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

All right. Welcome. Good morning, everyone. I'm Melissa Knox. I run the Global Software Banking business here at Morgan Stanley. And I am extremely excited to be here with Dave Barter, CFO of Cellebrite. Cellebrite is a leader in digital investigative solutions to state and local governments, federal agencies, enterprises and has had a tremendous run. So we'll talk about how the stock has performed, where you are today, some of the new solutions that you have out leveraging AI and data.

First, Dave, just give us an overview on the products that Cellebrite sells. There are 3 of them, 3 kind of main products, but why don't you go into what you're selling on the Case-to-Closure platform, starting with digital forensic software, your Inseyets product.

Super, and good morning, and thank you so much for having us here today. This is always great to be here. When you look at Cellebrite and our role in law enforcement, as Melissa highlighted, there's the Case-to-Closure platform. And that Case-to-Closure platform, when we think about law enforcement really starts with the idea around the mobile device and specifically the idea that when you're looking at a crime, the mobile device tends to be the richest source of information. And so our spectrum really runs starting with if you need to gain access to a device, which happens about half the time, somebody is not willing to give up a password. And so that's where we can actually step in. And so we have a pretty unique set of technology around the vulnerabilities around access, whether you're talking about a Google-based device like Android or you think iOS, even going out to Nokia and some of the feature phones. And so we have that ability. We understand the vulnerabilities, and it's usually not one vulnerability, but it's a series of vulnerabilities that lead to what we call an exploit. And that actually allows us to gain access to the device, but that's usually not the whole answer. Usually, there's an element around how we run a full file extract. And you might look at your phone and say, well, gosh, it only has a little bit of the data on it. And that's generally true. You have a lot of cloud services that are linked to your phones. That's exactly where we kind of kick in and we help scrape everything that might actually be on your device or linked to your device. And that becomes the basis of how people start to approach an investigation. Then we really see...

And that's really hard to do. So just that in and of itself, taking the data off the device, this can be encrypted data could have been deleted, it could be hidden. It doesn't matter, and it's in different formats.

Exactly. It could be everything from your signal or your WhatsApp or telegram to some of the more esoteric ones where people are using to communicate. And so one of our superpowers is, first, the ability to go in and scrape, then you actually start to go through the decryption process, the decoding process. And so it's a series of steps that ultimately in the form of discrete exploitations that allow us to actually start getting that information, organizing it and starting to convert it into insight. So that's really, I'd say, kind of trick 1 and trick 2 are pretty powerful tricks. That kind of leads you into trick 3, which within the Insights product, we have a component called physical analyzers is where the AI starts to kick in, where we get into image identification and classification. And it's very -- think of it, if you're in law enforcement, if you want quick actionable insights, that's where AI really comes in quickly. Now if you really want to get -- kind of start to progress through the suite, this is where we start to take, go from digital forensics into the investigation side, and we have a case evidence platform called Guardian. So Guardian has that ability to store all of your data, so you maintain chain of custody. So if you're concerned about a lawyer coming in and starting to press because there are some savvy defense attorneys in the world, but this gives you full chain of custody to be able to go from that mobile phone or all the cloud services into starting to think about investigating and prosecuting somebody. So having the data repository, it does allow you to collaborate that allows you to share from an examiner to a detective to now you're starting to think about a district attorney or somebody who's going to be sitting in the courtroom. Within that, you're also starting to look at advanced cases around AI. And this is where it really, I'd say, it starts to change the game for the company where within that Guardian product, there's an AI viewer. It really does advanced image classification. It also gets into starting to connect threats. And then we really, I'd say, start to wrap up our suite with Pathfinder. Pathfinder is an analytical platform. It's designed for 10 phones to hundreds of phones where you can really go through and upload information if you're thinking about a fentanyl ring, if you're thinking about gang activity, maybe you're thinking about something that involves prisoners trying to run and exploit and where you're getting access to hundreds of phones. Pathfinder has a lot of superpower in it in terms of it is AI because there is a strong AI component to it where you're starting to be able to do translations. You can imagine a variety of languages. You're starting to an element of -- there's a translation element of if people are speaking slang, it actually starts to really decrypt a lot of those threads very quickly. And then I'd be remiss if I actually didn't speak about Corellium, which we acquired on December 1. And then most recently, as of a couple of days ago, we are now into drone forensics. And so we're super excited about that, just given, well, everything you're reading about now, that's becoming a real vector for all of law enforcement.

You're selling a lot to these agencies. How do you sell? Is this cross-sell opportunity? Do you come in with a platform? Or are you buying these different modules and cross-selling?

