Cellebrite DI Ltd. Q2 FY2024 Earnings Call

Welcome to the Cellebrite Second Quarter 2024 Financial Results Conference Call. At this time, all participants are in listen-only mode, and we will open the floor for questions after 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, Todd and welcome, everybody, to Cellebrite's second quarter 2024 financial results call. I'm joined at our offices just outside of Washington, DC by Yossi Carmil, Cellebrite's CEO; and Dana Gerner, Cellebrite's CFO. There's a slide presentation that accompanies our prepared remarks. Please advance the slides and the webcast viewer to follow our commentary. We will call out the slide number we are referring to in our remarks. This call is being recorded and a replay of the recording will be made available on our website shortly after the call, along with a transcript of the event. Starting with Slide number 2, a copy of today's press release and financial statements, including the GAAP to non-GAAP reconciliations. This slide presentation and the quarterly financial tables and supplemental historical financial information for the first and second quarters of 2024 and each quarter of 2023 and 2022 are available on the Investor Relations website at investors.cellebrite.com. Also, unless stated otherwise, our discussion of our second quarter 2024 financial metrics, as well as the financial metrics provided in our outlook, will be done on a non-GAAP basis only, and all historical comparisons are with the second quarter of 2023. 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 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 of the topics we'll cover on today's call. And with that said, I'd like to now turn the call over to Yossi Carmil, Cellebrite's CEO.

