Good day and thank you for standing by. Welcome to the Cellebrite Q1 '22 Earnings Call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. I'd like to hand the conference over to your speaker today, Anat Earon-Heilborn. Please go ahead.

Thank you, Sandra. Welcome to Cellebrite's first quarter 2022 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 first 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 Annual Report on Form 20-F filed with the SEC on March 29, 2022, as amended on April 14, 2022. 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 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.

Thank you, Anat, and thank you all for joining us. I would like to focus in this call on three main topics. First, our strong results for the quarter. Second, the healthy market environment. And third, the substantial growth potential we have within our existing customer base. We are excited to report a strong start to the year, delivering strong growth on top of an already robust comparable quarter last year. We are pleased to report that ARR increased 33% year-on-year and reached $201 million, and revenue increased 17% and reached $62.4 million. This puts us on track to deliver on our target for the full year and on our long-term growth objectives. Next, our successful execution was also reflected in a net retention rate of 128% as of the end of March. This is the 13th consecutive quarter with NRR higher than 120%, and we are very pleased with the strength of this metric. Moreover, during the quarter, we booked 18 deals larger than $0.5 million compared with 17 such deals in Q1 '21, driven by wider adoption of our digital intelligence suite of solutions. Our performance reflects our position as a leading vendor in a growing and healthy market. Our growth is a result of two main pillars. The first is providing law enforcement agencies with the broadest, deepest, and most innovative digital intelligence suite of solutions on the market. Our solution provides digital evidence collection and review, investigative analytics, investigative management, and relevant services addressing the entire value chain of digital investigations. The second pillar is our focus on significantly increasing our wallet share within our existing customers. Our go-to-market strategy is designed to leverage Cellebrite's leading market position and strong customer base. Cellebrite has been a driving force in the field of digital collection and review market for many years. It has always been focused on building a suite of solutions that addresses the needs of hundreds of thousands of investigators, prosecutors, and decision-makers in law enforcement agencies. This digital intelligence suite, which includes collection and review, investigative analytics, digital evidence management, case management, and services, opens vast opportunities in a very large market, and we believe that we have only scratched the surface of our opportunity in this market. Given our status as the go-to solution with thousands of law enforcement agencies globally, we believe we are strongly positioned to continue to provide faster, highly effective, and more accurate solutions for our broad customer base. Moving to the second topic on today's agenda, I would like to share our perspective on the market environment. Over the past few quarters, we have seen a healthy budget environment. This trend continued in the first quarter of 2022, and we expect this to be the case for the rest of 2022. There is growing pressure on governments to increase police funding to fight crime more effectively, and therefore to deal with the massive growth in digital evidence. A recent example is President Biden's 2023 proposed budget that includes support for law enforcement largely at or above 2022 levels. The willingness to spend in the USA, our main market, reflects an acknowledgment that the fundamental demand drivers for our solution are continuous. Clearly, the quantity, variety, and complexity of digital evidence in investigations are all growing in our world and worldwide customer landscape. In addition, criminals are increasing the use of technology. For example, a few weeks ago, the FBI released its Internet Crime Complaint report that revealed that the number of complaints increased at a compounded annual growth rate of 29% over the past four years. Against this backdrop, the investigation process must modernize and cannot remain as manual, siloed, and inefficient as it is. An example that reinforces this necessity is the U.K. Channel 4 News investigation that revealed in late February 2022 that a total of over 21,000 devices, including mobile phones, tablets, and computers, are waiting to be examined in the U.K. alone. Moving to the third topic, let's talk about the substantial growth potential we have within our existing customer base. While some customers are more mature than others, essentially all of them are still at the early stages of transforming and modernizing their investigative workflow. Let me now share a few examples from the first quarter. While many agencies continue to focus on adding advanced capabilities at centralized forensic lab sites, a rapidly growing number of forward-thinking agencies are investigating significantly to empower frontline officers in the field, allowing earlier access to investigative data enables law enforcement to jumpstart investigations. The $2 million win that we announced in early April, with the National Police Force in EMEA, is an example of this type of expansion. The bill reflects one of the largest collection and review enterprise deployments to date, connecting over 100 police stations nationwide. Another critical growth factor is modernizing the agency's mode of operation through the adoption of high-end investigative analytics and management solutions. In a deal reaching nearly $3 million, a National Police Force purchased from us multiple solutions, including investigative analytics to assist with major investigations in a division specializing in organized and drug-related crime. During the proof-of-concept, investigators achieved quick actionable intelligence for their investigation. Within a matter of hours, they discovered not only what previously took them approximately six weeks but also identified a new person involved in a murder case. Lastly, our domain expertise and scale of operation make our professional services, which we view as an integral part of our digital intelligence suite of solutions, an additional avenue to increase wallet share. In Q1, a large municipal police force engaged with us to help it overcome its digital device backlog through outsourcing advanced collection services at a scope of approximately $700,000. Now let's talk about what we do to ensure we continue to realize this massive growth potential and our progress on the plan for 2022 we articulated on our last call. First, we continue to invest in our go-to-market as planned in order to develop close and direct relationships with an even larger number of customers. To that end, we assign senior account executives to dozens of additional large customers. This facilitates higher levels of discussions with senior officers that have the mandate to implement digital transformation within the organization. In addition, in Q1, we launched customer councils, which are forums comprising senior decision-makers that we intend to convene periodically to exchange ideas on digital intelligence matters. Further, we believe this type of interaction will cement our thought leadership position in the market. We continue to invest in our offerings in order to expand the suite of solutions and capture an even bigger share of the investigation-related spending. We highlighted on our last call the need to bring advanced access capabilities to the broader customer base, not just the large law enforcement agencies. As we speak, our team is at Techno Security, one of the leading trade shows in our space, showcasing our premium as a service, our cloud-based collection and review solution. This is a flexible licensing option that allows law enforcement agencies of all sizes to access our most cutting-edge technology through a cost-effective cloud-based solution. We are glad to bring our most advanced capabilities to more customers and help them protect and save lives. We are also pleased to announce the collaboration with Chainalysis, which will bring to our customers integrated blockchain analysis, enriching investigations with information about transactions or networks related to cryptocurrency. Such partnerships help us ensure that we offer a truly comprehensive digital intelligence suite and bolster our streamlined end-to-end investigative solution. We intend to continue and pursue additional integration and cooperation opportunities in the future. In summary, we are very pleased with our performance in the first quarter of 2022. Our market position is strong, and the opportunities in front of us are vast. IDC recently validated our position as a market leader in its first-ever market scape for digital forensics. The report is an acknowledgment that the digital forensic discipline as part of the broader digital intelligence market has reached a new level of maturity. It is a testament of our leadership, cutting-edge technology, and domain expertise. It also reflects the crucial and expanding role we play in safeguarding public safety around the world. With that, I will turn the call to Dana.

