Q2 2024 Cellebrite DI Ltd Earnings Call
Speaker Change: to
Speaker Change: Welcome to the Celebrite Second Quarter 2024 Financial Results Conference Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions following the presentation.
Speaker Change: If you would like to ask a question at that time, please press star 1 on your telephone keypad.
Speaker Change: If at any point your question has been answered, you may remove yourself from the queue by pressing star 2.
Speaker Change: So others can hear your questions clearly, we ask that you pick up your handset for best sound quality.
Speaker Change: Lastly, if you should require operator assistance, please press star zero.
Speaker Change: I would now like to turn the call over to your first speaker today, Mr. Andrew Kramer. Mr. Kramer, the floor is yours.
Andrew Kramer: Thank you very much, Todd, and welcome everybody to Celebrite's second quarter 2024 financial results call. I'm joined at our offices just outside of Washington, D.C. by Yossi Carmil, Celebrite CEO, and Dana Gerner, Celebrite CFO.
Speaker Change: There is a slide presentation that accompanies our prepared remarks. Please advance the slides and the webcast viewer to follow our commentary. We will call out the slide number we are referring to in our remarks.
Speaker Change: This call is being recorded and a replay of the recording will be made available on our website shortly after the call, along with a transcript of the event.
Speaker Change: Starting with slide number two, a copy of today's press release and financial statements including the GAAP to non-GAAP reconciliations.
Speaker Change: this slide presentation and the quarterly financial tables and supplemental historical financial information for the first and second quarters of 2024 and each quarter of 2023 and 2022 are available on the Investor Relations website at investors.celebrite.com.
Speaker Change: Also, unless stated otherwise, our discussion of our second quarter 2024 financial metrics, as well as the financial metrics provided in our outlook, will be done on a non-GAAP basis only, and all historical comparisons are with the second quarter of 2023.
Speaker Change: In addition, please note that statements made during this call that are not statements of historical facts constitute forward-looking statements.
Speaker Change: All forward-looking statements are subject to risks and uncertainties and other factors that could cause matters expressed or implied by those forward-looking statements not to occur. They could also cause the actual results to differ materially from historical results and or from forecasts.
Speaker Change: 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 21, 2024, and as amended on April 12.
Speaker Change: The company does not undertake to update any forward-looking statements to reflect future events or circumstances.
Speaker Change: Slide number three provides the agenda of the topics we'll cover on today's call. And with that said, I'd like to now turn the call over to Yossi Carmil, Celebrite CEO.
Yossi Carmil: Thank you, Andy, and thank you all for joining us today.
Yossi Carmil: We are pleased this morning to share our progress and continued execution across all key metrics, including ARR.
Speaker Change: Revenue, and EBITDA, which are highlighted on slide 4.
Speaker Change: Our strong second quarter performance further validates
Yossi Carmil: The appeal of our case-to-closure platform, the resolve of our nearly 1,100 colleagues and relentless tailwinds in a healthy, growing market.
Yossi Carmil: Now, Dana will review the details of our Q2 results, our outlook for the third quarter and our increased expectations for the full year 2024.
Speaker Change: In the meantime, what I plan to do is to focus my commentary on the long-term opportunity for our company and the important steps we are taking to further enhance Cellebrite's position as the leading platform for accelerating justice around the world.
Speaker Change: So turning to slide 5, let me begin by highlighting the recent formation of Celebrite Federal Solutions as part of our effort to expand our business with the U.S. federal government.
Speaker Change: Now, while Celebrite had already established pervasive, growing relationships across a wide range of U.S. federal defense and civilian agencies, our ability to maximize our impact had been constrained by our status as a foreign-owned organization.
Speaker Change: So in order to unlock our contribution to the U.S. federal government
Speaker Change: and further expand our commercial opportunity.
Speaker Change: We worked diligently over the past six months.
Speaker Change: to better position Cellebrite to work directly with our U.S. federal customers.
Speaker Change: and support a broad range of projects and programs.
Speaker Change: Last month, we established Celebrite Federal Solutions as a separate, dedicated company with independent board governance, and we acquired SciTech, which brings immediate expertise, experience, and authorized participation in key federal programs.
Speaker Change: Now, these actions will enable Cellebrite to significantly increase its impact and participation in critical federal law enforcement and intelligence initiatives over the long term.
Speaker Change: This new company is led by Eric Zachritz, who had directed our federal sales for the past several years, and it is overseen by a newly appointed board of four independent directors. These directors are highly accomplished in their respective fields, bringing unique and extremely relevant skills and experiences.
Speaker Change: By the way, the results from this business will be fully consolidated in our corporate financial reports.
Speaker Change: These actions closely follow our Q1 launch to gain FedRAMP authorization for our SaaS offerings.
Speaker Change: We continue to make incremental progress with these initiatives as we drive for the full authorization by the end of the first half of 2025.
Speaker Change: We anticipate that federal authorization will accelerate deployment of Cellebrite-relevant cloud-based offerings by our federal customers.
Speaker Change: By meeting the U.S. government's demanding security and technical requirements, we believe that this authorization will serve as a proxy for addressing certain standards outside of the U.S. as well as with other U.S. state and local government customers.
Speaker Change: So in summary...
Speaker Change: These actions reflect our commitment to expand our business in the U.S. federal marketplace over the coming years, and we've been encouraged by the enthusiasm from the marketplace in recent weeks and share their optimism about the impact this will have on both public safety and on federal rights.
Speaker Change: We believe that the initial financial benefits associated with Cellebrite Federal Solutions will begin to accrue in 2025 and build from there in subsequent years.
Speaker Change: Turning to our C2C platform.