Thank you, Andy, and thank you all for joining us today. We are pleased this morning to share our progress and continued execution across all key metrics, including ARR, revenue and EBITDA, which are highlighted on Slide 4. Our strong second quarter performance further validates the appeal of our Case-to-Closure platform, the result of our nearly 1,100 colleagues, and relentless tailwinds in a healthy, growing market. Now, Dana will review the details of our Q2 results, our outlook for the third quarter and our increased expectation for the full year of 2024. In the meantime, what I plan to do is to focus my commentary on the long-term opportunity for our company and the important steps we are taking to further enhance Cellebrite's position as the leading platform for accelerating justice around the world. Turning to Slide 5. Let me begin by highlighting the recent formation of Cellebrite Federal Solutions as part of our effort to expand our business with the U.S. federal government. While Cellebrite had already established pervasive, growing relationships across a wide range of U.S. federal defense and civilian agencies, our ability to maximize our impacts had been constrained by our status as a foreign-owned organization. So in order to unlock our contribution to the U.S. federal government and further expand our commercial opportunity, we worked diligently over the past six months to better position Cellebrite to work directly with our U.S. federal customers and support a broader range of projects and programs. Last month, we established Cellebrite Federal Solutions as a separate, dedicated company with independent board governance, and we acquired CyTech, which brings immediate expertise, experience and authorized participation in key federal programs. Now, these actions will enable Cellebrite to significantly increase its impact and participation in critical federal law enforcement and intelligence initiatives over the long term. This new company is led by Erik Sachwitz, who had directed our federal sales for the past several years, and it is overseen by a newly appointed board of four independent directors. These directors are highly accomplished in their respective fields, bringing unique and extremely relevant skills and experiences. By the way, the results from this business will be fully consolidated in our corporate financial reports. These actions closely follow our Q1 launch to gain FedRAMP authorization for our SaaS offerings. We continued to make incremental progress with this initiative as we drive for the full authorization by the end of the first half of 2025. We anticipate that FedRAMP authorization will accelerate the deployment of Cellebrite's relevant cloud-based offerings by our federal customers. And by meeting the U.S. government's demanding security and technical requirements, we believe that this authorization will serve as a proxy for addressing certain standards outside of the U.S., as well as with other U.S. state and local government customers. So, in summary, these actions reflect our commitment to expand our business in the U.S. federal marketplace over the coming years, and we've been encouraged by the enthusiasm from the marketplace in recent weeks and share their optimism about the impact this will have on both public safety and on Cellebrite. We believe that the initial financial benefits associated with Cellebrite Federal Solutions will begin to accrue in 2025 and build from there in subsequent years. Turning to our C2C platform. Our customers continue to realize substantial value from Cellebrite's built-in artificial intelligence capabilities, which enable them to work smarter and faster. AI has been an integral part of our innovation DNA for nearly a decade, and it is now embedded within each of our flagship solutions. At our first Investor Day earlier this year, we showcased a wide range of AI-powered capabilities that enable our customers to accelerate their investigations. Now, while our historic use case has delivered material value, the rapid evolution of generative AI is opening exciting new frontiers for Justice Accelerated, which we have enthusiastically embraced. Our customers report that leveraging our AI-powered capabilities enables them to achieve step-function increases in investigative speed, efficiency and effectiveness. For example, a law enforcement agency can leverage the AI-driven analytics with Pathfinder to substantially reduce the time it takes to complete the larger scale investigation from months to weeks and, in the process, lower overtime costs, decrease the involvement of supporting agencies, help the victims' loved ones move toward closure, and reassure the community that justice is being served. And for these reasons, we are aligning key product technology and go-to-market resources to maximize value creation and monetization associated with our AI technology, what we currently refer to as Cellebrite's Investigative Intelligence. Now, in tandem with this work, in keeping with Cellebrite's effort to ensure this technology will serve exclusively as an agent for good and for protecting public safety, we will continue to evolve a range of controls through internal assessments, customer feedback, and our external independent ethics and integrity advisory board. Responsible innovation in AI will supercharge our ability to advance our mission to make the world a better and a safer place. You can expect to hear more over the coming quarters and years as we make further progress with our work in this area. I want to switch gears now to briefly cover recent capital market activity associated with our ongoing effort to drive value creation for Cellebrite shareholders. First, we're very pleased to announce today a broad warrant redemption program covering 20 million public and 9.7 million private warrants. Now, Dana will share more details around this action, but I want to briefly highlight the significance of this milestone. While a substantial majority of SPAC-originated companies have struggled to create shareholder value over the past two years, Cellebrite's exceptional performance has enabled us to take this action. Second, Cellebrite's stock price performance over the past 30 days through yesterday has triggered the issuance of one-third of the price adjustment shares and divesting of 40% of our restricted sponsorships, as outlined in our business combination agreement. The combination of these events is an important milestone that we believe will help optimize our capital structure, support healthy trading liquidity, and simplify our financial reporting, and they complement and augment the steps we've already taken to enhance our investors' communication. Turning to Slide 6. We are making really good progress executing against our top four strategic priorities. This slide highlights a variety of Q2 deals that delivered meaningful ARR expansion and demonstrated our progress with each priority. So I'd like to share a few quick observations related to these priorities. Our first priority is to extend our leadership in the digital forensic units of our customers. To that end, our ongoing investment to enhance our lawful access capabilities for the most modern smartphones on the market is paying dividends. Over the past year, usage data reflects that more customers are turning to Cellebrite to lawfully access and extract data from both Android and Apple iOS devices. Related to this, we are also making good progress with upgrading our customers to Inseyets. As noted on our Q1 call, our goal in 2024 is to convert 10% of our installed base to Inseyets. I'm glad to share that market reception has been extremely favorable and we are currently on pace to exceed this target. Our second priority is to accelerate our growth within the investigative and intelligence units of our law enforcement customers. We continued to grow our Pathfinder footprint with IUs during the second quarter, and I can say that we are excited about our potential to accelerate penetration into the IUs as Pathfinder becomes fully cloud-enabled over the coming quarters. Our third priority is to expand our business in the private sector with enterprises and service providers who primarily rely on Cellebrite's data collection solutions to advance corporate investigation and eDiscovery use cases. Related to this, we recently announced an exclusive technology and go-to-market partnership with Relativity that is intended to help our mutual customers collect and manage mobile evidence as a key part of their digital investigations with utmost efficiency. We are collaborating with Relativity to create a streamlined RelativityOne and Cellebrite's remote mobile collection and conversion integration, in which Relativity is the only eDiscovery provider to have direct integration with Cellebrite Endpoint Inspector and with Cellebrite Endpoint Mobile Now. We are optimistic that this partnership will deliver compelling value to our mutual customers and help accelerate our growth with enterprise customers and service providers. Our fourth strategic priority is to help our customers harness the power of the cloud. Overall, ARR from cloud and SaaS-based solutions has nearly doubled over the past year and is now generating low teens as a percentage of our ARR, up from the high single digits. We are pleased to see increasing traction for Guardian, our SaaS-based case and evidence management solution. The number of Guardian customers has continued to grow, along with the number of users in terms of both examiners and investigators, and data storage volumes have doubled in the past five months alone to over 2 petabytes. I would like to conclude my prepared remarks on Slide 7. So, we view our C2C platform as unique in today's marketplace, enabling us to deliver an end-to-end set of integrated software solutions that support our customers' needs throughout the digital investigation lifecycle. We continue to move swiftly and decisively to deliver high-value solutions and responsive support to address the time-sensitive needs of our customers around the globe, fortifying the trust they place in our solutions. In turn, Cellebrite has successfully extended its market and technology leadership, expanded its customer relationships, and delivered strong results. We've also further enhanced our leadership team and Board. Earlier this month, we appointed Sigalit Shavit as our first-ever Chief Information Officer, CIO. We look forward to her contributions as we scale our ability to innovate and support customers around the world. We're also thrilled that Troy Richardson, an accomplished technology executive, was recently appointed to our Board of Directors. And as we look ahead, our updated 2024 expectations for ARR growth and adjusted EBITDA indicate that we are well positioned to exceed our performance baseline for Rule of 45 for the second straight year. It is really rewarding to see how our customers are leveraging their investment in Cellebrite technology to accelerate justice. Every quarter, our technology makes an outsized impact on hundreds of thousands of cases, enabling our customers to protect and save lives, stop bad actors, and keep our community safer. Overall, our team has done a great job in the first half of 2024 and I would like to use the opportunity and thank my colleagues for their ongoing commitment and contributions to our continued success. And with that said, I'll now turn the call over to Dana.

