Welcome to the Cellebrite First Quarter 2024 Financial Results Conference Call. At this time, all participants have been placed on a listen-only mode and the floor will be open for your questions following the presentation. I would now like to turn the call over to your first speaker today, Mr. Andrew Kramer. Mr. Kramer, the floor is yours.

Thank you very much, Leo. Good morning, good afternoon. Welcome to Cellebrite's first quarter 2024 financial results conference call. Joining me today from just outside of Tel Aviv are Yossi Carmil, Cellebrite's CEO, and Dana Gerner, Cellebrite's CFO. 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 are referring to in our remarks. This call is being recorded and a replay of the recording will be made available on our website shortly after the call. Starting with Slide number 2, a copy of today's press release and financial statements, including GAAP to non-GAAP reconciliations, slide presentation and the quarterly financial tables and supplemental historical financial information for the first quarter of 2024 and each quarter of 2023 and 2022 are available on the Investor Relations website at investors.cellebrite.com. Also, unless stated otherwise, our discussion for the first quarter 2024 financial metrics, as well as the financial metrics provided in our outlook, will be done on a non-GAAP basis only, and all historical comparisons are with the first quarter of 2023 unless otherwise noted. In addition, please note that the statements made during this call that are not statements of historical fact 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 March 21, 2024 and as amended on April 12, 2024. The Company does not undertake to update any forward-looking statements to reflect future events or circumstances. Slide number 3 provides the agenda for today's call. And as you'll hear, we started 2024 off on a positive note with another very solid quarter. We move forward with good momentum and are excited about the opportunities we see ahead to further expand our business this year. With that said, I'd like to turn the call over to Yossi Carmil, Cellebrite's CEO.

