Q3 2022 Cellebrite DI Ltd Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Good day, and thank you for standing by and welcome to the celebrate Q3 2022 earnings call. At this time all participants are in a listen only mode.
The speaker's presentation, there will be a question and answer session to ask a question. During this session you will need to press star one one on your telephone and you will then hear an automated message advising European does raise please.
Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Sabrina Matthews Investor Relations. Please go ahead.
Thank you welcome to celebrate third quarter 2022 financial results earnings call. Joining me today argued CCAR meal celebrate CEO and Donna Garner celebrate CFO . This call is being recorded and a replay of this recording as well as a presentation that accompanies this call.
<unk> will be made available on our website shortly after the call.
A copy of today's press release, and financial statements, including GAAP to non-GAAP reconciliations as well as supplemental financial information for the third quarter are available on the Investor Relations website at investors Dot celebrate dotcom statements.
Statements made during this call that are not statements of historical facts constitute forward looking statements.
All forward looking statements are subject to risks uncertainties and other factors that could cause matters expressed or implied by those forward looking statements not to occur. They can also cause the actual results to differ materially from historical results and ore from forecast.
Some of these forward looking statements are discussed under the heading risk factors and elsewhere in the company's annual report on form.
20-F filed with the SEC on March 29, 2022, I was amended on April 14th 2022. The company does not undertake to update any forward looking statements to reflect future events or circumstances.
I'd like to turn the call over to Yossi Carmel celebrate CEO .
Thank you Sabrina and thank you all for joining us today.
I'm pleased to share.
That we had a solid third quarter and in particular I'm happy with the results we delivered in the U S federal sector, which I will talk more about later.
In Q3, our <unk> grew 35% year on year to reach $232 million.
Total revenue in the third quarter was up 9% to reach $71 7 million.
Additionally, our net retention rate for the quarter came in at 129%.
As this represents the 15th consequent each quarter that we've delivered an IRR of greater than 120%.
We are proud of maintaining best in class retention rates proving that our go to market strategy is being fruits.
And our existing customers continue to spend on our technology, resulting in 25 large deals closed in the quarter.
I would like first to spend time outlining what we are seeing in our markets.
And some go to market update then I will go through a few exciting deals we closed in the third quarter before providing an update on our recent technology innovations and then we'll hand over to Donna to discuss the financials in more detail.
So we continue to operate in an environment, where the public safety gap is rapidly growing.
Digital evidence continues to be of growing importance to law enforcement efforts.
It's criminal cases become more complex and digital evidence volume grow agencies are under an enormous strain to sort through the massive amount of data and ultimately solus cases.
To combat this issue.
Celebrate suite of solution and services to offer an integrated experience for the entire digital evidence lifecycle from collect and review to management and analytics.
Additionally, we offer training and certification for our platform.
We've launched last month agents insights and best practices to properly fight crime with digital evidence.
Our growing pipeline demonstrates that our solutions and innovations are maintaining high relevance, which is further underscored by our discussions with customers.
So during the third quarter, we made significant progress in addressing some of the hiring issues in our go to market organization that we alluded to last quarter.
The actions, we've taken have been effective and on a faster timeline than planned in terms of recruiting onboarding and reaching an.
Reaching productivity. So we are now well positioned to take full advantage of the market opportunity in front of us.
In EMEA.
Europe Middle East and Africa, despite increasing headwinds in some parts of the region, we were able to grow our business faster than planned. We believe we have the right offering in place and we are optimistic heading into the end of the year. Despite its micro challenges such as they are clean war and continental inflation that are impacting many.
Companies.
We've also made some notable updates to our executive bench with the addition of Lisa <unk> as our new Chief Marketing Officer, and I'll elaborate further Shapiro as general Counsel Lisa comes to us with extensive experience in various leading market and growth and I along in addition to notable.
<unk> with global technology companies and some of the leading law firms in Israel brings a depth of knowledge in ethics, and compliance, which aligns with celebrate ethical focus but we are very excited to welcome. These leaders to our organization as we grow.
An important part.
