Cellebrite DI Ltd. Q4 FY2023 Earnings Call

Welcome to the Cellebrite Fourth Quarter and Full-Year 2023 Financial Results Conference Call. All participants are currently in listen-only mode, and we will open the floor for questions after the presentation. I will now hand the call over to your first speaker today, Mr. Andrew Kramer. Mr. Kramer, the floor is yours. Thank you very much, Angela. And good morning, everybody. Joining me today from Washington, DC, are Yossi Carmil, Cellebrite's CEO; and Dana Gerner, Cellebrite's CFO. Tom Hogan, Cellebrite's Executive Chairman, is also with us today and will be available to participate in the Q&A portion of our call. There is a slide presentation that accompanies our prepared remarks. Please advance the slides in the webcast viewer to follow our commentary. We will call out the slide number we're referring to in our remarks. This call is being recorded and a replay of this recording will be made available on our website shortly after the call. Starting with slide number two, a copy of today's press release and financial statements, including GAAP to non-GAAP reconciliations. This slide presentation and the quarterly financial tables and supplemental historical financial information for each quarter of 2023 and 2022 as well as 2021 data are available on the Investor Relations website at investors.cellebrite.com. Also, unless otherwise stated, our discussion of our fourth quarter and full-year 2023 financial metrics as well as the financial metrics provided in our outlook on today's conference call will be done on a non-GAAP basis only, and all historical comparisons are with the fourth quarter of 2022 or the full-year 2022 unless otherwise noted. In addition, please note that statements made during this call that are not statements of historical facts constitute forward-looking statements. 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. 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 April 27, 2023. The company does not undertake any obligation to update any forward-looking statements to reflect future events or circumstances. Slide number three provides the agenda for today's call. As you will hear, we closed 2023 with another strong quarter. As a result of our accomplishments today and the near-term opportunities we see, we are excited about our prospects to build on our momentum in 2024, which is reflected in our financial expectations. And with that said, I'll now turn the call over to Yossi Carmil, Cellebrite's CEO.