Speaker Change: Our customers continue to realize substantial value from Cellebrite's built-in artificial intelligence capabilities, which enable them to work smarter and faster.
Speaker Change: AI has been an integral part of our innovation DNA for nearly a decade and it is now embedded within each of our flagship solutions.
Speaker Change: At our first investor day earlier this year, we showcased a wide range of AI-powered capabilities that enable our customers to accelerate their investigations.
Speaker Change: Now, while our historic use case has delivered material value, the rapid evolution of generative AI is opening exciting new frontiers for justice accelerated, which we have enthusiastically embraced.
Speaker Change: Our customers report that leveraging our AI-powered capabilities enables them to achieve step-function increases in investigative speed, efficiency, and effectiveness.
Speaker Change: For example
Speaker Change: A law enforcement agency can leverage the AI-driven analytics with Pathfinder to substantially reduce the time it takes to complete a large-scale investigation for months.
Speaker Change: 2 weeks and in the process
Speaker Change: Low Overtime Costs, Decrease the Involvement of Supporting Agencies, Help the Victim's Loved One Move Toward Closure, and Reassure the Community that Justice is Being Served.
Speaker Change: And for these reasons, we are aligning key product technology and go-to-market resources to maximize value creation and monetization associated with our AI technology, what we currently refer to as Cellebrite Investigative Intelligence.
Speaker Change: In tandem with this work, and in keeping with Cellebrite's efforts to ensure this technology will serve exclusively an agent for good.
Speaker Change: and for the protecting public safety, we will continue to evolve a range of controls through internal assessments, customer feedback, and our external independent ethics and integrity advisory board.
Speaker Change: Responsible innovation in AI will supercharge our ability to advance our mission to make the world a better and a safer place.
Speaker Change: You can expect to hear more over the coming quarters and years as we make further progress with our work in this area.
Speaker Change: Tom. [inaudible]
Speaker Change: I want to switch gears now to briefly cover recent capital market activity associated with our own gain efforts to drive value creation for celebrity shareholders.
Speaker Change: First...
Speaker Change: We're very pleased to announce today a broad warrant redemption program covering 20 million public and 9.7 million private warrants. Now, Dana will share more details around this action, but I want to briefly highlight the significance of this milestone.
Speaker Change: While a substantial majority of SPAC-originated companies have struggled to create shareholder value over the past two years, Cellebrite's exceptional performance has enabled us to take this action.
Speaker Change: Second, Celebrite's stock price performance over the past 30 days through yesterday has triggered the issuance of one-third of the price adjustment shares and divesting of 40% of our restricted sponsor shares, as outlined in our business combination agreement.
Speaker Change: The combination of these events is...
Speaker Change: an important milestone.
Speaker Change: that we believe will help optimize our capital structure, support healthy trading liquidity, and simplify our financial reporting and complement and augment the steps we've already taken to enhance our investors' communication.
Speaker Change: Turning to slide six, we are making really good progress executing against our top four strategic priorities.
Speaker Change: This slide highlights a variety of Q2 deals that delivered meaningful ARR expansion and demonstrated our progress with each priority. I'd like to share a few quick observations related to these priorities.
Speaker Change: Our first priority is to extend our leadership in the digital forensic units of our customers.
Speaker Change: To that end, our ongoing investment to enhance our lawful access capabilities for the most modern smartphones on the market is paying dividends.
Speaker Change: Over the past year, usage data reflects that more customers are turning to Cellebrite to lawfully access and extract data from both Android and Apple iOS devices.
Speaker Change: Related to this, we are also making good progress with upgrading our customers to insights.
Speaker Change: As noted on our Q1 call, our goal in 2024 is to convert 10% of our install base to insights. I'm glad to share that market reception has been extremely favorable and we are currently on the pace to exceed this target.
Speaker Change: Our second priority is to accelerate our growth within the Investigative and Intelligence Unit, what we call the IUs of our law enforcement customers.
Speaker Change: We continue to grow our Pathfinder footprint with IOOS during the second quarter. I can say that we are excited about our potential to accelerate penetration into the IOOS as Pathfinder becomes fully cloud-enabled over the coming quarters.
Speaker Change: Our third priority is to expand our business in the private sector with enterprises and service providers who primarily rely on Cellebrite's data collection solutions to advance corporate investigation and e-discovery use cases.
Speaker Change: Related to this, we recently announced an exclusive technology and go-to-market partnership with Relativity that is intended to help our mutual customers collect and manage mobile evidence as a key part of their digital investigations with the utmost efficiency.
Speaker Change: We are collaborating with Relativity to create a streamlined Relativity 1.
Speaker Change: and Cellebrite Remote Mobile Collection and Conversion Integration in which Relativity is the only eDiscovery provider to have direct integration with Cellebrite Endpoint Inspector and with Cellebrite Endpoint Mobile Now.
Speaker Change: We are optimistic that this partnership will deliver compelling value to our mutual customers and help accelerate our growth with enterprise customers and service providers.
Speaker Change: Our fourth strategic priority is to help our customers harness the power of the cloud.
Speaker Change: Overall, ARR from cloud and SaaS-based solutions has nearly doubled over the past year and is now generating load teams as a percentage of our ARR, up from the high single digits.
Speaker Change: We are pleased to see increasing traction for Guardian.
Speaker Change: our SAS-based case and evidence management solution.
Speaker Change: The number of Guardian customers has continued to grow along with the number of users in terms of both examiners and investigators, and data storage volumes have doubled in the past five months alone to over two petabytes.
Speaker Change: I would like to conclude my prepared remarks on slide 7.
Speaker Change: So, we view our C2C platform...
Speaker Change: are unique in today's marketplace, enabling us to deliver an end-to-end set of integrated software solutions that support our customers' needs throughout the digital investigation lifecycle.