It's a great -- I think this is one of the elements that we love so much where we have such a deep set of relationships. And so every quarter, we certainly add logos. Those tend to be smaller ads where it's somebody where within -- potentially a branch office, they have a colleague, they need to start actually having forensics capability. And so our initial land may be $10,000. In some cases, a little bit more. Occasionally, somebody who knows us well because they've used Cellebrite before might actually start a little bit larger. But principally, it is just continuing to expand. And so whether you think about FBI offices or any police department, they usually have to -- from a budgetary perspective, they got to start somewhere. And then as they're actually getting value, it actually enables them to start expanding. Now we are starting to actually play with some new tricks. And so having been in the PLG motion before, we are starting to open up some products as we're rolling out some new solutions like our Investigate product that's purpose-built for detectives and investigators. We've actually just started to give that away, and we give it away in the form of using customers as design partners. They're going through and helping us harden it. And we kind of stumbled into the motion when somebody said, you wouldn't be offended if we actually started solving crimes with your software. And we said, of course, not. I said because we've already started.

We started. And let's talk about some of the crimes that are -- sorry...

Well, and that's what we love. And so as we see some of our new Agentic solutions where people are solving crimes, we are in this new phase of actually starting to experiment with a PLG or a free tier where design partners are actually hardening the solution. They're starting to solve crime, and that's allowing us to invite others in to go do great things for the community.

And the use cases are quite broad. When you think about what you're solving or what some of these agencies are solving, there are some of the most high-profile cases that are out there. The Nancy Guthrie kidnapping case is being run on Cellebrite, the First Trump Assassination, the Brian Brian Kohberger, Idaho Murders. These types of cases are being worked on with Cellebrite. So just talk about the expansiveness of the use cases. What can you uncover here?

The element that I maybe, I guess, is kind of touching us is there are no limits. We had a customer. They have been a long customer and they started to expand actually in the platform motion that we were describing. They said, gosh, we brought this new product from you, and I got to have to protect the customer because they said at this point in the investigation, they just asked us to be a little bit more -- just more reserved in our comments. But they said, we bought this new product from you in December. The first case that we put up, we put it in -- used the AI components of the product. We quickly found that there was a class of people in their community that were being exploited. They quickly used the AI to identify more and more victims. And then they ultimately actually through all of the AI components and the amount of data that they were able to scrape, actually realized it became an international crime. And within 24 hours, they were able to go from country to country and found the -- they apprehended the person, but they were able to, quite frankly, solve a case that before would have been almost impossible to get after. And that's what we're starting to see with the solutions as people get engaged in the platform.

Just let's double-click on the AI component here. So you talked about the data. Talk about what you're collecting. This is not -- clearly, this is super proprietary. You're taking it directly off these devices that can't be accessed. So the elements of the data, the relationships because you're not -- it's not just what's here, but you're able to then use external data as well to form relationships, what people are doing on social media sites and kind of build a web of connectivity. So maybe talk about the power of the data, the proprietary nature of it, the actual AI that you're using. So are these your own models that you're using third-party models? And then as it gets incorporated into the products, how you're monetizing that?

I think that one of the elements that's probably not well understood about Cellebrite is that even before you get to data, there's almost -- there's an infrastructure play to it. And so when we think about a device and what's going on, it's not a USB-C that goes in, we actually have specialized appliances, no different than the drone forensics company. Drone Forensics has its own dedicated appliance for which we actually start the basis of what's the exploit that's going to remove the information to start getting it. And then as we talked about frequently, there is elements of encryption that go with that data. And so it is a -- I'd say Cellebrite is a little bit unique in the sense that you start off with an appliance, you go into some pretty unique pieces of data because it is encrypted, and you have to go through an exploit process to actually start to unlock that data. Then it does become unique data in the sense that when we think about our job, our focus is both lawful investigations, and we also think about it in terms of ethical AI. And so to get our information, you are going through a search warrant process with the folks that we actually partner with in law enforcement. And when you think about a search warrant, search warrant isn't blanket data. There are a number of restrictions that go with that data. So learning how to work with that data is -- tends to be a very important one because it could be time to limit it, it could be space. There are a variety of elements that go into that warrant.

Let's talk about that. So there's concern, obviously, over surveillance, and you're in the forensics piece of it. So talk about the lawful nature of this and when you come in and how you differentiate between surveillance and forensics, how do you get the approvals to go do this? What's necessary?

