Welcome to the Cellebrite's Second Quarter 2023 Financial Results Conference Call. At this time, all participants have been placed on a listen-only mode and the floor will be open for your questions following the presentation. [Operator Instructions] 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, Ashley, and welcome everybody to Cellebrite's second quarter 2023 financial results call. Joining me today are Yossi Carmil, Cellebrite's CEO; and Dana Gerner, Cellebrite's CFO. There is a slide presentation that accompanies our prepared remarks. Please advance the slides in the webcast viewer to follow our commentary. We will call out the slide number we were 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. Let's start with Slide number 2. A copy of today's press release and financial statements including the GAAP to non-GAAP reconciliations the slide presentation and the quarterly financial tables and supplemental financial information for the second quarter of 2023, the first quarter of 2023 and each quarter of 2022 and 2021 are available on the Investor Relations website at investors.cellebrite.com. Also unless otherwise stated, our second quarter 2023 financial metrics as well as the financial metrics provided in our outlook that will be discussed on today's conference call will be on a non-GAAP basis only all historical comparisons over the second quarter of 2022 unless otherwise noted. In addition, please note that the statements made during this call that are not statements of historical facts constitute forward-looking statements. All forward-looking statements are subject to risks and uncertainties and other factors that could cause matters expressed or implied by those forward-looking statements not to occur. They could also cause the actual results to differ materially from historical results and/or from forecasts. Some of these forward-looking statements are discussed under the heading Risk Factors and elsewhere in the Company's annual report on Form 20-F filed with the SEC on April 27, 2023. The Company does not undertake to update any forward-looking statements to reflect future events or circumstances. Slide number 3 provides the agenda for today's call. And as you will hear, we delivered very strong Q2 financial performance, made important strategic progress and have increased our full year 2023 financial expectations. With that at the background, I'd like to turn the call over now to Yossi Carmil, Cellebrite's CEO.

Thank you, Andy, and thank you all for joining us today. Look, I'm excited to discuss our second quarter results which highlight our continued success in delivering the industry's leading digital intelligence software suite to public and private sector customers around the globe. As illustrated on Slide number 4, we delivered an excellent second quarter performance on all fronts. We reported strong financial results while making strategic progress in several areas which are critical to our long-term success. Our Q2 financial performance was highlighted by the following KPIs. Total revenue of $76.7 million driven by subscription software revenue growth of 35%. ARR grew 28% to $274 million. Dollar based net revenue retention was 125%, which was our 18 straight quarter above 120%. We closed 25 large deals each valued at greater than $0.5 million adjusted EBITDA of 11.1 million or 14.5% on a marginal base and non-GAAP EPS of $0.05. And lastly, we ended Q2 with cash and investment totaling nearly $245 million, up 23 million from Q1. Now with a strong first half of '23 behind us, we now move into the seasonally stronger second half of the year and in a healthy market. And as a result, we have increased our financial outlook for the year. Turning to Slide 5, Cellebrite customer relationship remains strong in Q2. Our ongoing investment in powerful customer driven innovation and go-to-market activities enable us to continue winning in the market. Our second quarter 2023 revenue growth demonstrates our ongoing success in extending the scope of our relationship within the digital forensic units of our customers and our progress in extending our reach into their investigative units. In addition to strong public sector expansion, we delivered our second straight quarter of high-teens revenue growth in the private sector. Geographically, our Q2 revenue and…