Thank you, Andy. And thank you all for joining us today. So Cellebrite delivered an outstanding performance in 2023 and we closed the year with another strong quarter. Our team did a great job executing on our plans throughout the year. We delivered impactful, customer-centric innovation, we expanded our customers' relationships, built our brand, and thoughtfully managed all aspects of our operation. Our accomplishments and strategic progress enabled us to exceed our original and upgraded 2023 financial targets. We also surpassed Rule of 45 status in 2023 with ARR growth of 27% and adjusted EBITDA margins of 19%. We move into 2024 as an even stronger market and technology leader. Now we began 2024 by announcing Cellebrite expanded Case-to-Closure, our C2C software platform. Our C2C platform is trusted by thousands of public and private sector customers in support of their efforts to close more cases faster. Now every day, our customers see that Cellebrite's solution delivers on our brand promise of Justice Accelerated throughout the entire digital investigation lifecycle. Our solutions play an important role in helping our customers transform their investigative workflows and make digital evidence more accessible, more intelligent, and more actionable. And as a result, we have built a strong foundation for us to continue thriving as a market and technology leader going forward. But before I dive into the details, I want to say that it is definitely an exciting time for Cellebrite and its shareholders. And we want to share more about how exciting our development is. Over the past years, we've taken important steps to upgrade our investors' communication and we are building on this effort in two additional important ways. First, I'm happy to inform that we'll be holding our first-ever Investors Day next month, which will be a great opportunity for us to share more about our healthy growing market, about our value proposition that is resonating with customers, about our attractive opportunities for strong growth, and our very bright future. Second, as of this quarter, we are providing quarterly guidance as a complement to the annual outlook that we have always offered. Now while I plan to share more about the opportunities that lie ahead for Cellebrite in a moment, I would like to turn now to slide four to recap our Q4 performance and selected KPIs. More specifically, ARR grew 27% to $315.7 million. Total revenue of $93 million increased 26% on the strength of a 26% increase in subscription software revenue. We delivered adjusted EBITDA of $22.27 million, or 24% on a margin basis, and non-GAAP EPS of $0.11. Lastly, we ended 2023 with cash deposits and investments totaling approximately $332 million, an increase of 62% since the end of 2022. Looking at our full-year performance, Cellebrite exceeded its targets and Rule of 45 status. We achieved record ARR and revenue, mainly due to our success in expanding existing customers' relationships and nearly doubling our adjusted EBITDA margins. We aim to build on these results going forward by delivering a balanced mix of strong ARR growth and healthy profitability in 2024. There are a number of factors that reinforce our confidence about our prospects for continued success in 2024, so let's move to slide five to cover this. I'll begin with our market, and we continue to operate in a healthy market. While overall spending on public safety continues to grow at a steady, moderate pace, we expect customer spending on Cellebrite solutions to keep increasing at a much faster rate. Our customers remain resource constrained; they are perpetually understaffed, underequipped, and under pressure. Our Case-to-Closure platform is designed to enable our customers to close more cases faster by addressing major challenges such as surging data volumes, increased complexity, operational inefficiencies, and building public confidence in law enforcement's ethics and accountability. Regarding customer relationships, we are fortunate to have built durable, expansive relationships with a wide range of government agencies at national, regional, and local levels. Most of our growth comes from upselling and cross-selling into our installed base. Digital forensic software solutions are both trusted and pervasive within the digital forensic units of our customers. This position, combined with our Case-to-Closure platform, is unlocking further expansion within digital forensic units and accelerating growth within investigative units. The fourth quarter saw healthy attachment rates of sales involving multiple flagship solutions within our Case-to-Closure platform. Cellebrite has evolved from offering cutting-edge point products into a true end-to-end platform provider with solutions used throughout the digital investigation lifecycle, with deployment flexibility spanning on-premises, virtual private cloud, or full SaaS mode. This is a major differentiator in the marketplace, which enables us to effectively address a broader range of our customers' pain points. Our Case-to-Closure platform is composed of three primary tools. First, within digital forensic units, Cellebrite is widely recognized for best-in-class digital forensic software