Cellebrite DI Ltd. Q4 FY2021 Earnings Call

Good day and thank you for being here. Welcome to Cellebrite's Fourth Quarter and Full Year 2021 Earnings Conference Call. Currently, all participants are in a listen-only mode. After the presentation, there will be a question-and-answer session. I would now like to turn the call over to your speaker today, Anat Earon-Heilborn, Vice President of Investor Relations. Please proceed.

Thank you, Victor. Welcome to Cellebrite's fourth quarter and full year 2021 financial results earnings call. Joining me today are Yossi Carmil, Cellebrite's CEO; and Dana Gerner, Cellebrite's CFO. This call is being recorded and a replay of this recording as well as the presentation that accompanies this call 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 fourth quarter are available on the Investor Relations website at investors.cellebrite.com. Statements made during this call that are not statements of historical facts constitute forward-looking statements. All forward-looking statements are subject to risk 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 forecast. Some of these forward-looking statements are discussed under the heading Risk Factors and elsewhere in the Company's registration statement on Form F-1 declared effective by the SEC on October 6, 2021. The Company does not undertake to update any forward-looking statements to reflect future events or circumstances. Please note that in the coming weeks, management will participate in a number of investor conferences as detailed in today's press release. Please visit the events section of the Investor's webcast to access the webcast of our presentations at these conferences where applicable. With that, I'd like to turn the call over to Yossi Carmil, Cellebrite's CEO. Yossi, please go ahead.

