Cellebrite DI Ltd. (CLBT) Q3 2021 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Cellebrite Q3, 2021 Earnings Call. [Operator Instructions] As a reminder, this call may be recorded. I will now like to introduce your host for today's conference, Anat Earon Heilborn, VP, Investor Relations for Cellebrite. You may begin.

Thank you, Justin. Welcome to Cellebrite’s third quarter 2021 financial results webcast. Joining me today are Yossi Carmil, Cellebrite’s Chief Executive Officer and Dana Gerner, Cellebrite’s Chief Financial Officer. This call is being recorded and a replay of this recording as well as a copy of the presentation that accompanies this call will be made available on our website shortly after the call. A copy of today's press release and financial statements including GAAP to non- GAAP reconciliations, as well as supplemental financial information for the third quarter are available on the Investor Relations website at investor.cellebrite.com. Statements made during this call that are not statements of historical facts constitute forward-looking statements. All forward-looking statements are subject to risks, 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 registration statement on Form S1 declared effective by the SEC on October 6, 2021. The company does not undertake to update any forward-looking statement due to future events or circumstances. Please note that in the coming weeks, management will participate in a number of investor conferences as details in today's press release. Please visit the events section of the Investor website to access webcast of our presentations at these conferences where applicable. With that, I'd like to turn the call over to Yossi Carmil, Cellebrite CEO. Yossi, please, please go ahead.