Speaker Change: We continue to move swiftly and decisively to deliver high-value solutions and responsive support to address the time-sensitive needs of our customers around the globe, fortifying the trust they place in our solutions.
Speaker Change: In turn, Sellerbytes has successfully extended its market and technology leadership, expanded its customer relationship, and delivered strong results.
Speaker Change: We've also further enhanced our leadership team and board earlier this month. We appointed Sigalit Shavit as our first ever Chief Information Officer, CIO. We look forward to her contributions as we scale our ability to innovate and support customers around the world.
Speaker Change: We're also thrilled that Troy Richardson
Speaker Change: and Accomplished Technology Executive was recently appointed to our Board of Directors.
Speaker Change: As we look ahead, our updated 2024 expectations for ARR growth and adjusted EBITDA indicate that we are well positioned to exceed our performance baseline for RULEO 45 for the second straight year.
Speaker Change: It is really rewarding to see how our customers are leveraging their investment in Celerbrite technology to accelerate justice.
Speaker Change: Every quarter our technology makes an outsized impact on hundreds of thousands of cases, enabling our customers to protect and save lives, stop bad actors and keep our community safer.
Speaker Change: Overall, our team has done a great job in the first half of 2024, and I would like to use the opportunity and thank my colleagues for their ongoing commitment and contributions to our continued success. And with that said...
Speaker Change: And now I turn the call over to Dana.
Dana: Thank you, Yossi.
Dana: Well, the combination of 30 top-line expansions, the sound management of our cost structure, produced another quarter of excellent results and helped underpin our updated 2024 guidance.
Dana: So let's begin with a review of our Q2 results by starting with our ARR growth on slide 9.
Speaker Change: Our A.R. grew 26% year-on-year to $346 million at the end of June 2024.
Speaker Change: The building block for our ARR growth began with gross retention, which was 91% for the period. The lion's share of ARR growth was once again driven by expansion within our installed customer base.
Speaker Change: Looking at the product level contribution, Insights Adoption continues to fuel our AOL growth. At the same time, we continue to make progress extending our reach into new buying centers or sub-logos within our installed base through both Guardian and Pathfinder.
Speaker Change: Geographically, the ARR mix for the 12 months ended June 30, 2024 was consistent with prior quarters.
Speaker Change: The Americas represented our largest geography at 53% of total, followed by EMEA at 35% and Asia Pacific at 12%, and all major geographical regions continue to enjoy ARL growth rates above 20%.
Speaker Change: with the America increasing 28%, EMEA growing 23%, and Asia Pacific up 27%.
Speaker Change: Now turning to revenue on slide 10, we reported a 25% year-on-year increase in second quarter revenue to $95.7 million. This increase was primarily driven by subscription software revenue growth of 27%.
Speaker Change: Our top-line performance benefited modestly from multi-year agreements and favorable product mix, and we expect this to continue into the second half of the year.
Speaker Change: In terms of non-recurring revenue, the increase in hardware sales within our other non-recurring revenue was largely offset by a modest decline in our professional services revenue.
Speaker Change: Subscription revenue represented 89% of total revenue and we expect that it will continue to trend within the mid to high 80% range over the coming quarters.
Speaker Change: Slide 11 details the historical trend for non-GAAP gross margins and non-GAAP operating expenses, which exclude share-based compensation, amortization of intangible assets, and acquisition-related expenses.
Speaker Change: Our Q2 gross margin was 83.7% and was generally consistent with our expectations and up slightly from the prior year.
Speaker Change: In terms of operating expenses, Q2 operating costs increased by 10% to $60.3 million. Higher sales and marketing and research and development costs reflected increased headcount and personnel-related costs in these areas.
Speaker Change: We ended Q2 with 1,077 employees, up 25 from the first quarter and 111 from the same quarter last year.
Speaker Change: We continue to invest in recruiting new talents with ambitions to increase our headcounts to roughly 1,150 employees by the end of this year.
Speaker Change: Now turning to slide 12, the combination of strong revenue growth, healthy gross margins performance, and a moderate increase in our operating costs resulted in profitability that exceeded our plans entering the quarter.
Speaker Change: We reported Q2 adjusted EBITDA of $21.6 million or 23% on a margin basis versus 15% one year ago.
Speaker Change: Our Q2 non-GAAP operating income was $19.8 million with non-GAAP net income of $22.9 million or $0.10 on a fully diluted basis.
Speaker Change: We close the second quarter with $366 million in cash, cash equivalents and investment, up $18.7 million on a sequential basis and $121 million higher than the same quarter last year.
Speaker Change: The sequential increase for the quarter primarily reflected the strong cash flow from operations. Free cash flow for the second quarter, which we defined as net cash provided by operating activities less capital expenditure and purchase of intangible assets, was $12.2 million.
Speaker Change: In terms of our mid-July acquisition of SciTech, you'll see the cash outflow of a little more than $3 million related to this transaction in our third quarter cash flow statement, with approximately $1 million anticipated to be paid in 2025.
Speaker Change: Before I move to the financial forecast, I'd like to quickly add to Yossi's comments regarding recent capital markets development. And more specifically, Celebrite announced earlier today that it is redeeming all of the outstanding warrants, which consists of 20 million public warrants and 9.7 million private warrants.
Speaker Change: We anticipate that the vast majority of warrants will be exercised on a cashless basis.
Speaker Change: Its recent price, this would convert nearly 30 million public and private warrants into 8 to 9 million common shares.
Speaker Change: This is approximately 70% less dilutive than if all of the warrants were exercised for cash. We plan to issue an announcement outlining the results from the redemption soon after the redemption date next month.