Thank you, Anat, and thank you all for joining our call. We are pleased to report that we closed the year with excellent fourth quarter results, and we are happy to share our outlook for 2022. We finished the year with strong Q4 results, delivering record revenue of $68 million and ARR of $187 million, and we ended the year with record bookings, record revenue, and record adjusted EBITDA. The healthy market environment coupled with our strong business fundamentals enabled us to increase our revenue forecast for 2022. Furthermore, these factors reinforce our confidence in the long-term growth model, which we shared with you during our going public process in 2021. Now since this is our second quarter as a public company, I would like to use the opportunity to provide a brief overview of Cellebrite before diving into the results. Cellebrite's customers are mostly law enforcement agencies whether it's federal, state or local as well as private sector corporations. Our largest market is in the USA followed by Europe. Our growth strategy is based on continued product innovation in the digital intelligence space and based on building a world-class go-to-market focused organization. The context is as follows. For many years, we have been driving and leading the digital collect and review business. Our solutions allow tens of thousands of police experts globally to quickly provide digital evidence collected mainly from mobile devices, computers, and the cloud as well as other digital sources. Now through our significant R&D investments in this space, we will continue to meet this sub-segment of the digital intelligence market. Cellebrite is also building a suite of solutions that address the needs of hundreds of thousands of investigators, prosecutors, and decision makers in law enforcement agencies. This digital intelligence suite, which includes collect and review, investigative analytics, digital evidence management systems, what we call DEMS, case management and services, VCI suites opened vast opportunities in a very large market. And we believe that we are at a very early stage of realizing this potential. We also continue to invest in a world-class enterprise sales organization, which enables us to dramatically increase our wallet share within our customers as we become increasingly strategic to their operation. The demand for our solutions is driven by a few key factors. First, growing crime rates in categories such as violent crime and organized crime as well as homeland security threats. This increase in crime is coupled with an increase in the quantity, variety and complexity of digital evidence in investigations. Now on top of that, currently, prevailing investigation practices are manual, siloed, and inefficient and as such are just unsustainable. In addition, there is a growing pressure on governments to increase police funding to fight crime more effectively and therefore to deal with a massive growth in digital evidence. Just as an example, in the USA, pandemic-related federal funding became widely available to law enforcement agencies. In the UK, the upcoming budget year will see an increase of over £1 billion or 7% in policing funding. And in this context, let's review our Q4 business results. We are pleased to report a strong net retention rate of 137% for the end of December, which demonstrates our wallet share expansion. Let me share with you a few examples. The first is a $1.5 million three-year subscription deal with a large West European National Police Agency. The deal includes advanced collect and review capabilities in an enterprise solution that connects dozens of endpoints and is expected to deliver nationwide benefits. This is an example of growth. So, the up-sell of a higher grade solution as well as an expected higher lifetime value through the optional subscriptions. The second deal is a multimillion U.S. dollar expansion with an Asia-Pacific based government entity that includes collect and review solutions, investigative analytic solutions, and extensive professional services. The value of this deal was over $11 million and to date it is the largest deal in Cellebrite's history. In this case, we play a key role in planning and designing the investigative flow and it is an example of the value becoming a customer trusted advisor. The third is a large drug enforcement national agency that formed a new narcotics unit, following a sharp 20% increase in overdose death cases. In order to accelerate criminal investigations and reduce the flow of illegal narcotics, the unit implemented advanced collect and review solutions. We continue to work with this police force to further enhance their digital intelligence capabilities. And this is an example of growth through selling to additional buying centers within an existing customer. Last, regarding wallet share, our success in wallet share expansion is also reflected in the fact that through 2021 we booked 83 deals larger than $0.5 million compared to 63 such deals in 2020. Now moving to our offering. We believe that our digital intelligence end-to-end investigative platform is the best solution to address current and future public safety challenges. In Q4, we continue to enhance the platform. First, we launched our cloud-based digital evidence management system designed to transform investigative workflow. Secondly, we've added open source intelligence via the acquisition of digital tools to help jumpstart investigations and extend our platform's reach to the earliest stages of the case. Of these additional conclusions, we see an early active year from an innovation perspective for Cellebrite. Just to remind you, earlier in 2021, we also achieved the following. We enabled mobile data collection on an agency-wide network-based solution. We also boosted our analytic solution with data ingestion from a broader range of sources, and we added remote computer and mobile collection to the private sector. Now, let's look at our plans for 2022. We will continue to invest in our go-to-market in order to develop close and direct relationships with an even larger number of customers. We will focus our investments in our offerings on several key areas. First, bringing access capabilities to the broader customer base specifically for smaller law enforcement agencies as well as the private sector; second, broadening our cloud offering to allow public safety customers to enjoy scalability and efficiency; and third, further streamlining the investigative flows allowing close collaboration between examiners, analysts, investigators, agency managers, prosecutors, and defense teams. Now before I conclude, I would like to also highlight our ethics and integrity advisory committee, which we formalized in Q3 2021 with an amazing group of outside experts in the social, legal, academic, and regulatory communities. They are vital, by the way. They can be found on our website. We are actually aware that our solutions are powerful enablers of digital intelligence, and we are committed to working only with customers who use our solutions in legal and ethical manners. Our Board will work closely with this group on ethics and corporate integrity issues on an ongoing basis. So, in summary, our results for 2021 show that we have a strong growing business. We start 2022 excited about the opportunities in front of us, and we are confident in our ability to drive forward our position as a strategic partner to our customers. We intend to continue being an undisputed leader in digital transformation in investigations and with that, to lead the growth of our markets in the coming years. As a one-stop digital intelligence vendor, Cellebrite modernizes the investigative process, and we look forward to continuing to help law enforcement and the justice system while delivering growth and profitability to our shareholders. Before I turn the call to Dana Gerner, our CFO, I would like to thank the entire Cellebrite team for their dedication and excellence throughout this exceptional year. Dana, please go ahead.