Thank you, Yossi. Well, the combination of solid top-line expansion and the sound management of our cost structure produced another quarter of excellent results and helped underpin our updated 2024 guidance. So let's begin with a review of our Q2 results by starting with our ARR growth on Slide 9. Our ARR grew 26% year-on-year to $346 million at the end of June 2024. The building block for our ARR growth begins with gross retention, which was 91% for the period. The lion's share of ARR growth was once again driven by expansion within our installed customer base. Looking at the product level contribution, Inseyets adoption continues to fuel our ARR growth. At the same time, we continue to make progress, extending our reach into new bank centers or sub-logos within our installed base through both Guardian and Pathfinder. Geographically, the ARR mix for the 12 months ended June 30, 2024, was consistent with prior quarters. The Americas represented our largest geography at 53% of total, followed by EMEA at 35% and Asia Pacific at 12%. All major geographical regions continued to enjoy ARR growth rates above 20%, with the Americas increasing 28%, EMEA growing 23%, and Asia Pacific up 27%. Now, turning to revenue on Slide 10. We reported a 25% year-on-year increase in second-quarter revenue to $95.7 million. This increase was primarily driven by subscription software revenue growth of 27%. Our top-line performance benefited modestly from multi-year agreements and favorable product mix, and we expect this to continue into the second half of the year. In terms of non-recurring revenue, the increase in hardware sales within our other non-recurring revenue was largely offset by a modest decline in our professional services revenue. Subscription revenue represented 89% of total revenue, and we expect that it will continue to trend within the mid-to-high 80% range over the coming quarters. 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. Our Q2 gross margin was 83.7% and was generally consistent with our expectations and up slightly from the prior year. In terms of operating expenses, Q2 operating costs increased by 10% to $60.3 million. Higher sales and marketing and research and development costs reflected increased headcount and personnel-related costs in these areas. We ended Q2 with 1,077 employees, up 25 from the first quarter and 111 from the same quarter last year. We continue to invest in recruiting new talent with ambitions to increase our headcounts to roughly 1,150 employees by the end of this year. Now, turning to Slide 12. The combination of strong revenue growth, healthy gross margin performance, and a moderate increase in our operating costs resulted in profitability that exceeded our plans entering the quarter. We reported Q2 adjusted EBITDA of $21.6 million, or 23% on a margin basis versus 15% one year ago. Our Q2 non-GAAP operating income was $19.8 million, with non-GAAP net income of $22.9 million, or $0.10 on a fully diluted basis. We closed the second quarter with $366 million in cash, cash equivalents and investments, up $18.7 million on a sequential basis and $121 million higher than the same quarter last year. The sequential increase for the quarter primarily reflected the strong cash flow from operations. Free cash flow for the second quarter, which we defined as net cash provided by operating activities, less capital expenditure and purchase of intangible assets, was $12.2 million. In terms of our mid-July acquisition of CyTech, you'll see the cash outflow of a little more than $3 million related to this transaction in our third-quarter cash flow statement, with approximately $1 million anticipated to be paid in 2025. Before I move to the financial forecast, I'd like to quickly add to Yossi's comments regarding recent capital markets development and more specifically, Cellebrite announced earlier today that it is redeeming all of the outstanding warrants, which consists of 20 million public warrants and 9.7 million private warrants. We anticipate that the vast majority of these warrants will be exercised on a cashless basis. At recent price, this would convert nearly 30 million public and private warrants into 8 million to 9 million common shares. This is approximately 70% less dilutive than if all of the warrants were exercised for cash. We plan to issue an announcement outlining the results from the redemption soon after the redemption date next month. The warrant redemption, which will ultimately result in fully retiring these securities, and the previously mentioned upcoming issuance of 5 million price adjustment shares and the recent vesting of 3 million restricted sponsor shares support our longstanding objectives of improving the company's trading liquidity, optimizing our capital structure and simplifying our financial reporting since it would eliminate the quarterly revaluation of our warrants and reduce the non-cash impact associated with the quarterly revaluation of the remaining unvested price adjustment and restricted sponsor shares. Now, let's move to Slide 13, which details our 2024 third quarter and full-year fiscal financial expectations. Based on our results to date and our assessment of the opportunities that lie ahead over the coming two quarters, we have increased our outlook for the year. While we strive to provide ambitious yet realistic targets at the start of any given year, this update marks the second straight year we have delivered a beat and raised the second-quarter expectations. More specifically, we have raised our revenue outlook for 2024 and increased the midpoint of our ARR expectations. Our increased revenue range reflects the impact associated with more customers making long-term commitments to Cellebrite in the form of multi-year agreements and product mix that result in more revenue recognized upfront at the start of the subscription. As we move into the seasonally stronger second half of the year, we anticipate improving contributions from the investment we made during the first half of the year to expand our quota-carrying sales force. Our updated 2024 outlook for adjusted EBITDA reflects a strong first-half performance and several other factors. First, we expect our solid revenue trajectory to continue with 53% to 55% of our full-year revenue anticipated in the second half of the year. Second, we now expect our full-year gross margins will range from 84% to 86%, which is higher than originally anticipated due to the timing of investment in our post-sale customer success organization and improvements in our hydro margins. Finally, we anticipate low single-digit to mid-single-digit expense growth in the second half of the year versus the first-half levels. In terms of the CyTech acquisition, we anticipate the minimum Cellebrite contribution to our services revenue and adjusted EBITDA during the second half of 2024. The CyTech resources have been integrated into Cellebrite Federal Solutions and our updated outlook factors the incremental governance and operational costs associated with this new business. Now, in terms of the third quarter expectations. We currently anticipate ARR to range of $360 million to $370 million, or 24% to 27% growth over the prior 12-month period. We expect Q3 revenue growth of 19% to 24% to support a range of $100 million to $104 million. Our Q3 ARR and revenue outlooks reflect our expectation for healthy spending by our U.S. federal agency customers in conjunction with the end of their fiscal year in September. We expect our Q3 gross margins to fall within the updated full-year 2024 gross margins target range of 84% to 86%. We anticipate our Q3 operating costs will increase by low single digits on a percentage basis over Q2 levels, as we continue to fully absorb the run rate cost of the new hires and further expand our team. As a result, we anticipate Q3 adjusted EBITDA in the range of $25 million to $29 million, or 25% to 28% on a margin basis. In terms of modeling our share count, we expect a modest increase in our weighted average diluted share count primarily due to the previously mentioned warrant redemption and triggering events. In comparison with the 2024 second quarter average rated diluted share count, we anticipate that our third-quarter fully diluted share count will increase by approximately 2%, and the full year will increase by approximately 0.5 percentage points as a result of the previously mentioned events. Now, in summary, as Yossi had already outlined, we are very pleased with the overall strategic direction of the business. We are making important progress on multiple fronts, the combination of which is enabling us to enhance our value proposition, broaden our customer relationships, and fortify our trading liquidity. As a result, we are in a great position to deliver a strong 2024 with our ARR growth rates and adjusted EBITDA margins above our baseline Rule of 45 targets. That concludes my prepared remarks, and I’ll turn the call back to our operator for Q&A.

