100% a long time ago. They're down to the low 40s. We would like -- and I would -- if Sun were sitting here, I'd tell them the same thing. We'd love to see them sell down some more just to diversify the holder base, and we think that will happen. Part of the problem is they've had a lot of success. They bought the company for $15 million, whatever it was, 18 years ago, and now you know what our market cap is. So it's been a pretty good deal for them. But we would like them to continue to downsize their position just to enable a broader fresh set of investors. And so we're working collaboratively with them, and we think that will happen with time. And the timing and the degree is TBD, but we think that would be a logical progression.

Okay. And we're more or less out of time, but maybe just to wrap up, what else should investors be on the lookout for over the long term with Cellebrite?

I think in the long term, this is -- if you like to invest in a company that's actually doing really good in the world and a company that's growing at a healthy clip. It's still small in the scheme of things. When you think about our business in the federal space being roughly $75 million and what the U.S. government spends in total, people like, "Oh, what about budgets? Like we're coffee money to every one of these agencies. So the headroom here is huge. And the last thing is we're pretty good stewards of the business running at a, call it, a Rule of 50 with free cash flow with a 3 handle and a plan to get back to next year a top line with a 2 handle that's doing good in the world. That's a pretty unique combination and a company that we're all proud to be a part of.

Perfect. Thank you both for joining us.

Thank you, Steve. Appreciate it.

Steve, thanks so much.