Speaker Change: The warrants redemption, which will ultimately result in fully retiring these securities, and the previously mentioned upcoming issuance of 5 million price adjustment shares and the recent vesting of 3 million restricted sponsor shares,
Speaker Change: support our long-standing objectives of improving the company's trading liquidity, optimizing our capital structure, and simplifying our financial reporting.
Speaker Change: Since it would eliminate the quarterly revaluation of our warrants and reduce the non-cash impact associated with the quarterly revaluation of the remaining unvested price adjustment and restricted sponsor shares.
Speaker Change: Now, let's move to slide 13, which details our 2024 third quarter and full year fiscal financial expectation.
Speaker Change: Based on our results to date and our assessment of the opportunities that lie ahead over the coming two quarters, we have increased our outlook for the year.
Speaker Change: While we strive to provide ambitious yet realistic targets at the start of any given year, this update marks the second straight year we have delivered a beat-and-raise second quarter.
Speaker Change: More specifically, we have raised our revenue outlook for 2024 and increased the midpoint of our ARR expectations.
Speaker Change: Our increased revenue range reflects the impact associated with more customers making long-term commitments to Cellebrite in the form of multi-year agreements and product mix that result in more revenue recognized upfront at the start of the subscription.
Speaker Change: As we move into the seasonally stronger second half of the year, we anticipate improving contributions from the investment we made during the first half of the year to expand our quota-carrying sales force.
Speaker Change: Our updated 2024 outlook for adjusted EBITDA reflects a strong first-half performance and several other factors.
Speaker Change: First, we expect our solid revenue trajectory to continue with 53% to 55% of our full-year revenue anticipated in the second half of the year.
Speaker Change: Second, we now expect our full-year gross margins will range from 84 to 86 percent, which is higher than originally anticipated due to the timing of investment in our Post-Sale Customer Success Organization and improvements in our household margins.
Speaker Change: Finally, we anticipate low single-digit to mid-single-digit expense growth in the second half of the year versus the first half level.
Speaker Change: In terms of the SciTech acquisition, we anticipate a de minimis top-ranked contribution to our services revenue and adjusted EBITDA during the second half of 2024.
Speaker Change: The CITAC resources have been integrated into Cedarbrook Federal Solutions, and our updated outlook factors the incremental governance and operational costs associated with this new business.
Speaker Change: Now in terms of the third quarter expectations, we currently anticipate ALR to range of $360 million to $370 million or 24% to 27% growth over the prior 12-month period.
Speaker Change: We expect Q3 revenue growth of 19-24% to support a range of $100-104 million.
Speaker Change: Our Q3 ARR and Revenue Outlooks reflect our expectations for healthy spending by our U.S. Federal Agency customers in conjunction with the end of their fiscal year in September.
Speaker Change: We expect our Q3 gross margins to fall within the updated for 2024 gross margins target range of 84% to 86%.
Speaker Change: We anticipate our Q3 operating costs will increase by low single digits on a percentage basis over Q2 levels, as we continue to fully absorb the run rate costs of the new hires and further expand of our team.
Speaker Change: As a result, we anticipate Q3 adjusted EBITDA in the range of $25-29 million or 25-88% on a margin basis.
Speaker Change: In terms of modeling our share count, we expect a modest increase in our weighted average diluted share count due primarily to the previously mentioned warrant redemption and triggering events.
Speaker Change: In comparison with the 2024 second quarter average rated diluted share count, we anticipate that our third quarter fully diluted share count will increase by approximately 2% and a full year will increase by approximately half a percentage point as a result of the previously mentioned event.
Speaker Change: Now, in summary, as Yossi has already outlined, we are very pleased with the overall strategic direction of the business.
Yossi Carmil: We are making important progress on multiple fronts, the combination of which is enabling us to enhance our value proposition, broaden our customer relationship, and fortify our trading liquidity.
Speaker Change: As a result, we are in a great position to deliver a strong 2024 with our ARR growth rates and adjusted EBITDA margins above our baseline rule of 45 target. That concludes my prepared remarks and I'll turn the call back to our operator for Q&A.
Speaker Change: The floor is now open for questions. At this time, if you have a question or comment, please press star 1 on your telephone keypad.
Speaker Change: If at any point your question is answered, you may remove yourself from the queue by pressing star 2.
Speaker Change: Again, we ask that you pick up your handset when posing your question to provide optimal sound quality. Thank you.
Speaker Change: Our first question will come from Brad Zelnick with Deutsche Bank. Please go ahead.
Brad Zelnik: Great. Thanks so much for taking my questions. Yossi, it's great to hear you're on track.
Brad Zelnik: to migrate roughly 10% of the install base to Insights this year. Two questions about that. Number one, can you just confirm for us if that's a dollar-based goal or a number-of-customer goal? And just secondly, are you seeing the 20% to 25% price uplift as you expected?
Yossi Carmil: So, thanks for the question. I would like to maybe first start with...
Speaker Change: state that there is a, in terms of the conversion of the insight, it was a really solid Q2. As we said, we are currently on a pace to exceed the 2024 upgrade targets by 50%.
Speaker Change: because we planned one about 10% and now we expect 15% of our install base that will be upgraded to insights during 2024, each in dollars and also in number of licenses.
Speaker Change: Thank you very much.
Speaker Change: also said that we stated that the long-term goal is to upgrade the vast majority of our installed base over the next three years and I'm very pleased to say that we are pretty much confident about our ability to do so.
Speaker Change: In terms of pricing,
Speaker Change: Again, the insights deliver more value than our legacy offering so far.