used to access mobile phones, extract data, and reveal important digital evidence. Building on this rich experience, Cellebrite is moving our industry forward once again with last month's introduction of Cellebrite Inseyets. Inseyets enables customers of all sizes to complete an examination up to twice as fast as previously by leveraging Cellebrite technology and adding new capabilities that allow our customers to access more devices, extract more data, and reveal more important information. Inseyets represents a compelling upgrade for our installed base of more than 30,000 existing licenses for our legacy digital forensic software solutions. The strong and enthusiastic interest we've seen from customers, combined with our success in swiftly upgrading our install base in previous product cycles, gives us confidence about expected adoption rates over the next couple of years. While the higher value provided by Inseyets commands a higher price tag, it will contribute to our growth in the coming years. We expect that more of our growth will come from upselling high-value Inseyets modules, such as advanced lawful access, automation, extraction of complementary digital data sources, and sharing digital evidence reports. The second major solution on our C2C platform is Guardian, our SaaS-based case evidence management offering that delivers tangible benefits to both digital forensic units and investigative units. Guardian offers greater operational efficiencies for managing digital evidence workflows and facilitates better collaboration between examiners and investigators. We believe Guardian will be the go-to tool for investigators as they advance cases involving digital evidence. While we are still at an early stage of Guardian adoption, we are pleased with our traction and confident that executing on our roadmap will make it even more attractive for our install base. The third solution is Pathfinder, a critical analytical tool that helps investigators expedite their cases. By applying powerful AI technology and machine learning modules, Pathfinder can quickly surface leads and identify connections buried under massive amounts of structured and unstructured data across multiple digital devices. We closed a record number of Pathfinder deals in the fourth quarter of 2023, finishing the year with approximately 200 agencies using this solution. Looking ahead, we plan to bring Pathfinder to the cloud, making our investigative offering even more compelling and easier to deploy for our entire install base. We are making considerable technology investments that are enhancing the value of our C2C platform, particularly in the cloud. Our customers are increasingly interested in cloud-based offerings, and while our cloud-based revenue was less than 10% of our total 2023 revenue, it grew very rapidly in 2023, and we expect that growth to continue. With the investments we're making to scale our SaaS infrastructure, our 2024 roadmap includes cloud-enabling previously on-prem offerings and developing cloud-native solutions that will further transform key elements of the investigative lifecycle. We are also investing significant resources this year to achieve FedRAMP certification for our SaaS offering; a milestone that will open up more federal opportunities and support large-scale deployments. A second fundamental technology building block is automation. By leveraging AI, cloud technology, and our unique Inseyets capabilities into our customers' workflows, we help them increase operational efficiency by automating time-consuming tasks, streamlining complex processes, and minimizing capital investment in compute-heavy systems that strain limited IT resources. AI has become an important foundational technology embedded within both our Inseyets solution and our Pathfinder analytics. Our advancements and proprietary machine learning modules, alongside potential applications of generative AI, allow our solutions to provide powerful, real-time insights into digital evidence, expediting investigations more efficiently while also limiting the emotional toll that viewing certain images can have on examiners and investigators. Finally, on the topic of talent, we've added key leadership to our organization over the past year. Recently, we welcomed Marcus Jewell as Chief Revenue Officer. Under his direction, we've intensified our customer-centric focus by establishing global pre-sales and post-sale customer success organizations and adding new sales leadership in EMEA and the private sector. Our Board and Senior Leadership also benefit from the guidance of Tom Hogan, our Executive Chairman. We enter 2024 with plans to expand our workforce, focusing particularly on sales and innovation initiatives. I would now like to turn to slide six to cover our strategic priorities in customer success. Last quarter, we shared our four strategic priorities for expanding our business in the coming year: increasing our leadership in digital forensic units; accelerating our growth within investigative units; building our business in the private sector; and harnessing the power of the cloud. In the fourth quarter, we achieved several customer wins that illustrate our success with each priority. Addressing