Thank you, Anat. And thank you for joining our call today. This is our first earning call as a public company. But many of you have been following our progress since the beginning of the going public process back in April. And I would -- firstly would like to thank you for your interest and support. We are thrilled to start our journey as a public company by delivering progress on our strategy. And all that together with strong financial results, just to refresh, our strategy is to lead the digital transformation of our customers' investigative units, and becoming a one stop shop digital intelligence leading vendor. In Q3, we continue to see momentum with large and multi solution deals, which we had highlighted earlier in the year. We are pleased to report this quarter 25 deals larger than US $0.5 million, compared with 15 such deals in Q3 last year, including our largest deal ever of approximately US $10 million with the US Federal account. In the first nine months of this year, we had 58 such deals reflecting a growth of 76% compared to the same period last year. That the large deals reflect a successful upsell of additional licenses or new solutions to existing customers, as well as the increase in multiyear term base deals. This momentum is a reflection of the success we have had within the public safety sector as part of the digital transformation process of strategic accounts. And the success in transitioning these customers to the term based model from their prior preference for one time perpetual license, giving their budgetary structure. We are excited to see upsell driven this year by premium. Our high end Collect & Review solutions with new license sales in Q3 to customers such as two federal agencies, and one state police force in the United States, a European Ministry of Interior Affairs and a municipal police force in the Near East. We are also successfully -- we successfully launched a Premium Enterprise solution and began deployments of the orders made even before solution availability, while receiving new orders from customers, such as county police force in the UK, two county sheriff's offices in the USA, customs authority and others. As a reminder, Premium is our advanced Collect & Review solution providing unlock and extract capabilities for leading iOS and Android devices. It is typically installed in a central location that can meet our strict security requirements. Now, the new solution the Premium Enterprise is designed to decentralize our advanced capabilities while maintaining the strict security requirements found in Premium. The Premium Enterprise allows remote connectivity to you UFEDs; the most widely adopted prime Collect & Review solution. And this enables our special capabilities on every UFED and improving significantly customers investigative mode of operation. Let me share with you two win stories, which provide some color on demand drivers for our functions. So typical demand factor and growth driver for Cellebrite is backlog of devices that needs to be investigated. For example, one of the large wins in the quarter was with a National Correction Facilities Network in one of our large markets. Historically, this customer spent between US $100,000 to US $200,000 with us annually. While the network includes multiple corrections facilities, the customer was or their facilities were all working with one lab and a small team. Now this lab was unable to keep up with the numbers of mobile devices that were smuggled into prisons. Engaging with the senior government officer and conducting an extensive proof-of-concept, we secured a seven digit order which includes distributing responders, our simplified field solution in the production facilities and also using Commander, our license management solution in order to automate the generating of data and their usage. In addition, the deal includes services to bolster the customers' lab capabilities, train the teams and implement best practices. Despite the fact that the customer booked this quarter approximately 10 times it its previous year spend with us. We believe there is additional upsell potential within this customer in the future. The second example, is a European country national police force that purchased multiple solutions including UFED and Physical Analyzer, Pathfinder, Premium UFED Cloud Seeker Inspector and Digital Collector as well as training in a multimillion three years deal. This police force will now be able to collect and review data for mobile, from computer, video and the cloud and analyze their finding across numerous Investigation Unit throughout the country and not only so far in central police stations. This customer is adopting a highly progressive approach to investigations, aspiring to expand the adoption of digital intelligence in the police force to overcome bottlenecks and increase efficiency. We expect this approach to become more widespread as part of global trend to digitize multiple aspects of the police force. This win was achieved through close engagement with senior level of agency and a flexible approach that enables tailoring the deployment to the agency strategy and specific needs. Now these two examples I shared help explain how we constantly and successfully generate best-in-class net retention rate, which was 139% for the 12 months ending September 30, 2021. Furthermore, we believe the spending potential of our existing customer base is significant. And we are very focused on capturing this additional opportunity. Our vision of a comprehensive digital intelligence platform that allows uses in agency to collect, review, analyze and manage digital data is a significant step forward from today's siloed manual and backlog process. The discussions of such a step forward are held at the agency's executive level. And in Q3 for example, we engaged with the most senior officers of the police forces at three of the largest 20 cities in the United States to discuss our end to end digital intelligence platform. Now having such discussions