Speaker Change: It does stuff that our separated models didn't do. Now we are combining them, and it's faster, and it offers advanced extraction and cloud extraction and other capabilities. And higher value commands, obviously, higher price tag. We spoke about 20 to 25 percent higher than the comparable legacy solutions.
Speaker Change: And I can say that we are successfully holding this price point when customers upgrade, which is obviously great validation of the value proposition of the insights.
Speaker Change: It's great to hear. Thanks for the color. And just to follow up...
Donna: for Donna. Donna, you know, NRR ticked down slightly, hoping you can unpack the drivers of that and how to think about it going forward. I think from the presentation,
Donna: It seems like it's just lower expansion rates with existing customers. I want to make sure that's correct. And just curious, you know, why should it not increase given all that Yossi just said, you know, about the great things and the, you know, the uptake of Insights. Thank you so much.
Speaker Change: First, we are very pleased with the business trajectory and the performance in Q2 of this year. We are seeing a great pipeline to support our growth for the second half of the year.
Speaker Change: As I've been sharing, we have raised the midpoint of the ARR.
Speaker Change: And our net retention rate is actually usually two points below the ARR goal. So ICT represents around 2% contribution of new customers and new logos joining the Centebrite as we are already serving the vast majority of the largest law enforcement agency globally.
Speaker Change: The NMR of 124% support our long-term growth and we are very pleased with it.
Speaker Change: Great. Thanks so much. Keep up the great work.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question comes from Mike Kikos with Needham & Company. Please go ahead.
Speaker Change: Hey guys, Mike Sikos on the line here and thank you very much for taking the questions. I want to circle back to some of Donna's commentary on the multi-year commitments.
Mike Sikos: Can you help us think about where does contract duration stand today?
Speaker Change: And the fact that these customers are making multi-year commitments, I think it's a great validation of their commitment to celebrate, right? But curious, is this a newer phenomenon or is it part of a broader trend?
Speaker Change: Maybe it's something that we should actually expect to persist as customers migrate to Insights. Anything there would be helpful on that contract duration.
Mike: So, thank you, Mike.
Mike: In the past, and we shared it with the market, we had around 25% to 30% of the contracts with Mottier.
Mike: Thank you very much.
Mike: and Jonathan Clark. Thank you
Speaker Change: Motion, as I said, in all regions of where we are selling, Americas, EMEA and APAC, and we see slight uptick in this percentage of multi-year deals.
Speaker Change: Maybe to add, especially when it comes to our strategic accounts, our large accounts and our large federal accounts.
Speaker Change: Clearly, we are embracing the element of multi-ideals. It secures basically our stickiness and the commitment from both sides. And on top of that, one can also contribute it to the C2C platform and to the fact that today...
Speaker Change: I am, obviously I am, we celebrate our sticky in the day-to-day investigative work thanks to our collect and review or our insights.
Speaker Change: Suito Solution, however, when you add into the equation the end-to-end effect and the ability to get from a vendor more than just
Speaker Change: Collect and Review but, you know, covering the entire life cycle of investigation, the ability to commit long-term and the interest to work long-term with Cellebrite is increasing.
Speaker Change: Understood. Thank you for that. And again, just coming back to the prepared remarks.
Speaker Change: I think, Donna, maybe you had said that part of this guidance raised anticipates some improving contribution from investments made earlier this year specifically to the quota carrying sales force.
Speaker Change: So it's a bit of a two-part if you're the first.
Speaker Change: Are you guys actually trending better than expected as far as how the hiring of reps was expected to play out this year? And then secondly, are you potentially seeing sales reps scale or ramp?
Speaker Change: at a faster rate than what we've seen historically. I'm just trying to tease out...
Speaker Change: I guess that contribution from those earlier hires this year.
Speaker Change: So, the earliest calls of the year, we spoke about double investment on our EMEA and our America's sales organization.
Speaker Change: led by our new CRO, and we are actually following the plans that we have set at the beginning of the year.
Speaker Change: We have a major investment in those two regions, and we are taking into consideration that the full contribution of new sales quota carriers takes time. And so whoever joined us in Q1 will be much more fully contributing in Q3 and so forth.
Speaker Change: So this heavy investment that we've done in Q1 and Q2, we do expect to start bringing fruits in Q3 and Q4, and mainly when we step into 2025.
Speaker Change: Okay, so it really does sound like...
Speaker Change: Okay, thank you. Bye.
Speaker Change: Thank you. Our next question will come from Eric Martinuzzi with Lake Street. Please go ahead.
Eric Martinuzzi: Just a point of clarification on the SciTech deal. Is there any part of that acquisition that's impacting the Q3, Q4 outlook here, revenue?
Ernie Slice: Ernie Slice
Speaker Change: So as I said, the impact is de minimis, and it's mainly introduced in our services forecast. The total contribution to EBITDA is almost now, as we have introduced some investment in governance and compliance to support the introduction of this business as part of the SET-A-BRITE.
Speaker Change: Federal Solutions Organization
Speaker Change: Okay.
Speaker Change: And then the traction with the federal government, is there, will we be getting maybe a breakout there? It sounds like it's going to be incorporated into the total company reporting, but how are we measuring that from our perspective, the success of that?
Speaker Change: and I'll tell you something. I'll tell you something.
Speaker Change: celebrate federal solutions.
Speaker Change: investment.
Speaker Change: Maybe I'll take it.
Speaker Change: One needs to understand that we created or upgraded basically an already very successful and significant size part of the company. The federal sector in Cellebrite was 19% of our ARR in 2023 and the growth was 21%.
Speaker Change: and the acquisition of SciTech and the creation of Cellebrite Federal Solutions, what we call the CFS, basically enables us to directly engage with federal agencies, customers, and also the relevant system integrators. Much earlier in the project planning.
Speaker Change: and in the process...