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

Great. Thanks so much for taking my questions. Yossi, it's great to hear you're on track to migrate roughly 10% of the installed base to Inseyets this year. Two questions about that. Number one, can you just confirm for us if that's a dollar-based goal or a number of customer goal? And just secondly, are you seeing the 20% to 25% price uplift as you expected?

So, thanks for the question. I would like maybe first to state that there is, in terms of the conversion of the Inseyets, it was a really solid Q2. As we said, we are currently on a pace to exceed the 2024 upgrade targets by 50% because we planned about 10%, and now we expect 15% of our installed base will be upgraded to Inseyets during 2024. It's in dollars and also in the number of licenses. Okay? By the way, I can say that also the interest is very high, and it's very simple. The Inseyets offer a significant improvement of productivity and efficiency to our customers. Also said that we stated that the long-term goal is to upgrade the vast majority of our installed base over the next three years, and I'm very pleased to say that we are pretty much confident about our ability to do so. In terms of pricing, again, the Inseyets deliver more value than our legacy offering so far, and it does stuff that our separated models didn't do. Now we are combining them, and it's faster and it offers advanced extraction and cloud extraction and other capabilities and higher value commands, obviously higher price tag. We spoke about 20% to 25% higher than the comparable legacy solutions. And I can say that we are successfully holding this price point when customers upgrade, which is obviously great validation of the value proposition of the Inseyets.