is first and foremost, a testament to the quality of our salesforce. We invested in high caliber account executives, and by that upgraded our ability to manage strategic accounts. And second, we view such discussions as a positive sign in the continued interest of major law enforcement organizations to educate themselves and adopt leading digital intelligence tools. Now of course, such a step forward will also take time. The processes involved in digital transformation are complex, because it requires not only our solutions, but also investments in infrastructure and personnel on the agency side. This complexity is one of the reasons we expanded our service offering as I elaborated on our previous call, the consulting services and training we offer assist customer in this transition. Now in the past few months, we continue to enhance and expand our digital intelligence platform to make the investigative process smarter, faster and efficient and pursue our vision of digitizing the entire investigative lifecycle. Starting with organic development, in Q3, we introduced a new version of Guardian, our Digital Evidence Management solution, and the industry's first remote mobile collection. Let me start with the Guardian. Now we view the Guardian solution we introduced as an important and strategic component in our digital intelligence platform. The world of digital evidence management is evolving quickly as public safety agencies are very challenged by the need to manage an increasing amount of digital evidence, while at the same time maintaining the channel of evidence, ensuring compliance, protecting privacy and meeting an increasing number of accountability requirements. Now most agencies today are still managing data manually. And most of the alternatives to that manual process are digital evidence management solution that specializes in operational data, which is generated by agencies themselves, for example, from in car, body worn cameras, or card/RMS systems. While such solutions are transforming agency's operational ecosystem, Cellebrite Guardian is a digital evidence management solution that specializes in the investigative ecosystem. It is linked to actual investigative data generation through our collection review offering. This enables annalistic approach toward data, evidence workflow and case management including elements of storing, sharing and reviews through the investigation process in order to make investigation faster and more efficient. Now all these now is offered in a SaaS solution, further enhancing efficiency and cost effectiveness. And this is our first SaaS solution, which is another dimension of strategic importance. We believe that readiness of the public safety sector for SaaS solutions is on the rise, and we are committed to enhance and expand our offering in this space. Regarding remote mobile collection, the remote mobile collection is an important capability for the private sector, where corporate investigations e-discovery and incident response often require collecting information from a distributed workforce. Now with constant based automated remote collections from both computer and mobile devices, the disruption to the workforce is minimized. Cellebrite is the first to market with this capability due to our domain expertise on the mobile collection. Let's discuss the inorganic portfolio expansion. We recently announced the acquisition of Digital Clues. We are obviously excited about this acquisition as we see open source intelligence is an expansion of our digital intelligence offering. Upgrading Cellebrite's competitive differentiation as an end-to-end digital intelligence platform provider. Open Source Intelligence is the collection and analysis of data from many publicly available sources including the surface web, deep web, and dark web. Agencies are all engaged in such activities in a simple and manual manner. This can be as basic as checking a suspects Facebook profile, but through use an automated solution as part of their investigative workflow. The addition of this OSINT capability to our digital intelligence platform is a natural extension; it enables quick information gathering in early stages of the investigation, and as such, fits our value proposition of making investigations smarter, faster and more efficient. Our extensive footprint and strong customer base provided significant cross-selling opportunity here. And as such, it's almost another $1 billion to our term. Now reaching the scale, will require delivering the strong Digital Clues cloud based technology as an integrated solution so that open source intelligence is fused into Pathfinder, our analytic solution is another layer of data that enriches Pathfinder's analytics capabilities. This will require some investment in R&D, and it will require time, we are excited about this new offering that expands our addressable market. And we welcome the digital tools team, which will join us in the coming days after the upcoming closing of the acquisition. So in summary, we are very pleased with our performance in the third quarter. And with the continued success we have had in executing on our strategy. We are excited also that our top customers remain committed to leveraging our suite of solutions to improve their efficiency and outcomes. We continue to innovate our portfolio by increasing the scope of our offerings as we focus on helping our customers apply their digital transformation initiatives in the investigative work flow. Now combined with a healthy spending environment, and budget availability of law enforcement organizations, we have a tremendous market opportunity. And we are confident in our ability to execute as more organization recognized the vast potential of our digital intelligence platform. And above all, we remain committed to our mission to accelerate justice, protect and save lives, and preserve privacy. And I'm proud of our team success in this quarter. Now with that, I will turn the call over to Dana to discuss the financials.