Thank you, Yossi. Let's begin our review on Slide 9. We reported second quarter revenue of $76.7 million, an increase of 23% against a relatively muted second quarter of '22. Strong 35% growth in subscription revenue was offset by declines in both other non-recurring revenue and professional services. Geographically, a revenue growth was led by EMEA at 33%, followed by the Americas at 23%. As detailed on the slide, 88% of our total quarterly revenue came from software subscriptions versus 80% one year ago. We expect that subscription revenue represents 85% or more of our total revenue for the foreseeable future. Slide 10 details our ARR goals, which is an important forward looking KPI for Cellebrite's sales momentum and the trajectory of future revenue. As Yossi noted, our ARR grew 28% year-on-year to $274 million at the end of Q2. This was primarily due to the successful expansion of our existing customer relationships. Within this category, more than 80% of the customer expansion growth came from our Collect and Review solutions. The contribution to existing customer ARR from our investigative analytics and evidence management solutions has more than doubled from one year ago. As you likely noticed, our subscriptions revenue growth of 35% outpaced our ARR growth, which is counter to the historical trend of subscription revenue modestly lagging ARR growth. This is primarily due to two factors. First, about two third of the difference was tied to the linearity of Q2 sales. In 2022, approximately half of our Q2 sales were closed at the end of the quarter when the majority of this year's Q2 deals were closed during the first two months of the quarter. The balance of the difference is associated with certain large customers who transition from maintenance agreements to subscription licenses during the second quarter…

Operator, that concludes our prepared remarks and we're now ready for Q&A.

[Operator Instructions] Our first question will come from Jeff Van Rhee with Craig Hallum. Please go ahead.

A number of questions for me. First, maybe just start on Guardian, Pathfinder, you called out some pretty good momentum there. I wonder if you just spent a minute more talking about the sales motion and what you figured out with respect to the appropriate buyer, the process, just how you feel about that motion? What still needs to be improved?

Maybe I will take it for a start. First of all, Guardian is an important solution basically to help digital forensic units and investigative units, basically to I would say modernize the flow and contribute to scalability functionality, which is around case management and evidence management. Now at this stage, Guardian was launched or the Guardian was launched last year in 2020 -- practically 2022. And we are pretty much in a starting phase. There are several dozens of Guardian customers and hundreds of users at the moment. We plan to take important steps, I would say, over the coming quarters to continue driving adoption of this platform into our install base. And obviously, there is a need, if I could say for the Guardian and Evidence Management, a need for more education, efforts around customer success. And the sales cycle here is a little bit longer. When it comes to Pathfinder, actually we are, I would say, very pleased at this stage with our position, definitely an important solution that which appeals to, not to the digital forensic unit, but for the investigative units. As I said, we believe that this is the second growth engine of Cellebrite side by side with the digital forensic units. And we have closed dozens of Pathfinder deals over the last 12 months and cross-sell and up-sell this offering. And we are pretty much satisfied with where we stand right now. We need just to continue to do the way we are doing right now.

And then if you, maybe just an open-ended question on pipeline. As you look at what's playing out in the pipeline? What variance, pro and con? Just maybe depth geo variance, large, mid small trends, product trends competitive landscape, any thoughts on what you're seeing in the pipe maybe expand a bit?

Pipeline of the Company is healthy and I would say it's healthy cross segments. If I look at the federal in the United States or Americas on our state and local government, both in America and in EMEA, I basically see a very good picture in terms of pipeline as we look ahead. One can also say that our sales tick and especially our sales operation, and not only that we have a healthy pipeline, we were able in Q2 to bring deals quicker, manage very well the elements of the normal tendency of lumpiness in large deals and we are very satisfied in that respect. Also the sales cycle, if I look at it remains the same, in all geographies and in all segments. Again, when it comes to Collect and Review, short few weeks to one quarter, we're pretty much ticking the box here and successfully. And when it comes to the Pathfinder and Guardian, a good pipeline, but a longer sales cycle, which takes, can take between six months to 18 months, but only in all the good picture.

And one last, if I could sneak it in on the M&A front, I know there's a lot of incremental capabilities that would make sense within the suite. Can you just give a little sense on the urgency, depth and breadth of the pipeline, what we should expect over the next three to six months?

So, regarding M&A, first of all, organically, we have a very clear plan and I think we are clear about that. When it comes to M&A, we have that's I would say part of our strategy and we are looking for alternatives and we're looking for options. There are some currently on the radar it has to fit in terms of our needs, I can say that we are looking at opportunities which are in the mix of small technological, both on packings, which will be suitable for the current portfolio and enabling us to deal better with the fulfillment of our existing plan. And side by side, we are also looking for options for some large opportunities, which will scale us up also in adjacent areas. Specifically in the private sector, I can also share that we are looking at several opportunities, which will give us options, which are going beyond the collection and eDiscovery where we are placed right now at the moment.