the needs of digital forensic units remains a strong point for Cellebrite. Our Q4 revenue and ARR performances reflect our success in expanding within customers' judicial forensic units. Demand for our advanced unlock solutions continues to be strong, delivering lawful access to the most sophisticated iOS and Android smartphones. For example, we closed a large deal with national police in a Western European country that will extend its usage of our advanced solution into the field, consequently reducing time to evidence. This specific deal grew the account's ARR by over 25%. Regarding Inseyets, we are already witnessing strong interest from our install base. We've closed a handful of Inseyets upgrades above our expectations at this early stage. A notable example involves a national police force in the Benelux region that upgraded to Inseyets, enhancing support for its examiners with richer data through full file system extraction and unlimited unlock packages. This Inseyets deal generated a 65% ARR increase for the agency. The second priority is accelerating our growth within the investigative units of law enforcement customers. One notable Q4 Pathfinder deal involved a state-based military agency in the U.S. deploying Pathfinder and our software for advanced lawful access as part of its efforts to combat human trafficking, resulting in a more than double increase in the agency's ARR. Our third priority focuses on building our business in the private sector, where our solutions are utilized by enterprises and service providers in corporate investigations and eDiscovery. We achieved solid top-line growth in the private sector during 2023 and expect to continue progressing in this area. With deployment flexibility from SaaS to on-premises, our integrated suite of solutions excels when customers' requirements involve various data sources, work environments, and user considerations. For instance, our secure remote access software is gaining traction within enterprises as part of our Inseyets for enterprise solution. During Q4, we completed multiple deals with new customers selecting this offering, including a leading U.S.-based diversified media company seeking a robust, repeatable process for collecting targeted data from geographically dispersed employees to enhance its eDiscovery and corporate investigation efforts. The fourth and final strategic priority focuses on helping customers harness the cloud to address challenges securely and cost-effectively. One of the largest U.S. police departments is leveraging our C2C platform as they build dedicated digital forensic centers for extensive investigative capabilities. Alongside our offering for advanced access and Pathfinder, this customer will utilize Guardian to manage judicial evidence and streamline secure sharing of key findings and reports among investigators, resulting in a 12-fold ARR increase at this specific account. In summary, we are proud of our achievements last year on behalf of our customers, employees, and shareholders. Our outstanding financial results exceeded our targets throughout the year, and we plan to build upon this momentum moving forward. We enter 2024 with strong tailwinds from a fundamentally healthy market, solid business momentum, and attractive prospects for continued global business expansion. Our financial targets for 2024 reflect the durability of our growth, expecting another year of solid ARR and revenue expansion. Additionally, we anticipate further improvements in our operating profitability, targeting 20%+ adjusted EBITDA margins. Dana will share further details of our 2024 financial expectations, along with insights into the first quarter, shortly. As we scale our global organization, we believe our ongoing enhancements to our C2C platform and execution of our go-to-market strategies will allow us to more than double the size of our business over the next several years. Our business should continue to deliver a blend of ARR growth and adjusted EBITDA at or near our baseline Rule of 45, with a focus on elevating our performance over the long term. Finally, it is gratifying to see Cellebrite recognized as an essential partner supporting those dedicated to protecting our communities, stopping bad actors, and preserving privacy. We believe in our mission and the power of technology to make an impact. This conviction is symbolized by Operation Find Them All, a collaboration between Cellebrite and three non-profit organizations aimed at accelerating investigations of online crimes against children. This project is dedicated to helping law enforcement find missing children, solve crimes involving exploited minors, remove harmful online images, and bring perpetrators to justice. I'm incredibly proud of the role Cellebrite plays in Operation Find Them All. Lastly, I would like to express my sincere gratitude to my colleagues at Cellebrite for their focus, resilience, hard work, and sacrifices. Despite challenging circumstances, notably for our teams in Israel, we persevered and achieved great results. We approach 2024 with confidence, supported by our exceptional people, products, partners, and programs, and are excited about making 2024 another successful year.