Thank you, Yossi. Hi, I'm very pleased to present the analysis of our results for the third quarter of 2021. From a corporate perspective, going public may be a milestone quarter for the company. And from a business perspective, we continue to deliver strong financial results that exceeded our expectations in many parameters, demonstrating strong execution on our go-to-market strategy, delivering growth primarily through expansion within our existing customer base. Let's starts with revenue where we enjoy very strong performance in Q3, a clear trend since the beginning of 2021, which we expected to continue in Q4. Total revenue in Q3 was $65.9 million, up 24% from Q3 last year. Revenue for the first nine months of the year was $178 million, up 29% from the first nine months of 2020, well ahead of our expected growth rate for the full year which was 21%. We are also pleased with our ability to deliver these outperform despite the global supply chain challenges, as you know, electronic components are required for the accessories that accompany some of our social distances, and our operations team resourcefully secure their needs for Q3 as well as Q4. Looking at the different revenue streams, we are making our targets to increase the proportion of subscriptions in our overall revenue mix, and subscription revenue was the main force driver in Q3 at 46% year-over-year. We are particularly pleased with the year-over-year growth in terms of licensed revenue, which was 131% for Q3, and 135% for the first nine months of the year. As Yossi mentioned, we are seeing an increase in multiyear deals such deals have an upfront revenue recognition component and the longer deal the higher it is. Therefore, the shift toward the deal contributed to the revenue growth of term licenses revenue and strengthens the predictability of future revenue in ARR. As I mentioned in our previous call, in May this year we introduced UFED Ultimate and Pathfinder also in term based model. Therefore, it was expected to result a steeper year-on-year decline in perpetual licenses in Q3, compared to previous quarters, and indeed, perpetual licenses and other revenue of $6.7 million decreased 44% from Q3 last year. Much of our service revenue comes from instructor-led training classes, which were negatively affected last year by social distancing and travel limitations relating to COVID-19. With the opening of main markets in which we sell professional services revenue of $8 million grew 25% from Q3 last year. Moving to ARR, ARR grew 42% year-on-year which is $171 million by the end of September 2021. The main drivers for ARR growth were the excellent quarter of additional modules and solution specific customer, which ties in with our high net retention rates of 139%. Out of 42% total ARR growth, 37% came from upsell and cross-sell and [Indiscernible]. The majority of the upsell and cross-sell was generated by our Premium solution, similar to what we experienced in the first half of the year. As mentioned in our previous call, we introduced the term license model for Premium in late 2019. And enjoy strong acceptance within our customer base. The fundamental demand for Premium Advanced capabilities is strong for the reasons Yossi described. And we also believe that the term license model increased the attractiveness of the solution due to the simplified pricing structure. The dynamics for UFED in some more outcomes was different. UFED perpetual license has achieved significant market penetration. And customers need time to transition to a term based model. Although, conceptually customers -- the administrative and budgetary processes for a new model can be lengthy. The introduction of the Premium Enterprise solution described by Yossi which is designed to decentralize the advantage capabilities by allowing remote connectivity to UFED will in our opinion support the willingness to such transition to a term based model. The transition to term licenses was always expected to be gradual over the coming two to three years given budget structure in the public sector. Now that we have gained more insights into customer internal processes, we expect a transition pattern that is less linear and more weighted towards 2022 and 2023 customer budget years allowing us to meet our ARR targets. Moving to operating expenses, which we will discuss on a non-GAAP basis so that share based compensation, amortization of intangible assets, acquisition related expenses and one time expenses are all excluded. One time expenses were particularly large this quarter, given the cost related to the completion of the business combination and going public. The revaluation of the financial instruments related to our de-stocking process is detailed on our balance sheet, resulted in a finance income. These financial instruments will be reevaluated on a quarterly basis to the market fair value --- and this revaluation will be presented in the financial income or expense line. But let's go back to non-GAAP OpEx. Non-GAAP operating expenses of $40.5 million increased 30% from Q3 last year, primarily due to headcount increase and travel and marketing related expenses resulting from the market opening to face to face meetings. We increased headcount by 23 employees during the quarter, ending September with 843 employees. We continue to recruit mainly in the areas of R&D and sales, and are aiming to reach 900 employees by the end of March '22. Non-GAAP operating income and margin in Q3 2021 were $13.5 million and 20.4% respectively. Adjusted EBITDA and margin were $15 million and 22.8% respectively. Adjusted EBITDA, our expectation for 15% margin on an annual basis reflecting the operating leverage that is a result of exceeding a revenue expectation for the third quarter as well as the nine month period. Our 15% margins expectation was also based on the exclusion of costs associated with becoming a public company, mainly board expenses and directors and officers insurance. We started incurring these costs in September and are pleased to have nevertheless delivered higher than expected profitability. Q4 will be the first quarter that would reflect those expenses in full Q3 net income was $8.1 million and fully diluted earnings per share were $0.05. Non-GAAP net income was $13.3 million and non-GAAP fully diluted earnings per share was $0.08. However, please note that these are not representative of these figures going forward. If they're based on the share count that is a weighted average between the two months of our historic ownership structure and one month of the new post going public ownership structure. For modeling purposes, we recommend taking into account the fully diluted shares outstanding if it was at the end of Q3, which we estimated to be approximately $198.5 million. This -- [Tech Difficulty] 10 million shares would be added. Operating cash outflow in the third quarter of 2021 was $8 million impacted mainly by the going public related expenses. In the 12 months ending September 30, 2021, there was an operating cash flow of approximately $38 million and free cash flow of $30 million. We ended September with approximately $172 million of cash, cash equivalents in short term investments. In the coming days, we expect to spend approximately $20 million on Digital Clues acquisition, as the acquisition will close in Q4 it will not have a significant impact on our 2021 financial results other than cash spent. In 2022, we expect Digital Clues to have a small positive impact on our ARR in subscription revenue and to ensure higher R&D expenses as we integrate open source intelligence into our DI platform. We will provide an update on our '22 outlook before Q4, '21 results. And with that, I would turn to our updated '21 outlook. We are very pleased with our results for the third quarter and the first nine months of the year which have exceeded our expectations in most parameters. We now increase our 2021 guidance; total revenue is now expected to be between $241.5 million and $243.5 million reflecting growth of 24% at the midpoint, up from our previous expectation of $236 million and 21% growth. We expect adjusted EBITDA to be between $45 million and $46.5 million, reflecting a margin of approximately 19% of the midpoint, up from a previous expectation of $36 million and 15% margin. Our ARR, we now expect to end the year with ARR growth of approximately 34%. This guidance reflects the mix between term licenses and perpetual revenues so far in 2021. It's where -- administrative and budgetary processes acquired by our customers in transitioning our UFED install base to term licenses, and to adopt an end to end digital intelligence platform as Yossi mentioned. At the same time, we see the quality of our ARR improving more than we had originally expected given the higher proportion of multiyear deals it comprises. We are constantly evaluating additional avenues for investment in our top line growth. Our expectation to end 2021 with higher earnings compared to the initial trend enables us to make such investments. And we are glad to be in this position. We will provide more color on that on our next call. And with that, I will turn the call to the operators to open Q&A session.