Thank you, Yossi. As Yossi said, ARR grew 33% year-on-year, reaching $201 million by the end of March 2022. The main driver for ARR growth is, once again, the expansion within existing customers, representing 33% year-on-year growth. Yossi gave a few examples on how we sell more licenses and upsell and cross-sell additional solutions to existing customers. All of these examples fall within this packet. New logo contributed another 5% growth. In addition, price increases and the transition to term license contributed modestly to ARR growth. Revenue in Q1 was up 17% from the first quarter last year and reached $62.4 million. The main growth driver continues to be total subscription revenues, which increased 19% year-on-year. Total subscriptions represented 77% of the quarter revenue. Subscription licenses are an important growth driver for Cellebrite, as it helps create a long-term incentive to increase customer spending with us. For example, one of our largest deals in the quarter was with a customer that was an early adopter of premium subscriptions when it was introduced in late 2019. In Q1, the customer renewed its subscription for the third time and extended the length of its commitment. We also saw strong growth in professional services revenue, which was up 64% compared to Q1 last year, reflecting the resumption of in-person training activity. In most countries, we are back to pre-COVID levels of activity. Our GAAP gross margins were 82.4% in Q1, slightly above our expected range for the full year of 80% to 82%. Moving to operating expenses, I will discuss this on a non-GAAP basis. Share-based compensation, amortization of intangible assets, acquisition operating expenses, and one-time expenses are all excluded. Non-GAAP operating expenses for $49 million in the quarter increased significantly compared to Q1 last year, but only marginally on a sequential basis. This reflects our cost structure as a public company, the increased in-person interaction and related travel, and our continued investment in our growth. We ended March with 920 employees, up 17% from the end of March last year. We continue to invest in our cutting-edge solutions and go-to-market efforts and expect to end the year with over 1,000 employees. Adjusted EBITDA in the quarter was $4.1 million, reflecting a margin of 7%. This is in line with the typical seasonality for our business. Historically, our revenue in the first half of the year accounted for approximately 45% of the full-year revenue. Most of our costs increased moderately throughout the year. This creates a sharper seasonality in profitability than in revenue. We are therefore on track to meet our full-year margin target of 13% to 15%. Non-GAAP net income in Q1 was $1.4 million and non-GAAP fully diluted EPS was $0.01. Operating cash outflow in the first quarter was $10.5 million, and in the last 12 months, we generated $25 million in cash inflow. We ended March with approximately $172 million of cash, cash equivalents, and investments. We are reiterating our financial year 2022 guidance. We maintain our expectation that December 2022 ARR will range between $250 million and $265 million, up between 34% and 42% from December 2021. We also maintain our expectation for full-year 2022 revenue to range between $285 million and $300 million. We expect Q2 revenue to be higher than Q1 revenue, and the second half's revenue to be higher than the first half. We continue to expect gross margins to be between 80% and 82%. As stated, we are on track to meet our adjusted EBITDA outlook of 13% to 15%, which means $39 million to $44 million. Margin is expected to be significantly higher in the second half of the year compared to the first. With that, I will turn the call to the operator to open the Q&A session.

We have the first question coming from Tomer Zilberman at Bank of America. Please go ahead.