Thank you, Yossi. Hi. At a high level, 2023, as Yossi said, was an excellent year. Cellebrite outperformed its original targets and exceeded the Rule of 45 milestone with strong ARR expansion and a significant increase in our adjusted EBITDA margin. I will begin the financial review on slide nine. Fourth quarter revenue of $93 million grew 26%. Our top-line growth was fueled by a 26% increase in subscription revenue, complemented by growth in other non-recurring and professional services revenue. We exceeded our top-line targets primarily due to the combination of strong overall demand, favorable product mix, and higher-than-expected demand for training. For the full year, revenue increased 20% to $325.1 million, due to subscription revenue growth of 30%. Subscription revenue growth was partially offset by a 36% decline in other non-recurring revenue associated with lower perpetual license revenue and a 7% decrease in professional services revenue, which saw reduced demand for Cellebrite advanced services as more customers adopted our advanced lawful access solutions. With subscription revenue comprising 85% of total full-year revenue, we move into 2024 with the transition to subscription now behind us. Slide 10 details our ARR growth, which we believe helps investors better appreciate our prospects for future revenue growth. Our ARR grew 27% year-on-year to $316 million at the end of 2023. Existing customers continue to fuel ARR expansion, largely attributable to ongoing success in cross-selling and upselling within the digital forensics units of our customers, complemented by our progress in driving adoption of our Pathfinder solution within investigative units. In terms of geographic mix, the Americas continue to be our largest region at 53% of total full-year 2023 ARR, followed by EMEA at 36% and Asia-Pacific at 11%. We were pleased with full-year ARR expansion in each major region, with the Americas growing 30%, EMEA increasing 23%, and Asia-Pacific up 29%. Slide 11 outlines our historical trends for non-GAAP gross margins and operating expenses, excluding share-based compensation, amortization of intangible assets, and acquisition-related expenses. We reported fourth-quarter gross margins of 84.5%, which was in line with our expectations entering the quarter and up 400 basis points from the same quarter last year. The improvement is due to higher training revenue with a relatively similar cost base compared to 2022. Fourth-quarter operating expenses were $57.6 million, a 21% increase from the prior year, primarily driven by higher incentive compensation costs, the timing of certain marketing programs, and phasing of hiring activities. Full-year operating costs increased 8% as we carefully managed our cost structure while realizing benefits from a favorable Forex environment. We ended the year with 1,008 employees, consistent with our plan. We are delighted to have welcomed back many colleagues in Israel who were activated into military service. These individuals are now back in full-time capacity, and we are immensely grateful for their military service and that they completed their assignments safely. As Yossi noted, we begin 2024 with a strong team and a plan to expand the workforce by approximately 15% over the coming year. Turning to slide 12, the combination of higher revenue and disciplined spending resulted in outstanding fourth-quarter profitability with adjusted EBITDA of $22.7 million, or 24% margin. For the full-year, we finished 2023 with adjusted EBITDA of $61.9 million, or 19% margin, primarily due to top-line growth, significant gross margin improvement, and prudent cost management. Our Q4 non-GAAP operating income was $21 million, with non-GAAP net income of $22 million, or $0.11 fully diluted EPS. On a full-year basis, we delivered $55.3 million in adjusted operating income, $60.9 million in non-GAAP net income, and fully diluted EPS of $0.28. We closed 2023 with $331.8 million in cash, cash equivalents, and investments, up $48.5 million from the end of the third quarter, and $126 million higher than our cash position at the end of 2022. The increase for the quarter and the year primarily reflected a significant rise in net cash provided by operations. Our free cash flow for 2023, defined as cash flow from operations minus capital expenditures and purchases of intangible assets, was $94.1 million. As we reflect on our 2023 progress and performance, it has been gratifying to see interest in our company from the investment community grow. As Yossi noted, we are continuing to evolve and enhance our disclosures to help analysts and investors better understand our business, focusing on providing greater transparency into our prospects for driving sustainable, profitable growth over the long term. We will host an Investor Day on Wednesday, March 27 in New York City; information about the event is already posted on our Investor Relations website, and invitations to attend in person will be sent next week. Our commitment is further reflected in our guidance, which we've expanded to include quarterly expectations for ARR revenue and adjusted EBITDA. Slide 13 details our financial expectations for the first quarter of 2024 and the full year. Specifically, we expect our 2024 ARR targets to range from $380 million to $400 million, representing a 20% to 27% increase over 2023. We are also optimistic about a potential modest improvement in our churn rate as the impact from our decision to withdraw from certain markets and cease selling to certain customers fades. Our first-quarter ARR targets range from $325 million to $335 million, which would equate to 24% to 28% growth compared to the same quarter last year. We anticipate full-year 2024 revenue in the range of $370 million to $385 million, equating to 14% to 18% growth over 2023. Our revenue and ARR expectations are supported by a healthy pipeline, including opportunities for Inseyets upgrades, cross-selling and upselling Pathfinder and Guardian into the install base, and private sector expansion. For Q1 of 2024, we expect revenue in the range of $83 million to $88 million, representing a 17% to 24% increase compared to Q1 of 2023. As in previous years, we expect around 52% to 55% of full-year revenue to be generated in the second half, along with higher quarterly growth rates later in the year, which reflects our expectations of product mix and the timing of year-end spending activities from our U.S. federal customers in September and most other accounts at the end of December. We expect our 2024 gross margins to be in the 82% to 84% range as we increase investment to build out our hosting infrastructure to further scale our SaaS offerings. We anticipate Q1 gross margins to be in line with or slightly above the full-year targets. We forecast 2024 non-GAAP operating costs in the range of $240 million to $250 million, with a marginal sequential increase from Q4 2023 into Q1 2024. We are optimistic about our potential to continue improving our profit profile and currently anticipate adjusted EBITDA in the range of $70 million to $80 million, or 19% to 21% of total revenue. Consistent with historical trends and in connection with our 2024 top-line outlook, we expect higher adjusted EBITDA and margins during the second half of the year. For Q1, we expect adjusted EBITDA ranging from $12 million to $15 million, or 14.5% to 17% on margin basis. Strong cash flow from operations has been a hallmark of our company, and we expect that to continue in 2024. Our business has minimal capital intensity, and we anticipate capital expenditures between $8 million and $12 million in 2024. In summary, we are pleased with Cellebrite's performance and progress in 2023. We are excited about our prospects for global business expansion and look forward to sharing our progress in the coming quarters.