Thank you, Yossi. I'm very pleased to present an analysis of our financial results for the fourth quarter of 2021, which once again exceeded our expectations in revenue and profitability and helped us to close a very strong year for Cellebrite. We delivered best-in-class NOI of 137% and continued to grow our ARR. The strong performance in these two metrics reflects the successful execution of our growth strategy. Revenue in Q4 was up 19% from Q4 2020 and full-year revenue was up 26% from 2020. Total subscription revenue increased 32% in Q4 '21 from Q4 '20, and full-year total subscription revenue was up 41% from 2020. Total subscription represented 74% of the total 2021 revenue, up from 67% in 2020, and in line with our goal of increasing the recurring components of our business. In 2021, 84% of our revenue came from collect and review solutions, 5% from managing analyze solutions and 11% from services. We expect strong growth across our entire portfolio. This means that while the manage and analyze solutions are more niche and expected to grow at a faster rate than the collect and review solutions, the revenue mix is expected to shift gradually over time. ARR grew 37% year-on-year reaching $187 million by the end of December '21. The main drivers for ARR growth continue to be the up-sell and cross-sell of additional modules and solutions to existing customers. Customers are increasing their spending with us driven by the needs to deal with the increasing complexity of accessing data and delivering insights that help to solve cases. The American customer that Yossi described earlier is an example of that. The Q4 win increased the number of licenses used by this customer by 25%, and the ARR from this customer by more than 3x, reflecting expansion in addition to up-sell. Please refer to the slide that the company disclosed for a granular breakdown of the total ARR growth from the end of 2020 to the end of 2021. Now moving to operating expenses, I will discuss on a non-GAAP basis. So, the share-based compensation, amortization of intangible assets, acquisition-related expenses, and one-time expenses are all excluded. Non-GAAP operating expenses of $47.9 million in the quarter increased 29% from Q4 in the previous year. We ended 2021 with 898 employees, up 18% from the end of 2020, and so the major driver for the operating expenses increase was headcount growth and recruitment costs. In addition, we incurred higher public company costs and experienced an increase in travel and marketing events cost due to the higher in-person interaction. We continue to record in a very targeted manner to support future growth and scale. In Q4 '21, adjusted EBITDA and margins were $8.9 million and 13.1% respectively. For the full year, adjusted EBITDA and margins were $47.9 million and 19.5%, reflecting the higher profitability rates before we begin incurring public company costs. Non-GAAP net income was $5.2 million for the quarter and $38 million for the full year, and non-GAAP fully diluted EPS was $0.03 for the quarter and $0.24 for the full year. Operating cash inflow in the fourth quarter of '21 was $29.8 million, and in the full year, it was $36.1 million. After a cash payment of $20 million for digital clues acquisitions, we ended the year with approximately $181 million of cash, cash equivalents, and short-term investments. Now moving to 2022 outlook, we expect December '22 ARR of $250 million to $265 million. Each range represents between 34% and 42% growth from December '21. We expect the vast majority of the ARR growth to come from selling additional new licenses to existing customers, as was the case in '21. We expect full year revenue for '22 to range between $285 million and $300 million. Please note that typically our revenue is weighted towards the second half driven by the September ending of the U.S. federal fiscal year and the December ending of the fiscal year for most of our other customers. We expect gross margin of between 80% to 82%. The full year expected adjusted EBITDA is $39 million to $44 million. We expect profitability to be significantly higher in the second half of the year compared to the first due to the operating leverage of the higher expenses revenue in the second half.

Our first question will come from Jonathan Ho from William Blair. You may begin.

I just wanted to maybe start out with some of your comments around pandemic funding and maybe seeing some of that flow through to your law enforcement customers. Can you help us reconcile how you're seeing that impact the pipeline and your thoughts around maybe the U.S. government strengthening your guide for 2022?

So in principle, what we are saying Jonathan, and thank you for the question, is the increase in interest from our U.S. government customers in our enterprise solutions and their ability to look at a long-term pipe for longer periods of engagement with us, which usually used to be a one-year engagement. They're taking into consideration that those funds are looking at a period of more than one year, and we're discussing multi-year deals with them and longer engagements.

Regarding the adjusted EBITDA guidance for 2022, there appears to be a decline in the implied margin compared to 2021. You mentioned that part of this is due to public company costs and investment expectations. Could you provide a breakdown of the additional investments you're making and any other impacts beyond the public company costs?