Thank you, Andy. And thank you all for joining us today. The financial results highlighted on Slide 4 demonstrate that Cellebrite is off to a very solid start in 2024. We delivered a strong first quarter performance anchored by the further expansion of our business, improved profitability compared with the same quarter one year ago, and meaningful strategic progress. I have to say it is rewarding to see our solutions making a tangible difference in accelerating justice around the world. While I plan to share more about the market opportunity, our strategy, our achievements, and our outlook, I would like to turn now to Slide 4 to briefly recap our Q1 results and selected KPIs. More specifically, ARR grew 27% to $331.8 million. We continue to see strong ARR growth globally, and our Q1 ARR expansion is primarily driven by our success in expanding existing customer relationships, which is consistent with historical trends. The total revenue of $89.6 million increased 26% on the strength of a 29% increase in subscription software revenue. Adjusted EBITDA was $17.6 million, or 20% on a margin basis, and we reported non-GAAP earnings per share of $0.08. We also ended the first quarter with cash deposits and investment totaling approximately $347 million, a $15.5 million increase since the end of 2023. After trailing 12 months, our ARR growth rate and adjusted EBITDA margin trended above a baseline target of Rule of 45. Turning to Slide 5. As most of you know, Cellebrite hosted its first-ever Investor Day in late March this year. This was a great opportunity to provide our analysts and shareholders with a deeper dive into our business and our bright future. During this event, we highlighted the underlying trends, Cellebrite's overarching strategy, our compelling Case-to-Closure platform and flagship solutions, as well as key technology and go-to-market initiatives that will enable us to convert meaningful ARR and revenue growth into further improvements in adjusted EBITDA. We expect our ARR and top-line expansion over the coming years will continue to primarily come from further expansion within our installed base of customers. Now, I'd like to explain why we are so bullish on this opportunity. First, there are several powerful trends that we believe will require our customers to invest more in digital investigative solutions like ours. Most notably, the number of cases that have a digital component continues to increase, and the digital component is often the most meaningful part of investigations today. As digital becomes more pervasive in crime, the growth in both data volume and data complexity makes it harder for law enforcement to capture and analyze this information. Those issues are compounded by structural, operational inefficiencies arising from siloed, manual and time-consuming processes, as well as greater scrutiny on law enforcement practices. In an environment where overall budgets and headcounts grow modestly, we continue to see more spending directed to disruptive technologies like ours that can help our customers address these issues and solve more cases faster and more efficiently. Second, we are well positioned with our existing customers to continue increasing our wallet share through the three flagship offerings in our Case-to-Closure platform, our branded C2C platform. Now, these solutions address the key challenges in the digital investigation lifecycle that involves collecting, reviewing, sharing, and analyzing digital evidence. Currently, spending on our solutions represents just a fraction of our customers' annual budgets, indicating substantial room for upside as digital becomes the primary starting point for an investigation. I'd like to take a moment to elaborate on that. Within the digital forensic units, the segment where we have established our leadership through relationships with over 5,300 public sector agencies, we are at the earliest stage of a major product upgrade cycle involving Inseyets, our next-generation digital forensic software solution. Inseyets deliver a more robust, integrated set of capabilities that helps our customers access more devices, extract more data, and reveal more information relevant to their investigations. Most of our customers rely on Cellebrite as their primary digital forensic software solution to collect and review digital evidence from mobile phones and other digital devices. We see substantial opportunity to better support our customers in the digital forensic units as they broaden their lab operations and extend our technology into the field to support an expanding range of use cases. Moreover, our customers are increasingly recognizing that they must modernize their workflows to drive efficiency and productivity, facilitate better collaboration, and strengthen the chain of custody around digital evidence, a dynamic that opens the door for Guardian, our SaaS-based case and evidence management solution. As we move forward, we are committed to further enhancing the integration between our flagship offerings and evolving our pricing and packaging in ways that support broader and more pervasive use of our solutions with national, regional, and local law enforcement, as well as with blue-chip enterprises and service providers. To realize our growth potential, we are making meaningful and thoughtful investments in our technology and go-to-market initiatives that we believe will strengthen our ability to address our customers' biggest pain points. Our technology investments focus on three key areas: advanced evidence acquisition, helping our customers leverage the power of the cloud, and harnessing AI to enable greater automation and increase operational efficiency. We made tangible progress in each of these areas during the first quarter. From a go-to-market perspective, we are broadening our sales coverage in key regions and customer segments in both the US and Europe while leveraging prior investments to capitalize on opportunities in Asia Pacific. We are reallocating existing resources as we globalize and optimize areas such as sales operations, technical pre-sale, and post-sale customer experience, which will enable us to add more quota-carrying sales representatives and specialists dedicated to nurturing long lead time deals within both the digital forensic units and investigative units. An example of our ability to blend our technology go-to-market efforts and other strategic initiatives to further expand our business is in the US federal markets. In mid-March, we announced the launch process to authorize our SaaS offerings with the Federal Risk and Authorization Management program, known as FedRAMP. We believe advancing our efforts in the coming quarters to ensure that our SaaS solutions meet the highest standards of security and data compliance will play an essential role in unlocking more opportunities in the federal marketplace. As we advance these initiatives to capitalize on upgrade, upsell, and cross-sell opportunities within our installed public sector customer base, we will see our technology deployed more pervasively as we extend our reach into new units, departments, and buying centers—what we consider new sub-logos within our existing logos. We also expect that our organic growth will