The floor is now open for questions. Our first question comes from Brad Zelnick with Deutsche Bank. Please go ahead.

Great. Thanks very much, and congrats on a strong finish to the year. I've got one for Yossi and then one for Dana. Yossi, the innovations that you talked about with Inseyets driving the speed of investigation sound really powerful. And I picked up on your example of the agency that saw a 65% increase in what they were spending. But can you talk a little bit more about how it's priced? And if we look forward a year from now, what percentage of new and expansion coming from Inseyets will make you pleased? And maybe also, what's the risk that it makes investigators so much more productive that your customers actually need fewer units?

I would ask you to repeat the last part of your question. What was the add-on at the end? I didn't hear it properly.

If it makes investigators that much more productive that they're able to achieve what they're trying to do at, you know, twice the speed, that the customer needs fewer units, because they have fewer people doing the same job.

In the broader context, Inseyets is clearly a key element of our value offering and delivers a truly unique Case-to-Closure platform. It serves as the starting point for everything, featuring attractive components for collection and review with specialized capabilities that we didn’t provide before. Cellebrite Inseyets stands out as a leading solution for collection and review, offering significantly more value than any previous legacy software. It enhances value by integrating capabilities that were once divided among multiple standalone solutions, each handling just a piece of the whole process, whether it was collection or review alone. Now, everything is unified under one platform. The positive aspect is that this increases value for our customers, which can lead to higher pricing. We expect that our pricing can range 20% to 25% higher than what we charged for our former solutions. Moreover, our model incorporates automation, which can further enhance value and support that higher pricing. I’m pleased to report that we launched this two months ago in the private sector and a month ago in the public sector, and we've seen significant interest. We believe that over the next three years, we can serve most, if not all, of our existing install base. The challenges our customers face stem from the vast amounts of data and the volume of information from each digital source. Specifically addressing your concern about the growing need, there is a backlog of inefficiencies in traditional investigation and data management methods. This certainly amplifies the demand for additional licenses in that area.

Very, very helpful. I appreciate all the color you've shared. Maybe just for Dana, it's great to see the ARR guidance in excess of what we expected, reflecting the confidence that you guys have and all the good things happening in the business. Can you maybe give us a little more insight into the key assumptions underlying the ARR guidance? Specifically, what do you assume for net retention, which I'm not sure we saw for Q4, but any insight there would be helpful. Thank you.

Great. If we look at the expected ARR growth for 2024, it aligns perfectly with what Yossi discussed in his prepared remarks regarding the three main offerings contributing to the company's growth. When evaluating the market, we observe it is healthy, and we continue to see demand for the Inseyets offering in digital forensics units. We've seen substantial growth in 2023, and we expect to continue growing it through the introduction of Inseyets in 2024. Pathfinder and Guardian are gaining traction in the market, and we believe that they will grow faster than our collection and review Inseyets offering. All three together will contribute to the ARR growth in 2024. Regarding our net retention rate, the increase in ARR related to new customers ranges from 2% to 3%. If we examine the ARR growth in 2023 of 27%, the net retention rate stands at approximately 125%.

The next question comes from Mike Cikos with Needham.

Hey, guys, thanks for taking the questions here. I did just want to double-check on the revenues in this quarter as well. I know that Dana, you believe you opened up your remarks by calling out some of the strength seen in perpetual or pro-serve, which were both stronger than we had modeled? I'm trying to get a better sense, like for the pro-serve and training dynamic specifically. Is this in any way underscoring the benefits of the learning management system that Cellebrite unveiled as part of its customer portal back in mid-October, or is there something else to consider regarding the strength in training that we are seeing?

I feel that overall, Q4 was a very strong quarter. We grew our subscription business considerably at 26%. The entire rest of the offering, including professional services, also grew at the same rate. Training was performing exceptionally well. The launch of the Learning Management System in October definitely supported our ability to deliver the required training more effectively for customers, and we believe this contributed to some of the growth with a better platform. I hope this answers your question.

I wanted to follow up on the topic of training. More broadly, I'm curious whether training is seen as a barrier to the wider adoption of technology. For example, I don't anticipate that the NYPD will reduce their budgets, but if cuts need to be made, it seems likely that training would be prioritized since it's often seen as less critical and could hinder the necessary technical skills to utilize Cellebrite. Conversely, I don't expect the NYPD to cut resources like patrol cars or bulletproof vests. Could you provide more insight into how the training aspect might influence the demand for Cellebrite? I hope that is clear.