It's great to hear. Thanks for the color. And just to follow up for Dana. Dana, NRR ticked down slightly, hoping you can unpack the drivers of that and how to think about it going forward. I think in the presentation, it seems like it's just lower expansion rates with existing customers. I want to make sure that's correct and just curious why should it not increase given all that Yossi just said about the great things and the uptake of Inseyets. Thank you so much.

Thank you. We are very pleased with our business trajectory and performance in the second quarter of this year, and we see a strong pipeline to support our growth in the latter half of the year. As I mentioned, we have raised the midpoint of the Annual Recurring Revenue, and our net retention rate is typically two points lower than our ARR growth. This reflects about a 2% contribution from new customers and new logos joining Cellebrite since we are already serving a significant number of the largest law enforcement agencies globally. A net retention rate of 124% supports our long-term growth, and we are very happy with it. We've significantly increased our quota carriers in the first half of the year, which we expect will further contribute, particularly in the Americas and EMEA during the second half and into 2025.

Great. Thanks so much. Keep up the great work.

Thank you.

Thank you. Our next question comes from Mike Cikos with Needham & Company. Please go ahead.

Hey, guys. Yeah, Mike Cikos on the line here and thank you very much for taking the questions. I wanted to circle back to some of Dana's commentary on the multi-year commitments. Can you help us think about where does contract duration stand today and the fact that these customers are making multi-year commitments? I think it's a great validation of their commitment to Cellebrite, right? But curious, is this a newer phenomenon or is it part of a broader trend? Maybe it's something that we should actually expect to persist as customers migrate to Inseyets. Anything there would be helpful on that contract duration?

So thank you, Mike. In the past, and we shared it with the market, we had around 25% to 30% of the contracts with multi-year agreements, mainly actually outside of the Americas. We are seeing a certain trend going both within the Americas and also with other customers, and as part of the transition with Inseyets, these customers are ready to commit for a longer period than they've been before. We are seeing this motion, as I said, in all regions of where we are selling Americas, EMEA, and APAC, and we see a slight uptick in this percentage of multi-year deals.

Maybe to add, especially when it comes to our strategic accounts, our large accounts and our large federal accounts, clearly, we are embracing the element of multi-year deals. It secures basically our stickiness and the commitment from both sides. And on top of that, one can also contribute it to the C2C platform and to the fact that today, we Cellebrite are sticky in the daily investigative work, thanks to our collect and review our Inseyets suite of solutions. However, when you add into the equation the end-to-end effect and the ability to get from a vendor more than just collect and review but covering the entire lifecycle of investigation, the ability to commit long term and the interest to work long-term with Cellebrite is increasing.

Understood. Thank you for that. And again, just coming back to the prepared remarks, I think, Dana, maybe you had said that part of this guidance raise anticipates some improving contribution from investments made earlier this year, specifically to the quota-carrying sales force. So it's a bit of a two-parter here. The first, are you guys actually trending better than expected as far as how the hiring of reps was expected to play out this year? And then secondly, are you potentially seeing sales reps scale or ramp at a faster rate than what we've seen historically? I'm just trying to tease out, I guess that contribution from those earlier hires this year.

So the earliest calls of the year, we spoke about doubling investment in our EMEA and Americas sales organization, led by our new COO. And we are actually following the plans that we have set at the beginning of the year. We have a major investment in those two regions, and we are taking into consideration that the full contribution of a new sales quota carriers takes time. And so whoever joined us in Q1 will be much more fully contributing in Q3 and so forth. So this heavy investment that we've done in Q1 and Q2, we do expect to start bearing fruits in Q3 and Q4 and mainly when we step into 2025.

Thank you. Our next question will come from Eric Martinuzzi with Lake Street. Please go ahead.

Yeah. Just a point of clarification on the CyTech deal. Is there any part of that acquisition that's impacting the Q3, Q4 outlook here, revenue-wise or earnings-wise?