Hey, this is Tomer Zilberman on for Tal Liani. Just a quick one for me. NRR of 128 was a bit lower than the past couple of quarters. Just want to get any takeaways there?

As we described, when we are transitioning to subscription, we expect ARR and NRR to align throughout the year towards the revenue growth. So this was quite expected considering the fact that the first step of moving to subscription provides higher NRR than when you are aligning to a long-term subscription business model.

Thank you. Just one moment. Next question comes from the line of Jamie Shelton from Deutsche Bank. Please go ahead.

Hi, guys. Thanks for taking the question. Can you hear me, okay?

Sorry, Jamie. Could you repeat?

Hey, can you hear me okay? Just checking?

Yes, we can hear you.

Quality is not that.

I was just curious to see how momentum is in getting your new Fed base connected to premium enterprise. I think you gave us some helpful color maybe last quarter or when it was initially announced. I was curious to see if there's any momentum there. Thank you.

As Yossi mentioned in the call, we launched Premium Enterprise last year. Just to showcase the premium as a service, we started introducing customers with Premium Enterprise, and we are seeing an increased number of UFED connected to the premium by having more and more customers adopting the Premium Enterprise as their main advanced access solution. We do not provide currently exact numbers, but we are on track with our annual expectation and 2022 plans.

Just to add that, as we said last time, Premium Enterprise is the main vehicle to bring advanced capabilities to the fields to all UFEDs. Obviously, combined with continuous investment in the UFED, such as access to coding and revenue. We are very pleased with the way Premium Enterprise is performing at the moment and, as I said, remains the major growth engine as part of collection and review activity.

Brilliant. Thank you very much, guys.

Thank you.

Thank you. Next question comes from the line of Louie DiPalma from William Blair. Please go ahead.

Thanks. Good morning, Yossi, Dana, and Anat.

Good morning.

Good morning.

Hi, Louie.

Hi. Given all the global geopolitical tension, there's been a lot of industry news related to open-source intelligence. With that context, I was wondering what has been the early adoption for your Digital Clues acquisition? Has it met your early expectations? And do you have plans for further investing in the Digital Clues asset and open-source intelligence, in general? Thanks.

Thank you for the question, Louie. First of all, I have to say that we are very pleased with the investment and very pleased with the fact that open-source intelligence is part of our offering. In Q1, we can see that we have an increasing pipeline, mainly in Europe, Asia Pacific, and Latin America. There is also a clear strong need in the USA at the state, local, and federal levels. Good traction in the investigation space. Again, there are many excellent tools, but having OSINT as a standard tool for investigation, combined with the digital intelligence or connected to our Pathfinder, is a key relative advantage of Cellebrite. That resonates very well in police, and there is also expected interest in the intelligence departments within the police and in some intelligence organizations. We are very pleased with the start of the momentum so far.

We can also say that we are seeing an increased pipeline.

Great. And on the last earnings call, thanks, Dana, for that. I believe you mentioned your target to increase your quota-bearing headcount by 35% this year in order to take advantage of the healthy budget and your pipeline. So I was wondering if you have a status update on that target. Do you still plan to increase headcount by that amount?

To my memory, we were speaking about over 1,000 employees. We stated 920 by the end of this quarter, and we do expect to cross the 1,000 mark by the end of the year. This is according to our budgets and plans to meet our go-to-market and investment in technology. And we are on track.

Great. And one last one. Last year, you announced a partnership with Axon, and you recently disclosed your partnership with Chainalysis. Can you discuss your decision to build the technology yourself versus partnering with a third party? How do you expect your partnerships with Chainalysis and Axon to evolve over time?

I would say a generic statement about the partnerships. When a company like ours aims to build an end-to-end investigative flow from the context of the mode of operation of customers, we do not necessarily need to offer everything ourselves. It's a multi-vendor environment, and at the end of the day, we want to bring value to the customer. A key part of such a strategy is to know how to have an open system and collaborate with other qualitative vendors to bring value to the customer, because that is basically the end goal. Our go-to-market strategy does not necessarily involve doing everything by ourselves, but also forming partnerships. The partnership with Chainalysis brings great value to customers, as Chainalysis is the leading blockchain data platform. The usage of cryptocurrency is increasing, so leveraging this technology for criminal activity is a key element for our customers. Their expertise will be seamlessly integrated into Cellebrite's suite of solutions, PA and Pathfinder, and through this partnership, we are offering customers a window to sophisticated criminal activity that begins funded through cryptocurrency and masked by the anonymity of blockchain. Customers can identify cryptocurrency-related activities, track the flow, and create a secure trail of evidence all in one place as part of the digital investigation. As for Axon, this is valuable for customers by connecting well-collected investigative data from our tools analyzed by Pathfinder, and the integration with evidence.com.

Sounds good. Thanks, Yossi.

Thank you.

We have no more questions at this time. I would like to hand back over to the speakers for final remarks.

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 very much.

That does conclude our conference for today. Thank you for participating. You may all disconnect.