Speaker Change: And that should drive more meaningful deployments and obviously...
Speaker Change: The sense of it is initial financial benefits which are associated with it.
Speaker Change: I would say that if I look in a long-term perspective, I do expect that this successful growing segment...
Speaker Change: will get even a boost and we might even think about doubling the size of that activity in a frame of, I would say, three to five years from now.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question will come from Shaul Eyal with TD Cowen. Please go ahead.
Shawl Eyal: Good afternoon Yossi, Dana, Andy, congrats on the ongoing strong performance.
Shawl Eyal: Dana, I want to go back to your analyst day, some of the metrics you provided at the time. For example, you mentioned that public sector customers spend an average, I think it was about $190,000.
Speaker Change: Dollars of ARR per case. Well, I don't have the number of cases to run the calculation. You probably have it.
Speaker Change: Can I assume this 190 metric is actually coming a bit higher than indicated about five months ago? Maybe just a housekeeping, what was the cloud revenue mix this quarter?
Amara Blissat: I might have missed that.
Speaker Change: Can you repeat your last question? It was very broken here. Just the cloud revenue mix. I might have missed that if you disclose that this quarter.
Speaker Change: Okay, so first you take them and I'll take them out [inaudible]
Speaker Change: Okay.
Speaker Change: So...
Shau: Well, Shau, what we have tried to allude to in our investors' day is the very small
Shau: Spend of a law enforcement agency on cerabite solutions.
Shau: in comparison to their total spend in investigation.
Speaker Change: And yes, we did based on a number of investigations that we are seeing being processed with Cellebrite Solutions. We are measuring events on an annual basis.
Speaker Change: Not on a quarterly basis, but I do think that if you see our ARL growth expansion...
Speaker Change: It actually alludes to the fact that more investigations are being done using Celerbrite solutions and our further expansion and growth with Guardian and Pathfinder in investigative units actually supports that result.
Yossi Carmil: We will measure it as we end the year again. With regard to the cloud, Yossi... Stop. Shaul, first of all, thank you for the question. The cloud, in general...
Yossi Carmil: is pretty much related to our ability to offer, I would say, something compelling and differentiated with a C2C platform, which is, by the way, cloud-driven and AI-driven. And I'm glad to say that customers are showing really appetite for a cloud-based solution of Cellebrite.
Speaker Change: Cloud Revenue and ARR continue to grow. It's representing low double digits.
Speaker Change: as percentage of DSQ in 2024, revenue and ARR. And I would say that we see, based on what I said in the trends, tremendous opportunities.
Speaker Change: In that respect, we expect Cloud Solution, I would say, to represent a larger percentage of revenue in ARR over the coming quarters and years.
Speaker Change: Thanks.
Speaker Change: to dance.
Yossi Carmil: And Yossi, if I may, how should we be thinking about the competitive landscape and, you know, specifically what you're seeing out of Magnet Forensics? Thank you.
Speaker Change: question was about competitive... we have some quality issues here so it was about the competitive landscape
Yossi Carmil: Exactly, about a competitive landscape, magnet forensics specifically. Thank you. So, Luke, I'm giving an answer basically as an industry leader here.
Yossi Carmil: and Industry Leader, which is placing itself on the market with an end-to-end portfolio.
Speaker Change: While we are talking about a multi-vendor environment, as we all know, there is only a limited number of competitors who can deliver a credible end-to-end solution.
Speaker Change: And that's a first statement. I would say that side-by-side with the collection review piece, this is our major relative competitive advantage today and into the future.
Speaker Change: In the DFU, we have clear leadership in Android and iOS.
Speaker Change: And that comes on top of the end-to-end.
Speaker Change: To the competitors, specifically, we've seen, I would say, no material changes.
Speaker Change: to the competitive landscape in this quarter. I have to say, and this is not by playing arrogant,
Speaker Change: We are, if we continue to produce this growth, we can and we are more confident today about our strategic direction and our market position.
Speaker Change: By the way, we spoke about it last quarter, and if we are talking about that specific competitor, certain competitors literally emulate our platform orientation and also our marketing messaging, which makes me happy because as a leader I'm leading the context in the industry.
Speaker Change: And so that's to that, I would say that we are more focusing about what we do.
Speaker Change: What we have seen from competitors and maybe as an add-on, there was a moderate price increase that was shown by...
Speaker Change: not only by us but also by Magnet and some others and this is generally consistent I would say with a historical mid-signal digit level of price increase that the market sees.
Speaker Change: Thank you so much and good luck.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question will come from Jeff Van Ree with Craig Hallam. Please go ahead.
Jeff Thanry: Great thanks, I'll add my congrats. Really nice numbers here. On the Insights rollout, I'm curious what progress you've made in terms of penetration of premium into the base and the impacts that the new platform has had in terms of potentially accelerating the adoption of those premium capabilities.
Speaker Change: Look, I call it, let's put it this way, let's call it the premium and all the suite of solutions that Telebyte offers regarding what we call local access.
Speaker Change: We continue to make good progress with advanced local access solutions in general.
Speaker Change: I can say that we are very satisfied that the rate of premium
Speaker Change: and other parts of the collection review of the lawful access modules.
Speaker Change: Within...
Speaker Change: The Insight family increased. The Insight family increased.
Speaker Change: several percentage points from the mid-20s level which we had in Q1 to the high 20s level at the end of Q2024 and maybe to add to that I can say that we are very optimistic and confident that advanced lawful access
Speaker Change: Modules will continue to see strong adoption across our customers in the coming years.