Our go to market motion has been increasing wallet share within our existing customers and our third quarter and net retention rates illustrates the success of that initiative.
In the third quarter, we closed a number of exciting engagements with existing customers and importantly, we are seeing a growing pipeline within both our existing customer base and with new customers and I would like to take you through a few examples.
The first one we.
We closed a large multiyear expansion deal with a major U S Federal agency.
This existing customer initially at approximately 100 collection with new licenses and one premium Standalone system.
And our team have done with the customers to better understand the motive operation and quickly identified areas for their users to get more out of their existing solutions through training and release process bottleneck stuff, we're putting strain on investigation by subscribing to our latest collect some of your offerings will ultimately.
This long term customer ended up purchasing a wider range of collectible review technology with advanced capabilities extending activities to the field with mobile collection review as well as management licenses.
They also purchased a large training package to ensure agents can harness the full power of celebrates offering and are well equipped to solve cases.
Second example, in the UK so in the UK, we had a significant expansion.
From an existing customers with premium enterprise.
This expanded the premium advanced collection capabilities to approximately 70, Uva endpoints across seven counterterrorism units.
Before that these customers were having to send locked funds to the central lab for data extraction, adding time and added complexity to investigations.
This expansion has had a notable impact on their operation with our collection of your technology now being available across seven district.
There was another one another similar large expansion deal in the EMEA region.
Pending an agency centralized extraction capability to 11 regional labs. These customer also added premium enterprise endpoints and now operates our premium collection review capabilities in more than 100 sites.
Also our partnership strategy is developing nicely.
Closed in this quarter, our <unk> analysis deal in the Asia Pacific region during the third quarter.
This new partnership announced in July expedite the resolution of digital investigations involving crypto currency by enabling customers to easily identify and assess criminal activity.
As the importance of crypto currency has increased in the past several years there has been a rise in illegal users two facilities crime, resulting in crypto currency artifacts more commonly found in digital evidence now by combining the power of celebrate ancient analysis customers can leverage the transparency.
Blockchain and modernizing investigation.
Now while we are still in an early stage of this partnership we look forward to continue traction and opportunities.
A little bit about our products.
Our recent innovations continue to resonate well with the market.
At the end of Q2, we launched premium as a service, which has already been adopted by more than 120 customers and we continue to see growing pipeline for this product.
We're continuing to maintain material productive for <unk> in this area within different customer profile, which demonstrates the power and stickiness of our technology.
As for Guardian Guardian also continued to show strong momentum with.
We ended the third quarter with 11 Guardian deals closed.
And more in the implementation process now, notably this SaaS offering is now serving more than 100 agencies.
A key aspect is or I would say in how customers utilize the guardian products. These by leveraging the tools for sure with digital evidence.
Well controlled and compliant manner with our agencies.
In turn this process gives guardian, a wide degree of exposure to other agencies, many of whom may be seen our capabilities for the first time and we have noted that this exposure has created a valuable new set of potential customers.
This coupled with our industry, leading technology has contributed to a large list of future opportunities with Guardian that we look forward to updating you on in the quarters to come.
So heading into the end of the year celebrate is well positioned to capture the demand for our solutions. Our relentless pursuit to innovate has been reaffirmed by our customers who are giving us positive feedback on our product portfolio of industry, leading technology I remain excited about celebrate.
Future and opportunity in front of us as we pursue our mission to protect and save lives accelerate justice and ensure data privacy and with that I will turn the call to Donna.
Thank you.
As Justin mentioned earlier.
Those 35% year on year, reaching 232 media and by September 32022.
We mentioned last quarter, we continue to move customers to a subscription model from our traditional perpetual license model. This manifest itself in an incremental AOR growth in the quarter that reflects our transition efforts.
Revenue for the third quarter was up 9% from the third quarter webcast here and reached $71 7 million, whereas subscription services revenue were up 31.
Percent and continue to be a primary driver of total revenue.
Total subscription revenue grew 8% year on year in the third quarter off strong compared from Q3 of last year in which we had some outsized deals with large upfront revenue recognition that benefited the term license revenue.