benefit modestly from annual price increases and the expansion of our private sector business. Finally, our organic growth will benefit as we continue to win new customers. Although new logos typically spend minimally with us in the first year, their spending growth generally keeps pace with overall business growth. Thanks to our strong financial foundation, we are positioned to advance opportunities that can accelerate our time to market with high-value technology and capabilities, as well as extend our reach into growth-oriented adjacent markets and capture more of identified opportunities. As we move into 2024, our top four strategic priorities remain unchanged: first, increasing our leadership in digital forensic units; second, accelerating our growth within investigative units; third, building our private sector business; and fourth, harnessing the power of the cloud. I'd like to briefly highlight the Q1 wins illustrating our progress in executing each of these priorities. Our Q1 ARR growth of 27% reflects positively on our ability to extend our leadership in the digital forensic units of our customers. Over the next three years, an important strategic objective and fundamental growth driver will be to upgrade the vast majority of our installed base of approximately 32,000 public and private digital forensic software licenses to Inseyets. During the first quarter of 2024, the first full quarter that Inseyets has been available to all customers, we made initial progress in converting our installed license base to Inseyets. The upgrade to Inseyets delivers substantially higher value in terms of enhanced capabilities and optimized workflows, while creating upsell opportunities for customers of all sizes through high value add-on modules that address their needs for lawful access, workflow automation, extraction of other digital sources, and enhanced evidence management functionality. We expect to see upgrade activity accelerate during the second half of this year and into 2025 as customers incorporate these investments into their annual budgets. One notable Q1 Inseyets upgrade involved a larger national police force in South America, which used the upgrade as an opportunity to broaden its lawful access capabilities to all major offices and broaden its use of Pathfinder, resulting in nearly tripling this customer's ARR. In Europe, we were pleased to see a large military agency upgrade to Inseyets to enhance its counter-terrorism capabilities for faster trials outside the traditional lab environment, along with using our Smart Search, our open-source intelligence tool, to generate rapid intelligence on persons and organizations of interest; as a result, the recount’s ARR more than doubled. Our second priority is to accelerate our growth within the investigative units of our law enforcement customers. A key offering for investigators is Pathfinder, our AI-powered analytics solution that enables law enforcement agencies to expedite their investigations by dramatically reducing the time it can take a detective to review text messages, photos, and videos by up to 80%, uncovering and linking data, surfacing new leads, and identifying connections and anomalies to capture the most meaningful evidence. We are pleased with the trajectory for Pathfinder, and believe that investing to add sales specialists will help us accelerate our progress. Our Q1 Pathfinder wins were highlighted by a mid-sized city police department in the US Southeast region that plans to use our analytics to support their organized crime units' ability to conduct cross-case analysis and accelerate investigations involving multiple phones; this win extended the scope of our relationship with this customer, increasing our ARR by 30%. Our third priority is to expand our private sector business, primarily in support of corporate investigations and eDiscovery use cases. We recently appointed a new Head of Enterprise Solutions to lead the strategic direction and drive product development as we support our customers through both SaaS and on-prem solutions to collect data from a wide range of devices, regardless of whether the user is working from home or in the office. In the first quarter, we extended our relationship with a Fortune 250 company in the waste management industry, which consolidated its data collection activities with Cellebrite by replacing its incumbent solution for remote computer collection with our Endpoint Inspector SaaS; this win more than tripled our ARR at this account. The fourth strategic priority is to help our customers harness the power of the cloud to make it easier, faster, and more secure to accelerate the time to actionable evidence. Although law enforcement agencies are generally early in adopting cloud technologies, approximately two-thirds of our customers expect to adopt cloud-based solutions over the next three years, and we are focusing our development, roadmaps, and infrastructure investments accordingly. We are pleased with the interest that is building in Guardian, our SaaS-based solution for case and evidence management. During Q1, a large city police department in the US, with over 1,000 sworn officers, selected Guardian to optimize their evidence management workflows. More specifically, Guardian will help investigators solve more cases by freeing up hours that detectives previously spent on driving to and from their primary digital forensic labs to drop off devices and pick up evidence reports; it will also eliminate the need for detectives to purchase their own flash drives and other external storage devices to view digital evidence, reports, and information. Let’s move to Slide 7. Now we head into the second quarter of 2024 with good momentum, especially with respect to our near-term sales pipeline. We continue to see customer budgets trend favorably in support of their plans to enhance and expand their digital investigative capabilities with our solutions over the coming quarters. To capitalize, we have continued to add talented professionals to our team, which included the appointment of David Gee as our new Chief Marketing Officer. Looking ahead, we believe we are on track to achieve our 2024 financial targets and have reaffirmed our outlook for this year. In summary, Cellebrite is well positioned with a differentiated and compelling software platform that is making a tangible difference in accelerating justice through more accessible, intelligent, actionable, and sensible digital evidence. We are pleased to have continued to onboard talented individuals who share our commitment to advancing Cellebrite's mission. We expect that our strong financial foundation will be further fortified by our anticipated fundamental performance over the coming quarters; as a result, we have sufficient fiscal flexibility to consider a wide range of strategic moves that can help us accelerate time-to-market with high-value capabilities, extend our reach into growth-oriented adjacent markets, and enhance shareholder value. Overall, we move forward with confidence that we have the people, the partners, the products, and the programs that will help us capitalize on exciting opportunities we see. That concludes my prepared remarks and at this point, I'll turn the call over to Dana.