Speaker Change: Yep, that's great. Great progress. And then on the AI, obviously, I think the demo that you did at the Analyst Day is one of the most compelling I've seen in terms of value-add of conversational AI. You talked about the roadmap of AI and you're integrating it throughout the platform. I'm wondering though if there are instances where it's going to be less than gradual, namely you have meaningful new product introductions that have meaningful ARPU impact. How does this playthrough of AI show itself?
Speaker Change: In terms of product introductions and more importantly revenue uplift over the next year or two.
Speaker Change: So, first of all, we need to understand that specifically in our area of customer's place,
Speaker Change: I would say high value to AI capabilities that we brought into the market in the past as we said.
Speaker Change: We've been there since 2016 with homemade grown AI capabilities.
Speaker Change: customers by the way when we talk to them they report that leveraging AI make them achieve
Speaker Change: Really step function increases and we're talking here about speed efficiency and effectiveness
Speaker Change: We are planning...
Speaker Change: to align, I would say, key product and technologies and also go to market, which is related to that.
Speaker Change: and to advance the AI innovation further.
Speaker Change: There will be a focus on the entire C2C platform because if you think about it and maybe a little bit more concrete.
Speaker Change: If you think about our activity and about investigative activity, there is media analysis.
Speaker Change: where unlocking, I would say, insights from visual and audio content is critical and can be massively upgraded with AI. There is the element of text analytics, so decoding and looking at text and text-based evidence.
Speaker Change: And then there is also the element of cybercrime, and maybe specifically in our case, cryptocurrency, and the ability to bypass...
Speaker Change: Traditional elements and accelerate by identifying a persona. I would say misuse.
Speaker Change: when it comes to crime cases.
Speaker Change: So, basically, if you think about what I just said, it's across our portfolio, okay, and we have clear attention to invest and to expand in that area throughout the entire C2C platform.
Jeff Thanry: Thanks, Jeff. Thank you.
Speaker Change: Thank you. Our next question will come from Brian Essex with J.P. Morgan. Please go ahead.
Brian Essex: Hi, good morning and thank you for taking the questions. I want to follow up to questions and insights from Brad, Jeff.
Brian Essex: Maybe give us some insight around, you know, what percentage of your customers come up for renewal in the back half of the year and what the conversion rate tends to be to convert, you know, customers to Insights on Renewal. What is that?
Speaker Change: How difficult is it for them to migrate budget toward technology to address better efficiency the platform offers?
Speaker Change: Thank you for the question. Well, as I mentioned before, around 53% to 55% of our business is actually generated in the second half of the year, powered by the fact that Q3 is the end of the federal year and Q4 is the end of the annual.
Dana Gerner: and Dana Gerner.
Speaker Change: to the install base of licenses that they are holding. They have much larger install base than.
Speaker Change: The Smarter Customers, so...
Speaker Change: I think it's really about how much of the install this is up to be renewed from a percentage perspective than customer.
Speaker Change: And I would say that due to the fact that we are looking at our larger customers towards the second half of the year, the renewal actually follow up the seasonality of the business itself. So it's 53 to 55 percent of the renewal business is also generated in the second half.
Speaker Change: We are seeing great interest in Insight by all these customers that we are approaching. The issue is really around can they make the right decisions.
Speaker Change: Placed to the inside upgraded
Speaker Change: Our expectations include specific oriented budgets required, and whether they are now being preparing sales for next year. As Yossi said, we upgraded or increased our expectations for 10% conversion.
Yossi Carmil: to 15% conversion of our install base. And this is actually supported by the opportunities that we are seeing for the second half.
Speaker Change: Great, that's helpful. And maybe on relativity, can you talk about the economics for that partnership? What do the incentives look like across the partnership and do you have significant overlap with them?
Speaker Change: Was it about relativity, the question? Yes, yes, correct. Yeah, just looking for, you know, an understanding of the economics with the relativity partnership. What incentives look like and how much customer overlap you might have with them.
Speaker Change: Thank you.
Speaker Change: Relativity Partnership has, I would say, a substantial potential in terms of business increase.
Speaker Change: We are talking here about a product introduction between two leading players, basically. We are coming from the mobile and Relativity is a leading e-discovery platform.
Speaker Change: And obviously, a combination of that, the e-discovery platform of their RelativityOne with our remote collection to mobile and to computer, really improves customer standards and work flows.
Speaker Change: For us it means that we can leverage and reach a much larger install base with enterprise solution segment and clearly with joint marketing activities, market education, and self-leadership we can basically improve our position over there.
Speaker Change: We are at the beginning of this partnership at the moment. Just like any other partnership, we need to make sure that the risk...
Speaker Change: alignment on the quarter carrier side
Speaker Change: and to execute those programs.
Speaker Change: But it's something really meaningful and solid that can take us to a different level when it comes to the private sector. Let's put it this way. It gives us, in any case, the confidence.
Speaker Change: Thank you.
Speaker Change #100: Great. That's helpful, Carlos. Thank you very much.
Speaker Change #101: Thank you. Our next question will come from Louis DiPalma with William Blair. Please go ahead.
Speaker Change #102: Yossi, Donna, and Andy, good morning.
Speaker Change #103: Morning. Morning. Good morning.
Speaker Change #104: What has been the early feedback for C2C? I know it was only released in January , but is C2C driving Pathfinder adoption?
Speaker Change #104: Ummmm
Speaker Change #105: Let's, um, um, I'll, I'll...
Speaker Change #106: I would like to say maybe the following.
Speaker Change #107: First of all, I'm glad to say that the perception of the C2C and the end-to-end, in general, resonates very well when it comes to our customer base.
Speaker Change #108: This is one item.
Speaker Change #108: As you know, Louis, we are in the very early days of the situation.
Speaker Change #108: [inaudible]
Speaker Change #108: We brought that because...