[Operator Instructions] And our first question comes from Shaul Eyal from Cowen.

Thank you. Good morning or good afternoon guys. Congrats on results and guidance. You'll see as we think about the overall healthy trends you're seeing and expressing. When we apply that into your product offering your end to end platform. Is it one product which is standing out rather than the entire portfolio or the strength you're seeing is pretty broad based right now?

Shaul, thank you first of all for the congratulations, highly appreciated. And to your question, I would say that we are, let's saying performing very well in all fronts, but particularly in the Collection and Review piece. And over there with Premium and with Premium Enterprise, the new launch Premium and Premium Enterprise. It is -- we are about to launch the management solution so that's basically not yet in action. We've got Commander, the license management suite, and the investigative analytics. We are growing but nothing is compared to the stage to the success that we had with Premium and Premium Enterprise. I would say that has a specific reason. Because we have to remember that in the field out there, we've got approximately 28,000 UFEDs well entrenched as the primary tool for Collection and Review. The Premium contains specific capabilities, which are related to the highest models of Android and iOS. And obviously there is a wish to get those special capabilities. But under as I mentioned before, pretty much strict security environments. The Premium therefore and based on the fact that I think Dana a one year ago, we have changed the model.

Right.

In an unlimited that was basically well embraced and enabled the much larger distribution of the Premium. And this is before we just as mentioned came with a Premium Enterprise, which has a tremendous impact on the ability of every UFED to get a distributed special unlock capabilities to reach you within the field. And that also improves dramatically, not only the ability of the UFED to get to special capabilities, but also enables the forces to improve their mode of operation rather from slow manual work sometimes entities have hundreds of UFED but only few Premiums. So it really it is they sometimes have to move evidence manually between one location to another. The fact that we bring right now a distributed capability and decentralized with a Premium Enterprise basically solved that issue cost, saves expense and improve the mode of operation. So those are the main reasons that the Premium is over achieving. And we anticipate that it will continue this way the sweet spot of this potential opportunity with Premium and Premium Enterprise are enormous.

Understood, thank you for that. And as my follow up, one of the main discussion points within the technology and non-technology sectors over the course of the past few months, have been obviously supply chain constraints. It would appear from your performance and guidance that you're not supposed to be seen. But just Yossi -- I want to hear how you guys are thinking about it internally.

Dana, would you like to take it?

Yes, so thank you, Shaul. Actually, we've seen those trends more than a year ago, and we started injecting our supply chain methodologies to be able to purchase upfront for a much longer lead time components and as such we have heavily succeeded to conclude Q3, and we will be able also to conclude Q4, with full ability to provide all of our sales need. We actually also stepping into 2022, we say very stronger position. And of course, nobody knows what's going on to be there. But we have a good contingency plan. And we hope we'll be able to continue perform accordingly.

And our next question comes from Jonathan Ho from William Blair.

Hi, good morning. And let me echo my congratulations as well. Just wanted to start out with I guess can you give us a sense of the customer spending environment? Maybe how budgets are these days? And help us understand how to think about potential stimulus from the budget administration?

Dana, to start.