Yes. So what we maintain, and it was actually an important element for me when I interviewed with the company was learning, we're actually not trying to be an enterprise software company where we might sell in 180 or 185 countries. We actually have our own specific KYC policy that we use, and that KYC policy runs by country, by customer. And so our general view is it's actually pretty important to us of whom do we sell within law enforcement. But equally, I'd say we apply this to defense and intelligence. And so as an example, we're very specific around, for example, customs and borders, okay? Well, that's a use case that makes a lot of sense to us. And so when we think about officers that are at the border who need to be able to extract information from somebody who's trying to immigrate or go through the customs process. We think of that as an area where it's very lawful for a customs official, which happens regularly to be able to say, gosh, may I please see your phone. I would like to learn a little bit more when somebody is going through an investigation. Clearly, that person has the ability to refuse and say, I'm not going to give you my phone, but -- and that obviously takes them down a different path if they're probably not admitted to that country. But that's generally our approach is we think there's a lawful way to engage, whether you're on the law enforcement side or on the defense intelligence side around protecting communities and protecting nations.

You generally need to have a search warrant or the owner's consent.

Exactly. And that's actually maybe a great segue even in our enterprise business where it's less than 10% of our business. But if you were a Fortune 2000 company or even somebody like a Deloitte or PwC, we will sell you solutions. We won't sell you the ability to unlock a solution. So the unlock technology is very reserved for very specific people who would say, gosh, we think you're going to be upholding our KYC policy and our ability to approach lawful investigations. And so if you are at a Fortune 500 company and you're doing potentially a cyber investigation, well, as long as you have employees access, then yes, we'll give you access, the ability to run a full file extract and find out, gosh, was your network compromised or was somebody's device compromised?

And what sort of relationship do you have with Apple, Google? And I know you're making investments in Android right now to kind of go after that operating system even more. Just talk about where you are with the different operating systems and how those companies view you?

Well, it's funny. I think our CEO was with a senior member of the Apple staff not too long ago. And I think it's one where there is an element where from an OEM perspective, I think both Android and Apple do go out and say, gosh, trust and privacy is important. At another level, I think they look at what we do for a living as, quite frankly, very complementary to what they do because it allows them to proceed in the market with their brands. But at the same time, I think I've never talked to Tim Cook or Sundar about this. But I have -- my sense is letting -- being -- assisting criminal activity is not high on their agenda. And so I think it is, to an extent, a very complementary relationship in terms of, I'd say, what our engineering and software development does vis-a-vis what they're trying to accomplish. And I think it's one where, I guess, maybe to your -- kind of your point, we've always been the market leader on all Android. I think when it comes to iOS, I think we have a good #2 competitor in the form of Magnet, where it's a little bit of a cat and mouse game with Tim Cook. And then I think when it comes to Nokia and feature phones, we tend to bat above our weight as well. And so I'd say in 2 of the 3 areas, I think we're the undisputed leader. And then certainly in iOS, it's -- Tim Cook keeps us all working pretty hard.

You and everyone else. So let's get into your customer base. So 7,000 customers across local police departments, federal agencies, governments, kind of what's the breakout within the group? Who are you primarily selling to? You said 10% enterprise, but between kind of the local police departments, federal government, what does that look like?

Yes. So it's interesting. I mean here, we sit in San Francisco, they are a wonderful customer of ours, and you can almost go from Sacramento all the way down to San Diego and you find actually a lot of Cellebrite customers.

There's nothing but opportunity in the city of San Francisco.

Well, I think the mayor are doing a really nice job, and we hope to continue helping them. It's -- the interesting part about our business that most people actually don't appreciate is it's actually to your -- maybe your suggestion, state and local government actually is the biggest part of our business. And so that is actually where we really shine in the sense that they have the greatest needs. And so that tends to be that area where we do land and expand. And so that's been -- it actually grows faster than our federal business, and it's an area where we find a tremendous opportunity. It's actually what compelled us to think about getting into drones because with the Open Skies Act and the fact that now cities and municipalities have the ability to start running their own drone programs, we think actually that's going to be a tremendous opportunity for us to be good local partners. And so for us, the strength of our business really starts off on state and local government. We do very well at the national level. I think we talked about that being within kind of the U.S. and Canada, which we refer to as our North America federal business, that tends to be about 20% of our business. But just across the globe, state and local governments or provincial governments or if you think about the U.K., they have about 55 to 60 kind of provincial operations. And so each level of partnership at that level tends to work really well for us.

And what does it look like when you come into one of these government agencies' police department? Are you replacing something that's there? Do you work side-by-side with other things and start adding over time? But just talk about kind of what the landscape looks like and what the land and expand is.