Speaker Change #108: The perception of an end-to-end...
Speaker Change #109: is pretty much consistent with a broader digital transformation trend and the need to modernize the mode of operation of our customers, especially in the public sector.
Speaker Change #109: So, since we're in the early days, the percentage of customers...
Speaker Change #109: that implemented the C2C end-to-end is still quite small.
Speaker Change #109: But on the other hand, since we spoke a lot about the trend and about the need to...
Speaker Change #109: Transformed, the digital life cycle of investigations, we are very optimistic that more customers will deploy. I would say multiple celebrities, we should within the C2C platform. And especially
Speaker Change #109: as we integrate them.
Speaker Change #109: More.
Speaker Change #110: It will enable a great ingestion of data flowing, let's say, from the...
Speaker Change #110: Forensic side into the investigative side.
Speaker Change #110: On top of that, it may be worth mentioning, as I said, we are investing a lot in cloud enablement and let's not forget that the cloud as such will make it even easier for our customers to adopt more solutions of the C2C.
Speaker Change #110: We expect further progress as part of our roadmap, which will bring value to more C2C interests by our customers.
Speaker Change #110: Great, that makes sense. And for Donna, you raised your full-year EBITDA guidance by 23%.
Speaker Change #111: With the strong operating leverage thus far this year, it seems that your long-term margin outlook that you provided at the Analysts' Day could be
Speaker Change #112: Conservative. Are there any major margin headwinds on the horizon that we should be aware of? Are there any like large acquisitions with you know lower margin profiles that you are
Speaker Change #113: considering or products with dilutive margins? How should we think about the long-term margin profile relative to your recent strength there?
Speaker Change #114: Well, first, we are very happy with what we've delivered thus far and the fact that we could exceed expectations even on our own. I would say that at this stage we are not changing our long-term model. We are now modeling our 2025, which will be shared with the market early next year.
Speaker Change #114: When we look on our EBITDA margins, the nice performance on our revenue and the fact that we are...
Speaker Change #114: Gradually and consistently growing our OPEX to support this top-line effort actually is the one that supported most of the growth in our EBITDA with a favorable gross margin.
Speaker Change #114: As I said, no changes to the models at this stage. We will revisit and update, if necessary, early next year.
Speaker Change #115: Sounds good. Thanks a lot.
Speaker Change #116: Thank you.
Speaker Change #117: Thank you. Our next question will come from Tamir Zilberman with Bank of America. Please go ahead.
Tamir Zilberman: Hey guys, I wanted to ask maybe a more broader picture about revenue and ARR trends. You raised your revenue guidance pretty solidly above expectations, whereas the ARR guidance raised was a little bit more modest, so I wanted to ask
Speaker Change #119: the difference, you know, what's driving the difference in the magnitude between the revenue guidance rates and the ARR guidance rates?
Speaker Change #120: Well first, you know, we are very pleased with our AR performance. It is in line with what we planned and it is in line
Speaker Change #120: We've, what we communicated is our expectations to the market.
Speaker Change #120: The improved revenue performance is really associated with the.
Speaker Change #120: product mix of how much of the product is. [inaudible]
Speaker Change #121: actually on Prem, James,
Speaker Change #121: compared to the journey to the cloud, and how much of the deals are one-year deals compared to multi-year deals. And we usually look at multi-year deals more towards the second half of the year. We enjoyed some multi-year deals also in the first half of the year, which we didn't plan, and generated a slightly higher revenue than...
Speaker Change #121: We have actually forecasted. So I do believe that the ARR growth and the fact that we are continuously meeting our target is a great sign of the company's progress and ability to continue.
Speaker Change #122: selling its offering and broadening its solutions within its customer base, I think that's good. I think the key is here, and when you think about Cellebrite, is Cellebrite well positioned for, I would say, durable,
Speaker Change #122: growth and profitable growth? And the answer is clearly yes.
Speaker Change #122: As Dana said, great quarter. We raised the midpoint of the ARR for 2024.
Speaker Change #123: And if we look and going back to the investors day, which was mentioned here, the midpoint is even higher than our 24% long-term target as we placed it. So I think that we are in a great place.
Speaker Change #124: Got it and maybe just as a follow-up going back on the previous question on the Relativity Partnership, does that expand your expectations for private sector contribution which I think is still around 10% of the business?
Speaker Change #124: As I said, it's more at this stage, give us the confidence to say that it will help us to meet the targets that we anticipated that we will do.
Speaker Change #124: So, combining forces with a review leader while we are coming as a remote collection leader will enable us to meet the targets.
Speaker Change #124: It's just like any other partnership, we are in a start phase.
Speaker Change #124: We need to see that we're executing properly on both sides. It's also a cultural element of companies all working together. And then, if we will be able to update and accelerate, we will be glad to update about new targets.
Speaker Change #124: Got it. Thank you.
Speaker Change #124: Thank you. This will conclude the day's question and answer session. I will now turn the call back to CEO Yossi Carmil.
Yossi Carmil: Thank you very much. So, look, first of all, thank you, everybody, for joining and thank you for the trust and the interest. I want to emphasize that we are in the middle of the road for 2024.
Yossi Carmil: But based on what we had executed so far, we are pretty much sure about our ability to meet the upgraded targets that we just gave and updated you all about. You can expect really great things from us.
Yossi Carmil: I would like as last to use the opportunity and thank again to all the Cellebrite employees about a very strong quarter and thank you all for participating.
Speaker Change #125: Thank you. This concludes the Celebrate second quarter 2024 financial results conference call. You may disconnect your line at this time and have a wonderful day.
Speaker Change #125: [inaudible]
Speaker Change #125: [inaudible]
Speaker Change #125: [music]