As we saw the U S dollar significantly strengthened against European getting the other major currencies.
Relative to Q3 2021, our total revenue and total subscription revenue was favorably impacted in favorably impacted by changes in forex rate of approximately $3 1 million and $2 5 million, respectively, representing adjusted <unk> growth of 13%.
On both total revenue and subscription revenue.
I would also like to highlight that our transition from perpetual to subscription has seen continued success with more than 98% of our software revenue is now subscription.
So it's a subscription represented 78% of the quarter's total revenue in line with the same period of last year.
We saw good performance in professional services revenue, which was up 9% compared to a strong Q3 last year contributed by the setup right advanced services executing on large contracts supporting law enforcement agencies overcoming digital device backfill. This.
This growth in professional services remains important to us as it helps drive larger deals and retention.
GAAP gross margin was 80% in Q3 as compared to 82% from the third quarter of last year.
And that is mainly a result of introducing cost related to our SaaS and cloud solution infrastructure and hosting services into our cost of goods sold expenses.
This business is still in the early stages of development and as it matures, we expect to streamline and optimize some of these costs, resulting in better gross margins.
Moving to operating expenses I will discuss these on a non-GAAP basis. So the share based compensation amortization of intangible assets acquisition related expenses and one time expenses are all excluded <unk>.
non-GAAP operating expenses were $54 1 million in the quarter similar to last quarter, although expenses increased compared to last year. The only grew marginally on a sequential basis.
The year on year growth reflect our cost structure as a public company.
Function of in person activities.
Operational costs associated with adding SaaS and Allstate offering to our development efforts.
Our ability to execute on hirings.
Adjusted EBITDA in the quarter was $5 1 million or 7% on a margin basis.
Our Q3 adjusted EBITDA results reflect our continued investment in head count quite mature set of rights significant growth opportunity and sort of maintaining our technical leadership, but demonstrating operational efficiencies.
Looking at the remainder of the year, we are focused on further optimizing our spend for efficiency, but supporting our go to market efforts and ongoing commitment to product innovation.
We ended the month of September with 1005 employees.
Up 18% from the end of September last year.
We will continue to monitor our staffing level to maintain our technological leadership and our go to market capabilities.
non-GAAP net income in Q3 was 3 million and non-GAAP fully diluted EPS was one cent operating cash outflow in the third quarter was <unk> 6 million and in the last 12 months, we generated $14 6 million.
$14 6 million of cash inflow. We ended the month of September we have approximately 168 million of cash cash equivalents and investments.
Heading into the end of the year, we feel that we have the right product in place to capture the significant demand for digital intelligent solutions.
EMEA business in traditionally about 30% of our total revenue and the strengthening of the U S. Dollar has negatively impacted our revenue in our results for the quarter.
We expect to finish the financial year of 2022 at the lower end of our guidance range issued last quarter. Further we remain confident in our ability to execute the targets, we set forth and believes cerebritis positioned well for long term growth.
With that I would turn the call to the operator to open the Q&A session.
As a reminder to ask a question press star one one on your telephone please standby, while we compile the Q&A roster.
Yes.
Yeah.
Our first question comes from Jonathan Ho with William Blair. Your line is open.
Hi, Good morning, I, just wanted to maybe start out with some of the strength that you're seeing in the U S. Federal government vertical and so can you give us some additional color on really what's driving that success what types of agencies what types of opportunities you see ahead, and maybe help us understand how you.
Target that market, a little bit more effectively with your go to market.
I will take an old stark.
The strength in the <unk>.
Federal markets from a celebrates perfect is based on few components first of all very strong position within the account.
And they are very well experienced and.
Grupo <unk>.
Account managers and account executives.
The second one is.
Strong penetration and stickiness with relationship for several years by now.
Combined I would say with the ability to.
It doesn't understand the specific ways.
<unk>.
It's being done over there, it's a very unique segment.
Actually a dedicated segment within the celebrate customer segmentation the federal in North America.