Yes, maybe I would, so especially in the US market and as you refer to the stimulus funds, we are seeing actually the opposite of what we were afraid of which were budgetary cuts, we see enough budgets before customers, what we see is mainly the challenge of a customer to be able to obtain those funds for digital intelligence, although in some cases, many of those stimulus funds were appropriated for crime fighting is due to the increased crime that is experienced in the US now. So our salesforce are actually working with those customers only to allocate those funds to their digital intelligence needs. And we don't see any budgetary constraints substantially on our customers. Yossi, if would you --

I would like to add that we see the contrary. And by the way, thank you for congrats. But one year ago or maybe even two or three quarters ago, there were lots of concerns about police de fund. And now we hear more and more about police refund. And especially in the segment of the state and local in the United States, I'm referring in the US language, 50% of our strategic accounts are North American accounts. So in that context, state and local governments are basically showing a positive context of refunding. And indeed, the US Fed gov is basically created this rescue funds to be used at state level. But it's funny I've been in the US last week as part of our QBR and plans for next year. And those the -- it's unclear that the usage of many of those funds are -- it's not necessarily for technologies, it's all over the place and that there is a little bit un-clarity on that respect. One thing and one trend are clear. We are, if we had concerns, three to four quarters ago, as I said right now it's more in the de funding and in pro funding. And we're pretty much optimistic about that. Also for the future, it will relate to the fact that the PDS, local, states will be the major I would say investment segment of Cellebrite into the future.

Got it. And then just as a follow up, can you give us some additional color on some of the large deal activity that you're seeing? I mean, this is picked up pretty significantly. Can you help us understand how much is coming from upsell to Premium versus how much is coming from new product areas? And how sustainable is your ability to kind of capture more wallet share from existing customers? Thank you.

I would say the following. First of all, one needs to understand that the Premium Enterprise is an upsell, it's a new solution. The Premium Enterprise is not just a feature, or a capability, which is just a new version of the Premium; it's a complete new solution with a complete different distribution system, a dedicated hardware which is completely different, the very smart adopter protected and to come also very soon in auto complaint or on also in a SaaS flavor, which by the way, enable not only strategic accounts, but also small longtail and midsize prime account to get that capability. So first of all Premium Enterprise is a classic upsell. As to the wider item, as we said, from the beginning is we did the journey. And already now, we are pretty much confident and stable with our growth plan. And the growth plan is based on the fact that we are sitting out, take the public safety, we are sitting by 5,000 agencies, out of which round about 250, by the way, going to be a higher number in the beginning of 2022 of strategic accounts. And as we analyzed our penetration level within those accounts, in comparison to the potential that we analyzed mid 2020 was around 20%. So our potential growth within, I would say few hundreds of strategic accounts and mid sized prime accounts is tremendous. And this is why we stand with our forecast or our estimation that on every dollar that we have seen so far in the lab and in the field, based mainly on collection and review. And slowly but surely. And obviously, with services like training academy and the start of the investigative analytics, we plan to see additional $4 from those customers in the coming three years. So it's a one to four ratio. And I have to say that in all the places where we really implement. If you remember my example, during the opening, we don't see a ratio of one to four, when they do DI investigative or digitized investigative decision or digital transformation, it's actually more a one to 10, one to 15, one to 18 ratio. So we are very confident about it. We have a great position in the lab and outside of the lab with collection and review. And with the greater ability to expand with more collection and review selling more to new buying centers, new labs, new fusion centers, and also grow within the investigative flow with investigative analytics and the Guardian the management, which is a key element. So I hope that answers but that's in a nutshell.

And our next question comes from Mike Cikos from Needham and Co.

Thanks for getting me on here, guys. And I appreciate the questions. I have two but the first thing that I did want to come back to just so you're aware, but there was a lot of, I guess, scratching of papers. And then at one point, the earnings call actually went quiet for maybe a couple of minutes, just for so you know, it was during Dana's comments, when you were talking to the last thing I had heard really was the fully diluted share count at the end of Q3 was around 198.5 million shares out. And then it kind of tuned back in right before you provided the updated guidance on calendar '21. And I did just want to call that out because I know that you're trying to provide all these new disclosures since this is your first quarter, and I just wanted to bring that to your attention if you wanted to hash it out again, because the call was quiet earlier. That I just wanted to make you aware of.