Thank you, Yossi. As noted in Yossi’s comments earlier, our Q1 results demonstrate that we are off to a very solid start for the year. We delivered revenue above our targets, ARR at the higher end of our plans, and stronger than anticipated adjusted EBITDA. So let's begin the review of the Q1 on Slide 9. We reported first quarter revenue of $89.6 million, an increase of 26%, with a 29% increase in subscription revenue partially offset by a more moderate increase in hardware sales within our other non-recurring revenue and a slight decline in our professional services revenue. Within professional services, the decline in advanced services revenue is correlated with the growth in higher sales of our advanced lawful access offering, and this decline was mostly offset by the growth in training and certification. Overall, subscription revenue represented 88% of total revenue and we expect it will continue to trend within the mid-to-high 80% range over the coming quarters. Slide 10 details our ARR growth drivers. Our ARR grew 27% year-on-year to $332 million at the end of March 2024. We maintained healthy growth retention of approximately 91% for the first quarter. Our ARR growth was primarily driven by existing customers' expansions, with new logos contributing modestly, which is consistent with our growth strategy. In terms of ARR growth by product area, we have continued to see customers expand their use of our Inseyets collect and review solution. This growth is complemented by our continued progress cross-selling and upselling our evidence management and AI-powered investigative analytics. Our geographic mix for ARR for the 12 months ended on March 31, 2024, was generally in line with historical trends, with the Americas representing our largest geography at 52% of total, followed by EMEA at 36%, and Asia Pacific at 12%. We were generally pleased with the ARR expansion during Q1 in each major region, with the Americas growing 28%, EMEA increasing 25%, and Asia Pacific up 30%. Slide 11 details the historical trends for our non-GAAP gross margins and non-GAAP operating expenses, which exclude share-based compensation, amortization of intangible assets, and acquisition-related expenses. We reported a first quarter gross margin of 85.7%, which was slightly above our plans and up 260 basis points from the same quarter one year ago. The improvement is due to further efficiencies introduced within our professional services activities, combined with an improved margin profile on hardware-related sales. In terms of operating expenses, our first quarter operating costs were $60.9 million, a 14% increase from the prior year. While we have remained disciplined with overall spending, the year-over-year increase primarily reflects the timing and phasing of hiring activity and related costs, as well as the timing and magnitude of certain sales and marketing programs, enhancement of our compliance infrastructure, and the impact of other one-time projects. We ended the quarter with 1,052 employees, which was generally consistent with our plan. During the first quarter, more than half of the new talent we added was within our sales and marketing organization. Geographically, most of our new hires were added to support the growth of our business in the Americas and EMEA. Turning to Slide 12, the combination of higher revenue and disciplined spending produced another quarter of improved profitability. We reported Q1 adjusted EBITDA of $17.6 million, or 20% on a margin basis versus 10% one year ago. Our Q1 non-GAAP operating income was $15.9 million, with a non-GAAP net income of $16.9 million, or $0.08 on a fully diluted basis. We ended Q1 with $347.3 million in cash, cash equivalents, and investments, up $15.5 million from the end of the fourth quarter. The increase for the quarter primarily reflected the strong fundamental performance of the business. Our first quarter 2024 free cash flow was $7.9 million. Now let's move to Slide 13, which details our financial expectations for the second quarter of 2024 and for the full year. Although it is still early in the year, we believe we are well positioned to achieve our full year targets and have reaffirmed them. In terms of the second quarter expectations, our expected Q2 ARR in the ranges of $342 million to $350 million represents growth of 25% to 28% and reflects the volume of business closed thus far into the quarter plus a range of deals in our near-term pipeline. We expect Q2 revenue in the range of $90 million to $94 million, translating into growth of 17% to 23%. We expect our Q2 gross margins to be at the midpoint to higher end of a full-year 2024 gross margins target range of 82% to 84%. We anticipate our Q2 operating cost will increase by low-to-mid-single-digits on a percentage basis over Q1 levels, as we continue to fully absorb our first quarter hires and further expand our team during the second quarter. These expectations set the stage for Q2 adjusted EBITDA in the range of $16 million to $19 million. With approximately 52% of our revenue expected in the second half of the year, we still expect that the majority of adjusted EBITDA will be produced during this period as we manage our cost base with relatively marginal anticipated quarter-over-quarter expansion. This implies that we expect approximately 52% to 58% of our anticipated full year 2024 adjusted EBITDA to be generated in the second half of the year. In summary, Cellebrite delivered a solid first quarter performance. It has been gratifying to see our value proposition resonating in the marketplace, and as we move forward, well-positioned to support our customers as they increase their spending on our solutions, by delivering the Cellebrite brand promise of Justice Accelerated and executing against our strategic priorities; we expect to remain on course to achieve our financial objectives this year. That concludes our prepared remarks, and I turn the call back to the operator for Q&A.