With the ability to build the right personnel not only in sales, but also in presale in customer success, including cleared personnel on the ground.
And.
I would say that as for the future.
Based on that stickiness and strong position that we have right now we can see that we are being we are we are.
Our capable to approach I would say larger budgets.
And also specific projects to expand the offering our current offering and even beyond.
As for the I will not go into specific names of customers, but one can say that in that area. We are working with most of this relates to agencies and in the areas of the deal would be in the cereal we cover seeing something like 130 accounts today in North America.
Would you like to add something at all okay.
I hope I answer that question.
Yes.
And then just as a follow up can you give us a sense of how much impact.
From FX there was on your full year guidance I think you quantified it for the quarter, but just wanted to get your assumptions on the full year impact relative to FX.
So the reason that we have referred to the quarter is because we have provided a guidance and updated guidance factor.
Water and as such we have looked at how much was changed since that.
The guidance that we have provided last time took into consideration or what already some of the forex impacts at the beginning of the year.
So this is why we have focused on Q3.
Got it got it I'll hop back in the queue. Thank you.
Thank you please standby for our next question.
Our next question comes from Thai Leon <unk> with Bank of America. Your line is now open.
Hi, this is actually tumors silverman on for <unk>. Thanks for the question just two quick ones from me.
Last quarter, you talked about lengthening sales cycles as well.
You have slippage so on the first one is that something that Youre currently seeing and is that something that's still impacting our full year guidance.
As well as on the deal slippage I think you mentioned last quarter that you expected most of them most of those delayed deals to close in Q3 of those subsequently been closed thank you.
So maybe I'll take it and Youll see you can follow up.
I think that the.
Challenge of closing new deals is even if he and.
It's still something that is becoming part of our go to market processes and and capabilities. We did have some slippage.
Last quarter more than we usually have because of the size of these deals we will always have some slippage from one quarter to the rest of it I think it is becoming more fee.
Normal course of business and indeed, we closed substantially most of the deals that have been delayed.
Leaped, sorry last quarter, we've seen Q3 and early Q4, I will add that in principle, we see.
Still longer sales cycle. This is one element, especially in the large deals.
And yet I would like to emphasize that we currently do not lose any deals due to these longer sales cycles.
And there is for example, one to the question are there all being closed some of the mis and I have in mind at least one which was relevant for Q2 and will be closed in Q4 for sure.
Yeah.
Great. Thank you.
Youre welcome.
Please standby for our next question.
Our next question comes from Mike <unk> with Needham Your line is now open.
Hey, guys you had Mike Cecos here, thanks for taking the questions I wanted to make sure that I was clear on the guidance I think that was the thing that I wanted to drill into first with you guys. So if I'm looking at the slide that you have posted on the webcast.
I think it was slide 16, you showed your your updated guidance expectations for 'twenty two.
The reason I'm, bringing that up is when I look at what's changed it looks like only the AOR guidance has been taken down versus what we had last quarter and I just wanted to make sure that I was interpreting this properly so when you're talking in the press release I know that there were some commentary that you expect to come in at the lower end of your previous.
Is that comment.
Only for <unk> or is that across the board when we think about revenue or gross margins or adjusted EBITDA. Okay can you just clean up better.
That question for me, because I do want to make sure I'm thinking appropriately about what the rest of this year looks like for you.
So first Mike. Thank you for the question.
D a.
The guidance that we provide on slide 16 is actually exactly the same as we have updated last quarter. Both on a revenue gross margins and EBITDA. So we did not change these guidance numbers.
What we are saying, what we were saying during the call is that we will find ourself on the lower side of these guidance on the <unk> I would say revenue and adjusted EBITDA and I Hope this answers your question.
It does it does thank you for clarifying that.
And I did want to come back I think it was Patrick who would ask the first question but.
One of the things that we're trying to do on the outside is figure out what the.
FX impact has been as we think about Q4 and the reason for the adjusted guidance.
I think we are aware that your previous guidance probably incorporated some of the.
Yes.
FX impact that you guys had been faced with.
Trying to get maybe a snapshot of what that Delta has been or what that change has been in the last three months.