So, as I said, the impact is de minimis, and it's mainly introduced in our services forecast. The total contribution to EBITDA is almost nothing, as we have introduced some investment in governance and compliance to support the introduction of this business as part of the Cellebrite Federal Solutions organization.

Okay. And then the traction with the federal government is there, will we be getting a maybe a breakout there? It sounds like it's going to be incorporated into the total company reporting. But how are we measuring that from our perspective, the success of that Cellebrite Federal Solutions investment?

So maybe I'll take it. One need to understand that we created or upgraded basically an already very successful and significant size part of the company. The federal sector in Cellebrite was 19% of our ARR in 2023, and the growth was 21%. And the acquisition of CyTech and creation of Cellebrite Federal Solutions, what we call the CFS, basically enables us to directly engage with federal agency customers and also the relevant system integrators much earlier in the project planning and in the process. And that should drive more meaningful deployments. And obviously, the sense of it is initial financial benefits which are associated with it. I would say that if I look at a long-term perspective, I do expect that this successful, growing segment will get even a boost and we might even think about doubling the size of that activity in a frame of, I would say, three to five years from now.

Thank you. Our next question will come from Shaul Eyal with TD Cowen. Please go ahead.

Good afternoon, Yossi, Dana, Andy, congrats on the ongoing strong performance. Dana, I want to go back to your Analyst Day, some of the metrics you provided at this time. For example, you mentioned that public sector customers spend an average, I think, it was about $190 of ARR per case. Well, I don't have the number of cases to run the calculation. You probably have it. Can I assume this $190 metric is actually coming a bit higher than indicated about five months ago? Maybe just a housekeeping, what was the cloud revenue mix this quarter? I might have missed that.

Okay. So first…

You take that and I'll take the cloud. Okay?

So, well, Shaul, what we have tried to allude to in our Investors Day is the very small spend of a law enforcement agency on Cellebrite Solution is in comparison to their total spend in investigation. And yes, we did base it on the number of investigations that we are seeing being processed with Cellebrite Solution. We are measuring this on an annual basis, not on a quarterly basis. But I do think that as you see our ARR growth expansion, it actually alludes to the fact that more investigations are being done using Cellebrite Solution. And our further expansion and growth with Guardian and Pathfinder in investigative units actually supports that result. We will measure it as we end the year again. With regards to the cloud, Yossi.

Shaul, first of all, thank you for the question. The cloud, in general, is pretty much related to our ability to offer, I would say, something compelling and differentiated with the C2C platform, which is, by the way, cloud-driven and AI-driven. And I'm glad to say that customers are showing really appetites for cloud-based solutions of Cellebrite. Cloud revenue and ARR continue to grow. It's representing low double digits as a percentage of this Q in 2024 revenue and ARR. And I would say that we see, based on what I said in the trends, tremendous opportunities in that respect. And we expect cloud solutions, I would say, to represent a larger percentage of revenue and ARR over the coming quarters and years. That's to that.

And Yossi, if I may, how should we be thinking about the competitive landscape and specifically what you're seeing out of Magnet Forensics? Thank you.

So, look, I'm giving an answer basically as an industry leader here and industry leader which is placing itself on the market with an end-to-end portfolio. And there is, while we are talking about a multi-vendor environment, as we all know, there is only a limited number of competitors who can deliver credible end-to-end solutions. And that's a first statement. I would say that side by side with the collection review piece, this is our major relative competitive advantage today and into the future. In the DFU, we have clear leadership in Android and iOS, and that comes on top of the end-to-end. To the competitors, specifically, we've seen, I would say no material changes to the competitive landscape in this quarter. I have to say, and this is not by playing arrogant, we are, if we continue to produce this growth, we can and we are more confident today about our strategic direction and our market position. By the way, we spoke about it last quarter. And if we are talking about that specific competitor, certain competitors literally emulate our platform orientation and also our marketing messaging, which makes me happy because as a leader I'm leading the context in the industry. And so that's to that, I would say that we are more focusing on what we do. What we have seen from competitors and maybe as an add-on, there was a moderate price increase that was shown by, not only by us, but also by Magnet and some others. And this is generally consistent, I would say, with the historical mid-single-digit level of price increases that the market sees.

Thank you so much. Good luck.

Thank you.

Thank you.

Thank you. Our next question will come from Jeff Van Rhee with Craig-Hallum. Please go ahead.

Great. Thanks. I'll add my congrats. Really nice numbers here. On the Inseyets rollout, I'm curious what progress you've made in terms of penetration of premium into the base and the impacts that the new platform has had in terms of potentially accelerating the adoption of those premium capabilities.