Our first question is coming from Shaul Eyal of TD Cowen.

Thank you. Good afternoon, good morning. Congrats on 1Q results. Yossi, the business seems to be kicking on all cylinders. I wanted to start by asking on the potential business upside you could be seeing from FedRAMP that you guys announced earlier in March.

Shaul, first of all, thank you for that. Indeed, in mid-March 2024, we announced the launch of the process to authorize our SaaS offering with FedRAMP. Now, FedRAMP is an important initiative for us and in the context of potentially doubling our total addressable market, specifically in the federal market space in the United States and, over the longer term, clearly opening substantial opportunity over the coming years, benefiting from accessing additional buying centers within the already existing logo and securing higher budgets in 2025. The FedRAMP represents an area of significant investment during 2024; this is something important to emphasize, which, by the way, had been factored into our 2024 outlook. The FedRAMP will initially apply to our Guardian platform and infrastructure that supports the Guardian. Once the work is done, it will make it easier to deliver other cloud-enabled offerings of our FedRAMP certified platform. An important element—FedRAMP is part of a broader plan to expand the business with federal customers. In that context, it will contribute clearly to the value proposition of our C2C platform in terms of an end-to-end solution and an extended runway for substantial ARR growth in the future.

Understood. Maybe you could double-click on the C2C, the Case-to-Closure platform that you've just mentioned. Can you talk about the early adoption you might be seeing among the other public sector customers?

Absolutely. Look, the C2C, the Case-to-Closure, is clearly in a very early stage. This is very encouraging for any Cellebrite investor because with 5,300 public sector customers, the percentage who have deployed the combination of Inseyets, Guardian, and Pathfinder as the total package is currently very small. We are optimistic about our installed base of public sector customers and their ability to deploy multiple Cellebrite solutions within the C2C platform, especially as we integrate more tightly. We expect further progress on our product roadmap in that direction.

No, absolutely, loud and clear. Thank you for that. I'll leave the floor. I may come back later for additional questions. Congrats.

Thank you.

Thank you.

Our next question is from Brad Zelnick of Deutsche Bank. Your line is open.

Great. Thanks for taking our questions. This is Bob on for Brad and congrats on the solid start to the year. Can you elaborate more on Inseyets? And it's great to hear some of the early successes you’re seeing there, but can you give us more elaboration in terms of what drives your confidence that the majority of customers will upgrade over the next few years from UFED to Inseyets? How do we think about the monetization opportunity and the uplift you might see as customers migrate?

Okay, maybe I'll take it for a start. Look, our goal is to upgrade the vast majority of our installed base to Inseyets over the next three years. Our goal for 2024 is to upgrade more than 10% of our installed base to Inseyets. I'm glad to say that the interest in Inseyets is high with very favorable feedback from early adopters. While we haven't announced any plans to sunset the legacy digital forensic solutions, it is reasonable to expect that on a timely manner to sunset it will accelerate the process. The Inseyets may deliver considerably more value than the legacy offering, which enables us to command a higher price tag—approximately 20% to 25% higher than the comparable legacy solutions. We expect the upgrading of the vast majority of the installed base of Inseyets to be completed within the next three years. Additionally, we see good traction in the private sector as our next-generation solution addresses complex data collection requirements.