Is there any way for you to size up what that impact has been on a from <unk> to <unk>, where we stand today.
So if I look from from I would say from the early of Q3 two at the end of Q3 from an AUR perspective. It was about between two five to 3 million daughters.
Impact when they are so we would have expected our AUR to be instead of 232 more towards the 234.
Five I would say if there were no fourth if you would look at it Forex impact as of the beginning of Q3, and I would say around $750 million to $1 million more than the revenue.
On Q3.
Compared to Arity Q3 forks numbers.
Okay.
And thank you for that I also wanted to make sure like if I'm thinking about Q4.
And it's rough numbers here right, but if I think about that two and a half to $3 million impact on <unk>.
At the end of Q3 versus the beginning of Q3 is it is it safe to think that it's probably a similar two and a half for $3 million impact on the <unk> or is it more or less have how do I think about the guidance for the rest of the year now.
So I would say that the impact will be on let's say the exchange rate will dramatically change up or down or the dot behavior towards the European main currencies will change dramatically I would say.
It will be similar in my slide might be slightly higher.
Okay. Okay, and then one more question if I could.
Apologize.
I did want to ask you about the subscription gross margins.
I know that you guys have spoken about.
You're investing in the hosting capacity and these be SaaS based solutions, which obviously have an upfront cost associated with it when I think about the infrastructure.
Is there a way for us to start thinking about when those gross margins should start expanding and I don't know if its Q4 or more of a calendar 'twenty three event, but how should we think about those gross margins playing out over time.
So I would say that.
Our leading setting SaaS solution that really started to show.
Show topline impact in Q3, we will see them in Q4, but this is still at an early stage of launching these solutions I wouldn't look at expanding the.
The margins on them before 'twenty, three and maybe even half two of 2003, we are still working on that.
Okay.
Work in progress.
Thank you for that I'll turn it over to my colleagues, but I do appreciate the additional color. Thank you.
As a reminder to ask a question press star one one on your telephone please.
Standby for our next question.
Our next question comes from Louie Dipalma with William Blair. Your line is now open.
Yossi, Donna and Sabrina and good afternoon.
Good afternoon.
Celebrate reported a very strong net revenue retention how much of the NII growth is coming from the existing base upgrading to.
Premium and premium enterprise versus.
Cross selling like newer products like Guardian and Pathfinder.
Let me talk to that.
Yeah.
Most of our revenue are still coming from the correct and review and as such also the expansion within customers are coming from the more advanced codec can reduce solution. So it's mainly the premium.
Various flavors premium premium is the best solution and also premium it's a service, which we launched at end of Q2 and was very very well accepted by our customer base in Q3.
We did see some expansion on the pace of fine. There we are seeing as we reported 11 deals of Guardian.
Q3, which also provide some expansion.
But again most of the expansion is coming from Kodak technology solutions.
Thanks, Donna and are we still in the early innings of penetration for premium enterprise on past calls I think you.
Quantified a number of specific target accounts that you are looking to upgrade to premium enterprise do you have any sense of.
What's the penetration of premium enterprise within those target accounts.
First of all I would like to say that we are in an early stage, but for sure. There is a number I don't have the number out of my head, but we are at an early stage we have.
Few tens of customers are on pure enterprise, we've got a lot of opportunities and growing pipeline.
The introduction of premium it's a service had allowed us to introduce premium to additional customer base that initially could notice participate or enjoy the premium due to the pricing of the offering but you have to plan for.
So I would say that well I would say I don't have the exact when since we are monitoring it all the time. The good news is that we are first again in an early stage and if I look at the strategic accounts and our mid Prime accounts, which are the most relevant for the premium enterprise, we are lower than 20% penetration.
Perfect exactly what I was looking for thanks, and thanks Dan.
Yeah.
At this time I show no further questions I would now like to turn the conference back to Yossi co mail for closing remarks.
So.
Thank you everyone for participating and for the questions.
Thank you have a great day.
This concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly.
To raise your hand during Q&A you can dial one one.
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