No, no, that's fine. From the customer's perspective, training is an essential element, particularly in the United States. At the end of the day, our goal with the quality of our C2C platform is to empower our customers, specifically law enforcement, to go to court and validate their evidence. Training is an essential component of this strategy. From Cellebrite's perspective, I see training as having two key functions. First, education for customers to generate more software sales; second, it's a revenue source. Regarding budgets, I'm less concerned. While you mentioned NYPD or others, we don't see any shifts in healthy budgets related to what our customers offer. Moreover, we find that the budget for digital investigations, which revolves around what we do, represents a small fraction of police forces' overall budget. Thus, we don't anticipate any significant disruptions. We see training as part of a larger investment in post-sale customer experience and engagement; customers have been requesting this. This is why I mentioned earlier that under our new CRO, we are establishing a dedicated post-sale customer experience program, and training is a vital part of this initiative. We perceive significant value, and our customers recognize that value too.

That’s very clear, Yossi. Thank you for clarifying that. I realize it’s a small piece regarding the overall revenue. Just wanted to highlight that as I try to piece together this broader industry dynamic and its relation to Cellebrite. Thanks for all your insights.

Thank you.

The next question comes from Tomer Zilberman with Bank of America.

Hey, guys. It's actually Tomer Zilberman on for Tal. Thank you for taking my questions. My first inquiry relates to the success you're seeing on Pathfinder and Guardian. Can you provide details on the overall contributions of your analyze and manage solutions? I understand that analyze was about 5%-6% of your revenue at one point, and manage was close to zero. I'm curious how that's trending now and what your expectations are for 2024 and beyond.

Let me highlight that we are striving for a streamlined portfolio. Analyzing one standalone solution does not fully reflect our customers' needs, and I believe that our entire focus should be on delivering integrated, end-to-end solutions to address these needs. Both Pathfinder and Guardian have experienced strong growth during Q4 and throughout 2023. Together, they account for approximately 10% of our business in 2023, and we expect their contributions to accelerate further. Specifically, the growth rate for Guardian is projected to exceed 50% year-over-year. The strategic importance of Guardian lies not just in the revenue it generates but in its role as an integrative component of the overall C2C platform, combining our digital forensics and investigative units. That is pivotal.

Understood. Thank you. As a follow-up, you mentioned subscription now makes up 85% of revenue and that this transition is largely behind you. Should we consider this 85% figure as the new benchmark for your subscription offering? I assume you will have some government customers who will still require perpetual licenses?

Yes, absolutely. We're pleased to see our customers globally accepting the software subscription model. Our perpetual business has nearly vanished over the last six months. Even during peak sales periods, federal government entities and larger agencies have fully embraced our subscription offering and the associated advantages. Therefore, 85% is a solid mark for our subscription business moving forward. Considering Yossi's earlier comments on our professional services training, this will also contribute to our enterprise solutions, supplemented by residual hardware components in our product mix.

The next question comes from Jeff Van Rhee with Craig-Hallum. Please go ahead.

Great. I'd echo my congratulations. With all the conflict, you guys are in the center of an impressive performance by the team. I have three questions. First, on the sales motion, Yossi, how would you grade yourself on the transition from the digital forensic unit to the investigative unit? How well is that motion dialed in? Can you put that in context?

For us, the digital forensic unit has been a clear growth engine for this company and will continue to be so. Investments in that sector will remain a priority. As we evolve, each of our subregions—America, EMEA, and Asia-Pacific—will have dedicated sales teams focused on this area. The performance of investigative units, however, is an emerging growth engine for us. The KPIs and budgets differ significantly compared to digital forensic units, and the needs of our customers necessitate that we manage this segment intensively and with the right focus. The anticipated growth rate pace for Pathfinder alone is around 35% to 50% year-over-year.

Thanks for that context. Shifting gears to M&A: you have solid cash generation. As you consider digital tools relevant to law enforcement and federal agencies for your platform, what role do you envision M&A playing in 2024?