It's funny. Over the last 10 years, I think that's been really -- maybe the birth of the industry in the sense that if you go into any major police department 10 years ago, it was whiteboards and forensics was something that somebody was probably doing in a supply closet where they were just getting into the business. And now forensics actually has a prominent place, but it is continuing to crawl across. And I think the -- maybe the great observation that somebody had made, and this was several years ago when the Trump Assassination occurred, it took 4 hours to drive the phone to a place where the forensics could actually start. Now I'd say with the rate and pace of crime, I think every police department is looking for having advanced capabilities at their fingertips. This is becoming in terms of the ability to solve crime, having access to that almost instantaneous insight is where people are going. And it's one of our account -- just maybe to kind of play this forward, one of our AEs was -- we were just debriefing on a recent visit. And he said, gosh, I was visiting with the prison system of a major state. And they said, what we really want is the ability to have instantaneous insight. When a [ parole release ] sits down, we would like to be able to run that phone through our forensic system and be able to know within 10 to 15 minutes, have they violated their parole or not. And I think that's increasingly just kind of the vector of how people are pursuing, whether it's customs and borders looking for instantaneous insight, a detective being able on the front lines when an accident happens. One of our great customers said, we're pretty good at our jobs. When we ask for phones, we normally get them. And so people are looking for that level of immediate insight to go track signal versus noise, where do I need to go focus because minutes and hours matter so much. And that, I think, is what actually compels people where they actually say, and this is maybe the network effect of a Cellebrite of, hey, I've been able to celebrate a phone. I've been able to celebrate a report. The brand starts to actually kind of carry through the system of law enforcement where...

It's a verb.

It's -- Cellebrite may not make it to cocktail parties, but I guess within that community of law enforcement...

We're going to start it now, start the trend. We're going to celebrate our phones. Any questions on the business? We're going to turn to business model financials. Questions from the audience on the core business? Okay. Why don't you talk -- let's talk a little bit about the business model. And you've had some changes from legacy products into Inseyets and from on-prem to cloud subscriptions. And so just talk about what the business model is today and kind of where you are with the migration into the Inseyets product.

Well, let me -- even before I go into Inseyets, I think one of the things that is probably least understood or appreciated about Cellebrite is the fact that the company, if you rewound the clock over 10 years ago when it really got into this business, actually started off as a perpetual business. And then ultimately, the company kind of about halfway through went into term licenses. And lately, as we think about everything that we're doing on our case evidence platform, it's all consumption. And so increasingly, I'd say the element that we've done very well is actually kind of continuing to evolve the business. One of the reasons we use ARR as the metric is the revenue ultimately reflects kind of a transition, I'd say, from a very old school company to being very -- just very leading edge in terms of being able to have a consumption component, which I think is really what sets us up nicely for being able to be able to go to customers and have an AI offer is, well, we've gotten you comfortable with meters and the idea that we will meter the unlocks and meter access to phones. We'll meter ultimately the amount of terabytes that you actually will move through because these phones are kind of beefy. They come with a lot of data. And so we've actually been able to get people accustomed to that. And so kind of the biggest part, I'd say, is the underlying layer that says from -- if I were to use the old kind of the classic expression I grew up with licensing and pricing for us is really, I'd say, become a good discipline in terms of moving our customers through having from the single perpetual all the way to having a set of consumption meters.

Do you have predictability and upside with the model?

I would say we do. And moreover, I think what we've aligned with our customers on is value meters. And so our customers actually greatly value the idea that says, hey, I run cases. So I need to be able to run extractions or I need to be able to unlock a device, extract a device. And then ultimately, I have terabytes, the petabytes of data that is associated with cases. And so when we've gone through our pricing work as we were preparing for some of the new Agentic products, I think that was a good affirmation for us and says, gosh, this work -- the spade work that was invested on the meters actually is really starting to work where our customers are actually able to plan and think that way. And so that actually gave us more confidence as we're starting to think about how to price some of the new offers that we're working through. At a fundamental level, there's good physics in terms of how our customers think about the world.

Can you give us some data points on where you are with some of these migrations from the legacy to the new products and from on-prem to cloud?