We consider the premium and the suite of solutions that Cellebrite provides for lawful access. We are making significant advancements with our lawful access solutions overall. I am pleased to report that the uptake of premium and other components of the lawful access modules within the Inseyets family has risen from the mid-20s percentage level in Q1 to the high-20s percentage level by the end of Q4 2024. Additionally, I am optimistic and confident that the advanced lawful access modules will continue to gain strong adoption as our customers progress in the coming years.

Yes. That's great. Great progress. And then on the AI, obviously, I think the demo that you did at the Analyst Day is one of the most compelling I've seen in terms of value-added conversational AI. You talked about the roadmap of AI and you're integrating it throughout the platform. I'm wondering though if there are instances where it's going to be less than gradual. Namely, you have meaningful new product introductions that have meaningful ARPU impacts. How does this playthrough of AI show itself in terms of product introductions and, more importantly, revenue uplift over the next year or two?

So, first of all, we need to understand that specifically in our area, customers place, I would say, high value on AI capabilities that we brought into the market in the past. As we said, we've been there since 2016 with homemade grown AI capabilities. Customers, by the way, when we talk to them, they report that leveraging AI makes them achieve really step-function increases. And we are talking here about speed, efficiency, and effectiveness. We are planning to align, I would say, key product and technologies and also go-to-market, which is related to that. And to advance the AI innovation further, there will be a focus on the entire C2C platform because if you think about it, and maybe a little bit more concrete, if you think about our activity and about investigative activity, there is media analysis where unlocking, I would say Inseyets from visual and audio content is critical and can be massively upgraded with AI. There is the element of text analytics, so decoding and looking at text and text-based evidence. And then there is also the element of cybercrime and maybe specifically in our case, the cryptocurrency and the ability to bypass traditional elements and accelerate by identifying a persona and, I would say, misuse when it comes to crime cases. So basically, if you think about what I just said, it's across our portfolio, okay? And we have clear intention to invest and to expand in that area throughout the entire C2C platform. Thanks, Jeff.

Thank you.

Thank you. Our next question will come from Brian Essex with JP Morgan. Please go ahead.

Hi. Good morning, and thank you for taking the questions. I want to follow up to the question on Inseyets from Brad, Jeff. Can you maybe give us insight around what percentage of your customers come up for renewal in the back half of the year and what the conversion rate tends to be to convert customers to Inseyets on renewal? What does that decision process look like for them, and how difficult is it for them to migrate budget toward technology to address better efficiency that platform offers?

Thank you for the question. As I mentioned earlier, approximately 53% to 55% of our business is generated in the second half of the year, primarily because Q3 marks the end of the federal fiscal year and Q4 is the conclusion of the annual financial year for many customers. It's important to note that federal customers represent a significant portion and, compared to smaller customers, they hold a much larger installed base of licenses. Therefore, the focus should be on the percentage of the installed base that is due for renewal rather than the number of customers. Given that we are engaging with our larger customers in the latter half of the year, the renewal aligns with the seasonal trends of our business. Thus, 53% to 55% of the renewal business also occurs in the second half. There is considerable interest in Inseyets from the customers we are targeting. The main challenge is whether they can allocate the budget for the Inseyets upgrade and if they are getting ready for sales for the upcoming year. As Yossi mentioned, we have raised our expectation from a 10% conversion rate to a 15% conversion rate of our installed base. This is supported by the opportunities we anticipate in the second half.

Great, that's helpful. And maybe on Relativity. Can you talk about the economics for that partnership? What do the incentives look like across the partnership and do you have significant overlap with them?

So, the Relativity partnership has, I would say, a substantial potential in terms of business increase. I'm talking about ARR. We are talking here about product introduction between two leading players basically. We are coming from the mobile and Relativity is a leading eDiscovery platform and obviously a combination of that, the eDiscovery platform of their RelativityOne with our remote collection to mobile and to computer really improves customer standards and workflows. For us, it means that we can leverage and reach a much larger installed base with Enterprise Solutions segment and clearly with joint marketing activities, market education and self-leadership, we can basically improve our position over there. We are at the beginning of this partnership at the moment, just like any other partnership, we need to make sure that there is alignment on the quota carrier side and to execute those programs. But it's something really meaningful and solid that can take us to a different level when it comes to the private sector. Let's put it this way, it gives us, in any case, the confidence or helps us giving us the confidence that we can meet our targets when it comes to the private sector in '24 and beyond.

Great. That's helpful color. Thank you very much.

Thank you. Our next question will come from Louie DiPalma with William Blair. Please go ahead.