Yes, I think yes, I think this is very, thank you very much for that. I think I would just you know, because we know that the account share is very important to analyses. So we'll just say a few words about this. So, we are all clear. So in principle, if you could also see in the presentation, our current count of shares is on a fully diluted basis is 198.5 million shares, which is comprised from 100 million shares and 18.5 million shares underlying will be granted employees options. What I discussed further was the fact that on top of that we have 7.5 million earnout shares owned by Tooling Capital, the sponsor, and 15 million set earnout shares, which are both conditions, reaching certain thresholds of share price and as such are not included in the count. On top of that, there are 20 million public warrants and 9.7 million private warrants that can be added to that. We do believe that maybe for calculation basis, those one should be looked at on a cash basis, which is bring them down to approximately 10 million shares. So that what I had to say, with regard to the shared counts, and I hope it's a little bit more clear now.

It is. Thank you. Yes, go ahead.

The explanation about the guidance. Did you hear that? Were we back by then?

We were. Yes, we had gotten back, right around the time that Dana started to talk about the reach to revenue, with the new midpoint being plus 24% year-on-year and then the adjusted EBITDA the updated range with the 19% margin at the midpoint.

So I think the main issue that was missed there is fair bit. I mentioned that our cash balance is around $172 million, that we are about to spend in the coming few days upon closing the Digital Clues acquisition. $20 million and that we do not expect Digital Clues taking the fact that the close of the deal will be late in Q4 would contribute significantly to the financial results of this year. Nevertheless, I did mention that we in 2022, we expect Digital Clues to have a small positive impact on our ARR and subscription revenue, and incur higher R&D expenses while we are integrating the open source intelligence into our DI platform. As Yossi mentioned in his discussion on the maker, but and I believe then I went to the guidance. So we are now close that one the entire way too far. Thank you.

Yes. Thank you. And thank you very much for the clarification. I was hoping to get just a couple of questions. Since I know we were just clarifying some of the prepared remarks. And the first question I had was actually about this Digital Clues acquisition. I was curious to hear, can you walk us through the criteria that Cellebrite went through when going about its process on a build versus buy in this acquisition? And then the other thing that I wanted to ask you is I know that the acquisition hasn't closed just yet. But what has initial feedback been like from some of your customers? As an example, I'm curious if customers had been pulling you into OSINT or this is somewhere where you had been planning on evolving the DI platform even before the acquisition was announced.

So first of all, to the process, regarding I call it, make or buy. We basically the OSINT, the Open Source Intelligence is a discipline which is emerging on, we anticipate that it will emerge within law enforcement. As part of I would say standard investigations was always on our radar, not always but in the last one and one and half year on our radar. And it was always an element of make, of buy, sorry, an element of buy never an element of make, it's a dedicated discipline. So, in terms of when I look at our non organic growth major criteria, which are mainly basically increasing the span of the digital intelligence, or even the term by enlarging the ability of Cellebrite to be in a wider spectrum of investigation, one criteria, second technical capabilities that we either can do by ourselves that will take long time or cannot and third, customers, it definitely tick the box in the first two. The open source intelligence was for us a clear expansion of the digital intelligence offering I would say the relevance of Cellebrite earlier in the investigation, because every investigation starts with this open source searches before one goes into seizing of any digital device or any digital source. And second, obviously bringing a technology that we do not have so that's tick the box about these two. I started basically already answering the second question, but I will emphasize, first and foremost OSINT is the natural expansion of the AI enabling quick information gathering in early stage of an investigation. And it's basically adding another source of investigative and intelligence data to the DI offering, now the FIT is obviously clear, because when we think about the three main value creation objectives, as I mentioned, then we are ticking these boxes. And I would say that, in terms of the digital intelligence offering, it's definitely something that, I would say, as a standalone, it has a value. But when we integrate that and that's what we are planning basically over time, there will be a roadmap to integration, which will include, among other things, the ability to ingest open source intelligence data into other Cellebrite solution, such as the investigative analytics, the Pathfinder, and enriching data for other Cellebrite collection tools with OSINT data. So I'll stop here. I hope that was clear.