Thank you. That was extremely helpful. Just one follow-up. On the go-to-market changes that you're making and broadening coverage in the US and EMEA, how should we think about the payback period on some of these investments given the long sales cycles? Could there be any disruption as we think about optimizing sales operations and customer experience?

Maybe I'll start. We have a very solid model on return on investment for introducing a new quota carrier. We have clear internal KPIs that we take into consideration. A reasonable onboarding period for a quota carrier until we see a high level of return on investment is around six months. Inseyets sales may have a shorter payback period. Even with the longer sales cycles, we see return on investments in a manner of two to three quarters with our quota carriers. We mention reallocating OpEx to support increased quota carriers in the Americas, EMEA, and APAC; it's also from other activities we are doing, and we can achieve this by introducing efficiencies into our systems and processes. We do not anticipate any shortfall in our ability to support the increased business.

Our next question is coming from Jonathan Ho of William Blair.

Hi, good morning and congrats on the strong quarter. I just wanted to understand, given your strong performance to start the year, why not raise the guidance for the full year? I'm just trying to understand if there's any deals that came in earlier than anticipated or if there was any movement between the quarters.

We started the year by saying that we would provide quarterly guidance to enhance transparency and provide better insights for investors and analysts on our plans and performance. We are off to a solid start, but we have considerably more work to do ahead as Yossi mentioned in his prepared comments. We believe it's a bit premature to start changing our outlook at this stage of the year, although we are confident in our guidance and our ability to execute.

Our next question is from Mike Cikos of Needham.

Hey, thanks for taking the questions, guys, and I apologize for any background noise. I wanted to revisit Yossi's prepared remarks on the conversion process or upgrade cycle that we're on the cusp of. Can you further elaborate on how Q1 played out with respect to the conversion rates compared to your internal plan? Are you actually seeing the ASP uplift now that we have a full quarter under our belt?

As I said, I look at it long term, so I’ll get to 2024 in a second. I want to upgrade the vast majority of the installed base. There are factors that influence that, including the timing of existing multi-year subscriptions and levels of churn. In Q1 2024, there was good initial progress—I'm very satisfied with where we stand. The target for 2024, to upgrade more than 10%, is based on budget cycles. Customers will build this into their 2025 and 2026 budgets; that has been factored into our financial expectations. We expect to see upgrade activity build during H2 this year to create momentum for 2025.

From the ARPC we are seeing high teens increase in price, which is a great success considering that those early adopters did not include this increase in their budget. Their ability to introduce it in the first year rather than waiting for the second and third years is very encouraging.

Our next question comes from Eric Martinuzzi of Lake Street.

You talked about a gross margin range of 82% to 84%, yet you have an 85.7% non-GAAP gross margin in Q1. Was there anything in Q1 that goes away in subsequent quarters?

If you look at the gross margins related to subscription provided in the additional financial deck, it's around 7%, 7.5% of cost to subscription. As we introduce more cloud and SaaS offerings, expect our costs around subscription to increase over time, especially for hosting and cloud operations. Further, as we transition more of the installed base from UFED to Inseyets, we'll see a little more hardware sales with very marginal gross profit, which is why we discuss a full-year basis of 82%-84%.

We'll take our next question from Brian Essex of JPMorgan.

Hey, good morning and thank you for taking the question. Maybe just a follow-up on Shaul's FedRAMP question. How is that progressing so far, how long do you think it will take? And do you think you'll be able to complete the process fast enough to benefit from the 3Q federal spending cycle this year?

We expect to finish the process or that initiative in the first half of 2025, with the audit out by end of 2024. All is proceeding well at this moment. We published our process with Coalfire to build the site, testing, and applicative part. We have one or more sponsors as part of the process, meaning that if all goes well, audit by the end of 2024 enables us to discuss business with customers in 2025, completing the process in the first half of that year.

Great. Super helpful. Just a follow-up, Yossi, in your prepared remarks, you talked about expanding exposure to the private sector, particularly pointing out a Fortune-250 waste management provider replacing incumbent solutions there. Can you offer a little color on what you replaced and how applicable this will be to other customers within the private sector?