Yes, I would like to refresh your memory that we acquired Digital Clues in November '21. We also shared that there will be some additional costs related to the operation of this acquired business in '22 which is a full-year impact and that will impact somewhat our profitability. Furthermore, we did budget into our '22 budget, getting out of the pandemic, restrictions in more face-to-face activity, and moving to a more human life throughout the year compared to '21 and 2020.

Jonathan. I would like to add a little bit to the former questions, Yossi. Regarding our comments on the pandemic, is that okay? Maybe start a little bit with the current business climates and business environment that we see which is very positive. The environment today is I would say healthy and pretty much across the board. In late 2020, when the 2021 budgets were planned, the funding trends were pretty much mixed in some geographical areas; budgets increased, but in others, they were still under the COVID impact. In late 2021 and end of 2022, what we see and what we saw is a stronger budget environment. One of the most important factors — and by the way especially in the U.S. — is the pandemic-related federal funding has become widely available to agencies, providing a significant source of income, especially pushed by the Biden Administration. We can also see that there are other examples of budgets related to pandemic in other areas such as in the UK, as I mentioned, and Australia, where for example Queensland police received a 7% budget increase in 2021-2022 compared to the previous year. Often — and again, so maybe in that context, there is a positive business climate supported by such pandemic-related funding.

Our next question comes from Mike Cikos from Needham. You may begin.

Thanks for taking the questions here. Maybe to start with Yossi. The number of large deals that you guys are doing headcount substantially on a year-on-year basis. Now, I'm trying to figure out what would you say is driving that success? Is it having more products? Is it having this broader platform? Anything you could talk to there would be incremental? And then for Dana, it's just to put a finer point on unlike the previous questioner, but I wanted to make sure you guys are looking at, I guess, increased costs as we move post-pandemic towards this more normalized environment. I guess I've heard from other companies that these costs could be in the way of maybe 2% to 3% drag on EBITDA or operating margins. Is that a fair characterization as we think about the impact that Cellebrite is seeing in its own assumptions as we look to calendar '22?

Thank you for the question. So as you suggested, I will take the first one regarding those large deals, and the large deals are obviously not mentioned by us and not happening just like that. It has a meaning because we continue to see momentum with large deals, and I will say also multi-solution deals which we were, by the way, highlighting, not only in this release but also in former releases. It basically shows our ability to grow and nurture and get more wallet share from the same accounts, or as we said, the original set in our plan, grow within the accounts selling to existing and new buying centers within the same accounts, and basically see more digital intelligence relevant budgets. We climb up the food chain from the labs, where we used to be to the rather head of investigation and the entire agency end-to-end investigative flow. For example, the large deal that we have done, the five-year deal, is basically with a customer who is a relatively low customer of Cellebrite showing a situation of a customer who reached a very advanced situation already purchased many of our solutions in the past. Here, there is a focus on the expansion of the sources of digital evidence from which is collection alongside with analytics and extensive professional services. And it goes basically to the same thing, large deal, more expansion, more nurturing within the large account, as reflected or as we promised, basically as part of our go-to-market and growth strategy. Dana?

Yes. And I would like to confirm that indeed the opening of the market would have an impact of around a 3% additional expenses on profitability.

That's very helpful. And I know it didn't come up in the prepared remarks, but I just want to make sure I'm doing my due diligence here. But if I think about some of the companies across the market that have spoken about global supply chain shortages and inability to get product, it sounds like that really isn't a factor for you. I know in the quarter specifically, you guys said that your team has done a great job as far as building inventory to kind of component shortages, but curious is that still the case as we stand today? Thank you.

Yes, it's still the case. We are basically in a situation that we planned ahead very well in all relevant components. We can say for sure that there is no impact or definitely, no negative impact, or only positive impact on our business. We are on track, well-equipped, and based pretty much, good planning and sourcing. There is no negative impact on us, basically positive, and we continue with our plan as originally stated.

Our next question comes from the line of Shaul Eyal from Cowen. You may begin.