Yes, it was thank you for that. And definitely sounds like a checkbox, especially when you're talking about the TAM expansion provided by that acquisition as well. The other question that I had for you, and I know that we touched on it earlier, but the upsell opportunity really comes into focus, given the number of different agencies that you're touching into already and the fact that we're talking about these very low penetration rates. And I'm curious from go-to-market perspective. Can you remind us how you're talking to these customers? And continuing to help get that cross-sell or upsell across the finish line? Is it just a matter of having subject matter experts that are constantly working with these customers, or what's the process there?

And maybe to refresh, and as you said, we mind we are, I'm talking public sector now. And within the public sector, we have two targeted groups of accounts or customers, and what we call the strategic accounts, those, let's say 250 to 300 accounts. And they are strategic, because we identified first of all a potential growth. And there is a threshold of 750,000 average customer lifetime values in revenue in three years. That's marked them above the rest are below. And there are some hundreds, a few hundreds of mid size prime accounts, which are about to become strategic the way we anticipate that. And then the longtail of the prime accounts, the few 1000 prime accounts of Cellebrite, which are less relevant for the entire digital intelligence platform. The strategic accounts are those accounts were either already decided or about to decide that we anticipate that they decide to do a digital or digitization of the investigative flow and to end that the decision maker will implement that parts. And those accounts will be managed by us with a direct or dedicated account executives, and dedicated in most of the cases technical account manager which is there so the basically, that's so to say four eyes principle in the account management. And on top of that a group of customer success which is nurturing the implementation of solutions within these accounts. And we intend basically to invest the majority in those strategic accounts, make over their all possibilities or make the available budget and the relevant processes in order to create upsell and cross-sell and nurturing more of digital intelligence solutions, and more of each digital intelligence solution within these accounts in existing and within few buying centers within those accounts. So it's a dedicated salesforce account management, technical account management, dedicated account based marketing budgeted for those accounts, unlike the longtail of prime accounts, which are being managed by a group of inside sales in techniques of one to few or one to many. I'll stop here.

And our next question comes from Louie DiPalma from William Blair.

Great. And Yossi, Dana and Anat, good afternoon and congrats on closing the true end merger. Upselling to you said Premium appears to be one of your main near term revenue growth drivers. It seems we are very early in the cycle. Can you provide an estimate for what percent of your UFED base is on, UFED Premium; is it less than 20%? And how many years do you estimate that it will take for most of your UFED base to be on UFED Premium.

Okay. So, in principle, we have signed around 20 Premium Enterprise deals immediately before the end of the quarter. We installed, I believe only two. So that still comprise of a very small number of UFED to be connected to the Premium, we see customers that start not with their full install base, but gradually. So I would say that out of my memory, till now we have around 7% to 10% of the UFED being contracted under UFED Premium to be connected to the UFED premium, some of them are even in the installments phase. But this is a very early stage of introducing UFED Premium. Sorry, Premium Enterprise.

We have to make an order in the house in that respect, first of all positioning, there is no UFED Premium, the UFED, and the 20,000 entrenched. And there is a Premium solution that we are selling to vetted agencies for several years by now, but only few hundreds, in not more than 40 countries, the Premium Enterprise is a new solution. And within that solution, best opportunity to connect the UFED into the Premium and that one as Dana said in an early stage. As you can understand, I spoke about the mode of operation. So far, agencies do few Premiums, and sometimes dozens and hundreds of UFED without the ability to connect them. So the Premium Enterprise which is just at the start right now, I agree with Dana very early stage. That's the upgrade. But there are few Premiums, hundreds of Premiums out there and are not connected to any UFED because that's the nature of the Premium. They are the 1,000, the 28,000 UFED. And the Premium Enterprise, which is coming now, is new solution is the one with the ability to connect all the UFED into the special capabilities.

And what I tried to say this with those deals that we have now in the pipeline, we're talking about 5% to 8% of the UFED when all those deals will be implemented will be already connected to the Premium, to the Premium Enterprise.

Very strong potential of growth.

Very, yes, very strong growth.

First of all, no further remarks for my end besides and before we conclude today call, I would like to thank you all for joining us. And thank you for listening and for your support and wishing you all a nice day.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.