Absolutely. First of all, private sector revenue and ARR performed well at the beginning of the year, similar to last year and the past six months. I mentioned leadership positions; we upgraded two positions in Q4 '23, a new sales leader within the CRO organization and a new Head of Enterprise Solution in Q2 2024. We are optimistic about achieving our targets for private sector revenue and ARR for 2024. The focus here is on targeting blue-chip enterprises and mid-sized service providers, particularly in industries where eDiscovery and internal corporate investigations are critical. We executed a strategic review of the segment with clear vectors for progress in the near and mid-term future.

We'll take our next question from Jeff Van Rhee of Craig-Hallum.

Thanks for taking my questions. Yossi, along the lines of the high-level outlook, how has your macro thinking evolved in the last 90 to 180 days?

I’m happy to say that the major focus is related to the public sector. The anticipated factors and drivers remain unchanged; the market is healthy. The drivers pushing our technology in the context of disruptive technology are there, and customer spending is expected to remain steady, with potential for upside. This remains valid for both state and local government and federal markets. Notably, spending on Cellebrite at the moment is a fraction of what those customers spend, indicating secured ground for our anticipated developments.

Very helpful. Thank you.

We will take our next question from Louie DiPalma of William Blair.

Yossi, Dana, and Andy. Good morning.

Good morning.

Hi.

It seems price is expected to be a significant driver of growth over the next three to five years. Are there three primary upgrades taking place for the installed base of 32,000 licenses? First is the Inseyets upgrade, then the C2C upgrade for the end-to-end ecosystem, and third, the on-premise upgrade to the cloud. Do all three of these upgrades involve higher pricing for the increased value you provide?

If we look at the long-term model, Louie, the main driver of expansion in the coming years will be linked to the increased digital data our customers need to process. You can see it as a price increase because Inseyets can perform double the work with much greater efficiencies. We are setting more capacity with the same number of licenses at a reasonably higher price. We expect ongoing price increases of approximately 4%. Inseyets is not just a price increase; it's a different offering with a different value and price tag.

Thanks. You reached a 20% EBITDA margin in the first quarter, which is typically your lowest margin quarter. Is this 20% margin sustainable going forward, even with increased headcount and investments? Will margins be smoother on a quarter-to-quarter basis going forward compared to the past?

We believe that throughout the years, we will see smoother margins quarter-to-quarter because, with the transition to subscription, there will be smoother revenue increases aligned with marginal increases in OpEx each quarter. Our model speaks about achieving 20% plus EBITDA in the mid-term. We are very satisfied with Q1; however, Q1 was not fully representative of our OpEx plans for the full year.

We'll take a question from Tomer Zilberman of Bank of America.

Hey guys, maybe just one quick one to touch on an earlier question. Can you talk about how much visibility you have into demand for the remainder of the year? Less on expectations for guidance and more on how much visibility you can see?

When we look at the opportunity management process, we have great visibility into the coming two quarters, so Q2 and Q3. This gives us confidence in our ability to deliver for the full year.

We do have a follow-up question from Mike Cikos of Needham. Your line is open.

Thanks for getting me back on here, guys. I wanted to follow up. I know that you expect an acceleration in upgrade activity in the back half of this year into calendar '25, which intuitively makes sense as customers incorporate additional budget. Is that acceleration embedded in the guidance, or is it seen as more of a potential upside catalyst?

The 10% plans are embedded in our plans for the year. We will see the opportunity starting to build this year, but most will be realized in 2025.

With your new Chief Revenue Officer, Marcus, doing a great job at the Investor Day, is he being charged with helping accelerate the building of the budget for those conversions, such as sales operations improvements?

Mike, your question makes sense. First, I completely agree with your statement about Marcus. The focus is on mixing quota carriers and post-sale customer success—these are the two major areas of investment. There is a potential for acceleration.

This concludes the question-and-answer portion of today's call. I would now like to turn the floor over to Cellebrite CEO, Yossi Carmil for additional or closing remarks.

I would like to thank you again for participating. Thank you for the interest and trust in Cellebrite. Above all, I would like to thank my colleagues, the Cellebrite employees, for their performance in Q1. Well done, and good luck to us for the rest of the year. Thank you.

Thank you. This concludes today's Cellebrite first quarter 2024 financial results conference call. Please disconnect your line at this time and have a wonderful day.