Yossi, Dana and Andy, good morning.

Good morning.

Good morning.

Good morning.

What has been the early feedback for C2C? I know it was only released in January, but is C2C driving Pathfinder adoption?

I want to share a few thoughts. First, I'm pleased to note that our customers have a positive view of the C2C and the overall end-to-end solution. We are still in the early stages of the C2C platform, but we introduced it because the concept of end-to-end aligns well with the broader trend of digital transformation and the need for our customers, especially in the public sector, to modernize their operations. Currently, only a small percentage of customers have implemented the C2C end-to-end solution. However, given our discussions about the importance of transforming the digital lifecycle of investigations, we are optimistic that more customers will adopt multiple Cellebrite solutions within the C2C platform. As we continue to integrate these solutions, we anticipate a smoother flow of data from the forensic side to the investigative side. Additionally, we are heavily investing in cloud capabilities, which will further simplify the adoption of C2C solutions for our customers in the future. We expect to see continued progress on our roadmap, which will enhance customer interest in C2C.

Great. That makes sense. And for Dana, you raised your full-year EBITDA guidance by 23%. With the strong operating leverage thus far this year, it seems that your long-term margin outlook that you provided at the Analyst Day could be conservative. Are there any major margin headwinds on the horizon that we should be aware of? Are there any large acquisitions with lower margin profiles that you are considering or products with dilutive margins? How should we think about the long-term margin profile relative to your recent strength there?

We are pleased with our progress and the fact that we have surpassed our expectations. At this point, we are maintaining our long-term model. We are currently working on our 2025 plans, which we will share with the market early next year. Our EBITDA margins have shown positive performance alongside our revenue, and we are steadily increasing our operating expenses to support our top-line growth, which has contributed significantly to the growth in our EBITDA, complemented by a favorable gross margin. There are no changes to our models at this moment, and we will review and update them if needed early next year.

Sounds good. Thanks a lot.

Thank you.

Thank you. Our next question will come from Tomer Zilberman with Bank of America. Please go ahead.

Hey, guys. I wanted to ask maybe a more broader picture about revenue and ARR trends. You raised your revenue guidance pretty solidly above expectations, whereas the ARR guidance raise was a little bit more modest. So wanted to ask the difference, what's driving the difference in the magnitude between the revenue guidance raise and the ARR guidance raise?

Well, first, we are very pleased with our ARR performance. It is in line with what we planned and it is in line with what we communicated as our expectations to the market. The improved revenue performance is really associated with the product mix of how much of the product is actually on-prem compared to the journey to the cloud, and how much of the deals are one-year deals compared to multi-year deals. And we usually look at multi-year deals more towards the second half of the year. We enjoyed some multi-year deals also in the first half of the year, which we didn't plan and generated a slightly higher revenue than we have actually forecasted. So I do believe that the ARR growth and the fact that we are continuously meeting our target is a great sign of the company's progress and ability to continue selling its offering and broadening its solutions within its customer base.

I think the key is here. And when you think about Cellebrite, is Cellebrite well positioned for, I would say, durable growth and profitable growth? And the answer is clearly yes. As Dana said, a great quarter. We raised the midpoint of the ARR for 2024. And if we look back at the Investors Day, which was mentioned here, the midpoint is even higher than our 24% long-term target as we placed it. So I think that we are in a great place.

Got it. And maybe just as a follow-up, going back on the previous question on the Relativity partnership, does that expand your expectations for private sector contribution, which I think is still around 10% of the business?

As I said, it's more at this stage, give us the confidence to say that it will help us to meet the targets that we anticipated we will do. So, combining forces with a review leader while we are coming from as a remote collection leader will enable us to meet the targets. Just like any other partnership, we are in a start phase. We need to see that we are executing properly on both sides. It's also a cultural element of companies all working together. And then if we will be able to update and accelerate, we will be glad to update about new targets.

Got it. Thank you.

Thank you. This will conclude today's question-and-answer session. I will now turn the call back to CEO, Yossi Carmil.

Thank you very much. So, look, first of all, thank you, everybody, for joining. And thank you for the trust and the interest. I want to emphasize that we are in the middle of the road for 2024, but based on what we had executed so far, we are pretty much sure about our ability to meet the upgraded targets that we just gave and updated you all about. You can expect really great things from us. I would like as last to use the opportunity and thank again to all the Cellebrite employees for a very strong quarter. And thank you all for participating.

Thank you. This concludes the Cellebrite second quarter 2024 financial results conference call. You may disconnect your line at this time and have a wonderful day.