In a broader context, we view Cellebrite as a platform company, and the C2C platform allows us to thoughtfully measure our make-or-buy decisions. We operate in a significant total addressable market, creating extensive growth opportunities. Given our strong balance sheet, we have the ability to make strategic moves in the right target markets at the right times. Inorganic growth is clearly a part of our long-term strategy, which includes both small technological tuck-ins and potentially larger opportunities if they align with our goals. Keep in mind, all the figures you see right now account solely for organic growth.

Great. Just two final and smaller questions: Dana, you mentioned churn earlier. Could you provide more detail? I understand that some churn comes from your decision to prune your customer base, but how do you expect it to play out in 2024?

Our churn is slightly above 9%. Approximately 2% of that was due to our decision to stop doing business with certain customers, which we expect to mitigate over the next year and a half. Moving forward, our normalized churn rate should likely fall between 7% and 8% on an ongoing basis. We diligently work to improve these numbers over time.

Lastly, regarding overall market conditions: You've mentioned budgets, but I've heard chatter about peers getting aggressive on price increases. What observations do you have about what competitors are doing, particularly in light of Inseyets’ distinctive value proposition?

I'm pleased to say that this is indeed a value-based market. Customers have budgets in place, and there is a readiness to pay more for value. Our competitors are also adjusting prices. Some have systematic annual increases, while others adjust prices for specific products as part of long-term strategy initiatives. We are no exception; however, what distinguishes us is our differentiated offering that justifies higher pricing.

Thank you.

The next question comes from Doug Bruehl with J.P. Morgan.

My question pertains to your FedRAMP authorization announcement. How large of an incremental market do you expect at eventual approval to unlock?

FedRAMP is a crucial element of our expansion strategy regarding our C2C platform. This effort is particularly oriented towards our federal business within the United States. Importantly, we are investing in FedRAMP to access additional markets, enhancing our overall total addressable market. I want to highlight that our federal business is currently robust, which gives us a strong foundation for growth. We believe that the approval can potentially double our current capabilities. Achieving FedRAMP certification would allow us to tap into additional buying centers within existing clients. We are aiming to complete certain processes by mid-2024 to ensure we can capture the budgets for 2025. Notably, FedRAMP applies to our entire C2C platform, encompassing all solutions, allowing us to offer them both on-premises and in the cloud.

Great. Thank you so much.

The next question comes from Jonathan Ho with William Blair.

Hi, good morning and congratulations on the strong results. I wanted to start out with a little bit more detail into Inseyets. Can you help us understand what’s changed with the product and how you're able to speed up investigations and boost customer productivity?

Inseyets is—specifically focusing on collection and review—offers capabilities that were previously addressed through disparate standalone solutions. We enhance access routes and processing speed associated with our premium offerings. One key performance indicator in our customers' labs is reducing backlog and quickly accessing more devices amidst a growing number of open cases. By integrating features that were previously limited to high-end offerings along with improved speed and a better user experience, we deliver real value to customers. Since the launch, feedback suggests that Inseyets has significantly optimized operations within customer labs and investigative units.

Excellent. Regarding the C2C platform, do customers today purchase these solutions as a bundle? How do you envision the go-to-market strategy evolving to underscore this integrated approach?

It’s essential to understand that Cellebrite now presents a genuine end-to-end platform. Customers traditionally purchase collection and review solutions as standalone offers. However, for leadership in investigations and intelligence, seeing the broader picture of our integrated solutions becomes crucial. It’s not just about collection; it's also about how to share and review evidence most efficiently, thereby improving quality and speed while managing chain of custody, which is facilitated by our integrated Guardian tool that connects collected data from Inseyets and analytical data from Pathfinder. The shift towards a backlog integrated environment necessitates holistic solutions rather than standalone products. Thank you all for joining us, and for your time. I want to emphasize that it was a very successful year for the company, particularly given the several challenges we've faced; 2023 was a notable year, and an even brighter future is ahead. We are excited about the prospects for Cellebrite. I’d like to extend my deepest gratitude to all Cellebrite employees for their professionalism, resilience, hard work, and commitment to the terrific results achieved in 2023. Thank you, and have a great day.

Thank you. This concludes today's Cellebrite's fourth-quarter and full-year 2023 financial results conference call. Please disconnect your line at this time, and have a wonderful day.