Absolutely. I think our shift with Inseyets has been very successful. I think over the last several years, we've gotten up to about 55% last year, about 30% of our customers moved. We kind of handicapped it this year. And my general view on transitions is that we're kind of in that phase of middle earth, and we'll figure out that it could be 25 to 30 points more could be a little more, could be a little bit less. But I think what we're intrigued about is, one, I'd say that the migration to the Inseyets has gone very well. So that allows us to retire some of our legacy offers around the extractions and just get everybody on one set of products relative to how we think about our unlock and our access. So that's been very positive. It does come with a small ARR uplift, which we've kind of shared with investors that about out of the net new ARR every quarter, we get about a little -- about a 10% uplift when people migrate. And so this is why we really are focusing a lot on the growth engine where we think nearly 20% of our ARR will come from our growth products this year. And so the business is really changing very quickly in terms of how much of the growth is driven by Inseyets versus some of these newer products across Guardian, across Pathfinder, Corellium, which, again, we just acquired in the drone company.

So this is -- you've told an amazing story here about a product capability platform that's really differentiated. It's hard to do. It's widely applicable to a number of use cases. You have proprietary data. And when I translate that into the financial metrics of the company, you're almost $0.5 billion in ARR, $480 million in ARR, growing 17%, 34% free cash flow margins, pretty amazing, trading at 5x revenue. So what's the group missing here? You're different. When we talk about the baby being thrown out with the bathwater, this is one that should not be thrown out. And so what does the market have wrong about the story?

Yes. I think it's -- for us, as a company that when we kind of came out to the market, I'd say we really kind of came out to the market almost just given our heritage where half of our company is Israel. I think people thought of us almost as a cybersecurity company. And I don't think they actually appreciated the elements around what does Cellebrite mean to public safety. And so I think that's the element that I think we have an opportunity to ultimately do a better job of saying, gosh, how integral are we to state and local governments? How integral are we to customs and borders and helping people protect the perimeters of their nations? So I think we have an opportunity just to almost, I'd say, reset how people perceive us both as a vertical company, but actually how do people perceive us both as a vertical company in an AI era where I'd say a very unique appliance plus pretty unique data is translating into unique and actionable insights. And so I'd say that's the part that we're looking forward to being able to share more of in the sense that as you think about our investigator product, as you think about the Agentic products that are all in trial mode with customers, we're pretty encouraged about where that takes us. And our general view is last year, we had a decel in the business as a result of what happened with the federal government when Trump came in and he took over Biden's budget. He kind of changed that and that ultimately compressed growth by about 4 points but, we feel like we have a pretty credible path to taking our 17% and starting to reaccelerate it. And part of that is a little bit around customers, a little bit around the products that we have.

So maybe, talk just briefly on that point, you're accelerating growth. So you've come in, you've tightened up the guidance ranges. We're guiding to accelerating revenue growth. 18% to 19%. You've committed to keeping free cash flow margins over 30%. Just what are those growth levers? How much is kind of new customers, expansion, new products? You've done some acquisition that you can cross-sell. Just kind of lay out those building blocks to accelerating growth.

Yes. That's a great question. I think when you think about it from a customer perspective, because our lands tend to be on the smaller side, new logos might represent 1 to 2 points of incremental growth in any given year. So it does tend to be more of a customer-based motion. And for us, I think I looked at it and said, I think we tried to lay out a scaffolding in the last earnings call to say, Inseyets, just because it is our largest and most mature product, I think that will continue to drive upper single digits in terms of our overall growth as we think about that 18% to 19%. But then we get pretty excited about Guardian, which has been growing over triple digits the last 6 quarters. And so with the ability that as a case evidence platform, everyone is moving their data in, we think that data plus the AI layer on that product will continue to lead to strong growth. Pathfinder ultimately that's way above its weight in terms from an analytical perspective, and that ultimately contributes to growth. We think some of the newer products like Corellium ultimately kind of come in and Corellium has that ability to add a couple of points of growth even as a small product with $16 million of ARR that we acquired, it's growing at a pretty healthy clip and has the ability to grow almost as fast as Guardian if things work out the way we think it could. And then Drone Forensics. I mean, really very nascent business, but boy, with what's going on in the world right now, drones just continue to become more important. And so we'll give some perspective on the next earnings call. And then I'd say the last area that we're excited about is we actually do think gross retention is going to continue to climb as we really get our plays dialed in. Last year, we finished at 91%. We think this year could ultimately be 92% or 93%. And so I think what we like about the model is there's, one, a lot of focus around our customers, but a lot of ways we win. And so I think as we thought about the scaffolding, a lot of ways to ultimately kind of get to the lower end of the guide, a lot of ways to get to the upper end and then kind of cross through it to get back to a 2 handle on growth.

Excellent. Well, tremendous execution. Congratulations on what you've built, and thank you for being here, Dave.

Thank you so much for having us. This is fantastic.