Thank you. Good afternoon, guys. Congrats on fourth quarter performance and outlook for 2022. Yossi or Dana, I wanted to ask about the great promise seen with large deals in from a different direction. Are there any initial investments needed on your end at the early phase of these contracts? Or are they similar in cost structure and profitability let's say to a typical six-figure transaction?

I will take it. So, in principle, Shaul, there are no differences in other size deals which are not very transactional, so most of these deals are coming from our large customers. This was discussed before; we have very experienced account executives coupled with experienced tech sales personnel. In most cases, it's just a very good sales motion, but Yossi please elaborate.

Obviously, I will strengthen the answer, Shaul. We are still in the mode of plug and play as much as possible. Selling basically simple, fast, adopted solutions to a fast, well, I hope, fast-adopting environment. We are not going that much to tailor projects; it's still our products, our solution. In most of the cases, there is no need for extra preparation. There will be in the future, as we basically go deeper into what we called strategic mega accounts. There will be situations that we will need to do some custom stops, integrate our solutions with others. But in the majority of this strategic account penetration and even in those large deals, there is no doubt much preparation, and it's pretty much in the course of our offering.

And Dana, did you meet your 2021 hiring plans or targets? And what are those for fiscal '22, maybe just from a qualitative perspective?

Let's put it this way. Basically, we were, I would say, pretty much in good shape. We're glad to meet, I would say, the headcount targets for this year, as we did. And basically due to relatively low attrition rates compared to the market, and successful recruitment efforts, we met the headcount targets for 2021. All that needs and takes, I would say, to meet the 2022 financial targets. And like everyone else, we see in some of the areas or in some professional professions that the market is in a very, I would say, more competitive environment. And I would say that sums it up; we have a very strong value proposition as a company, and we don't see any special difficulties.

Our next question will come from the line of Jamie Shelton from Deutsche Bank. You may begin.

Just a quick one for me. Premium Enterprise is a compelling value proposition and as of the last disclosure, I believe 28,000 users, only a few hundred Premium units. Going forward, is the innovation going to be the kind of product innovation focused on those advanced extraction capabilities? I guess, is it a carrot and a stick type scenario trying to connect more of those users to Premium? Just trying to frame how you're approaching connecting that large existing base to advanced extraction capabilities at a variance price?

I would — first of all, you describe it and it's great to remember this because indeed we spoke about it. We spoke about it because in the area of collect and review, we're planning our ability to use the Premium Enterprise to connect the users to a central premium and deploy special capabilities to all well-entrenched users in the field is a key element. There is only positive in that because again for the case, I go back to the last time we spoke about it. One is to enable the user to consume remotely the advanced capabilities of the premium license including the support in collecting all the unique operating systems around Android, around iOS and so on. For the large customers with significant case of, I'd say, first of all, large amounts of Cellebrite licenses in decisions and industries, those with this device backlog feature — if you remember that one of the things we are talking about in investigations is the backlog due to the huge amount of digital sources. Here we are improving the mode of operation because these advanced capabilities are going very efficiently into the field without the need to physically move thumb drives and all that stuff. We intend to invest — to sum it up, we intend obviously to invest a lot as I mentioned in our previous presentation. In special capabilities around research, around access, I mentioned obviously small customers, but obviously to the large agencies. The Premium Enterprise is the vehicle, the major vehicle to bring all those capabilities into the field.

So just last question. I guess, as you try to connect more of those units to Premium via the connect client server architecture of the enterprise device. Is it so much, as we assume that as security hardening and encryption challenges increase then the need for premium will increase and therefore the demand for enterprise will increase? I just try to kind of how you're going to change that ratio between 28,000 users and a couple of hundred premium?

A couple of hundred of premium units can serve thousands and dozens of thousands of UFED units. Because imagine an agency where a premium is in a central place today or a certain location without connectivity to UFED. You need basically to move evidence in a physical way from one location to the next. The entire principle here is either placing a Premium Enterprise in one location and serving well connected hundreds of them, or basically to place it in a SaaS mode or on a private cloud to enable an easier distribution quicker, faster. Basically, less Premium Enterprise but more than we are placing today in comparison to the regular premium will serve thousands and dozens of thousands of UFED. And one needs to remember that within that move the number of UFED will increase because it eases basically the rationale to acquire more licenses of collect and review and place them in end stations that are well connected. This is vital, especially when it comes to security demands and all that stuff, we will mix all the local needs, as we do in other parts of our products, which are cloud-based and placed in customer environments, for example, in a private cloud.

Our next question comes from the line of Louie DiPalma from William Blair. You may begin.

Good morning, Yossi and Dana. Last October, you launched the Remote Endpoint Inspector for commercial customers. In the past, you have discussed how your solutions are used by accounting firms, law firms, and many financial services organizations. However, commercial today is still a small percentage of revenue. So, I was wondering, can you talk about how your commercial vertical is steering relative to law enforcement and your federal customer verticals?

Yes. I'll take it at least for the beginning. First of all, I think that we continue very successfully with our plans regarding the private sector. As you mentioned, indeed, we launched the Endpoint Inspector. From an offering perspective, the endpoint which represents remote mobile collection combined with computer that we offered is I would say the first step in bringing a disruptive offering to this market, and we are very pleased with that. And from the fact that we have this part of the offering, I can also just refresh we said that at this stage, we are building our go-to-market on bringing a disruptive offering combined with winning more logos. In fact, in 2021, we acquired approximately 300 new logos for the private sector. Basically, there is a long-term target here because we are focusing on the collection piece. We intend within collection and especially with the remote collection to acquire more customers and by that come basically with a solution, more solution approach to customers. With that, using the trends of remote collection is one of the trends, which are pushing budgets within the private sector. We see those budgets getting bigger in the commercials in the private enterprise market and that's in an option. So, we are very pleased with what we have today. Import is out there, ready for 2022. I would say disruptive enough in order to increase our share within this market.

Our next question comes from the line of Tal Liani from Bank of America. You may begin.

I have a question on the ARR guidance. You previously lowered the ARR guidance from 44% to 34% for growth. But then you closed the year at 37% and you've guided — the growth guidance for 2022 is up from 32% to 38%, or at least that's what I had. So you lower this, but now you're increasing it versus what we had before. And the question is: can you talk about your confidence with the higher ARR numbers? What are the trends? And can you explain the decline? Once again, we're seeing very good numbers coming out. What are the underlying trends with these changes? Thanks.

I'll take it. I believe that when you look at our ARR growth plan for 2022, these are very healthy ones that you mentioned — 34% to 42%. When we provided guidance for '21, we said that we would meet our long-term ARR targets and catch up with the little bit of a delay that we had in '21. As you know, we used to sell only perpetual. We are moving very strongly into subscriptions. The ARR is pending on the pace of the adoption of the subscription model. We've seen a nice adoption in '21. We're seeing even a nicer adoption into '22. The strategy of selling more to the customers, more licenses through after quarter actually fortifies the confidence in our ability to bring the ARR growth for '22.

Our next follow-up will be from Shaul Eyal from Cowen. You may begin.

Maybe just a quick housekeeping question for Dana. Dana, can you remind us the source of the $49 million of net financial income for this quarter? Thank you.

Yes, of course. Through this SPAC, we've introduced three financial instruments. One is the warrants that we just came from this SPAC, the public warrants, and the private warrants. There are no churns and the price adjustment churns or all of them are in our long-term liabilities balance sheet. All three instruments are being evaluated on a quarterly basis to their fair value, and the difference in their face value flows into the financial income or expenses.

Thank you. I'm showing no further questions in the queue at this time. I would like to turn the call back over to Yossi Carmil for any closing remarks.

Thank you very much. Before we conclude today's call, I would like to thank you all for joining us and wish you all a nice day. Thank you.

And this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.