Thank you. We'll take our next question from Jamie Shelton with Deutsche Bank. Please go ahead.

Just a couple of housekeeping questions for me. Can you provide us what percent of the UFED based is now connected to premium as a fiscal 2Q and then I've got one or two follow-ups. Thanks.

We are expanding our premium offering within our existing base. We've been at the low-teens, close to mid-teens. Last quarter we increased and passed the meetings this quarter and it's an ongoing effort and continuous penetration.

And I'm probably nitpicking here, but I saw the net dollar attention tick down a few percentage points sequentially. Is there any additional color there you can provide and I guess any color on how we should expect that to trend from here?

Well, the net dollar retention rate is actually following our ARR trend, which we said will converge in the midterm with the revenue. Our revenue case our expectation is on the past 20%, so we expect ARR to get closer and next dollar retention slightly below, if we also more than customers.

And then last one maybe for you, I mean, many of your cybersecurity public peers are talking about the application of generative AI within their product set. I was interested to get your view and if you can, if you see potential application of, I guess, security centric large language models within your portfolio?

The question was related to AI to artificial intelligence?

Specifically, generative AI and the use of large language models on your dataset.

So, look, first of all, we continue to invest in enhancing AI capabilities and as I said, both in Physical Analyzer and in Pathfinder solutions, it is important for investigators the way we look at it, because it helps to automate time consuming tasks and basically make investigations, at least in our view and in the view of our customers more efficient. So, we believe that AI will play increasingly important role in digital investigations over the coming years. And we are investing in each one of our product, Physical Analyzers as part of the Collect and Review and Pathfinder in several areas. So far our investment has been primarily focused on developing our own machine learning models and we will continue to explore with, I would say, to open source based AI models, which we can implement on our own capabilities. I hope it is helpful.

Thank you. We'll take our next question from Tal Liani with Bank of America. Please go ahead.

Hey guys, thank you for the question. This is Tomer Zilberman on for Tal. Two questions from me. The first question, just wanted to close in on something you mentioned during your prepared remarks. So you said that the ARR growth this year was supported by customer expansion more than 80% of that was Collect & Review. Then I think you also mentioned that you're seeing or you're expecting to see significant expansion within Pathfinder and to grow ARR through that. So my question is what you expect the impact of not collect and review, but analytics and management to be on ARR list growth? And also additionally, what you're expecting the revenue breakout to be within your different product lines?

We currently do really provide detailed information for each and every of our product offering. We just provide general guidance. And as the base of both Pathfinder and Guardian is substantially smarter than the base of growth for Collect and Review, we expect it to contribute on a percentage growth more than the Collect and Review. But from a dollar perspective, still the majority will come from Collect and Review both on the ARR and on the revenue growth.

And as a follow-up on regional trends, you saw growth accelerate in America and EMEA, but I think you actually saw some slow down in APAC. So any color you're seeing across the three trend, three regions?

So first of all, I would say that we believe that the APAC region has a significant growth potential and we also informed recently about the appointment of a new regional leader and we plan to continue upgrading the regional sales leadership in that area. I can also say that we continue to see pretty much favorable budget tailwinds when it comes to specific sub-regions over there, Australia, New Zealand, Japan, and Singapore. And we believe we are only starting basically to scratch the surface over there. Now while indeed in Q2 revenue grew just 2% a trended favorably versus Q1 results and ARR in APAC grew solidly 22% and was generally in line with our plan. So, I would say that we are pleased with the market position, we are pleased with the pipeline in some of the larger markets and while, it'll take us some time basically to make the relevant changes, we are positive and confident that it'll look much better as we progress with the year.

And if I can actually sneak in one last question, appreciate the commentary on UFED Ultra. I know it's early days, but any initial customer conversations that give you confidence on the growth potential here? And what is your customer target versus just selling normal UFED along with premium?

So, the short answer is a little bit too early because in June we announced our plans to introduce the UFED Ultra, and obviously, we plan that the UFED Ultra will deliver great ease of use, simplified workflow, we are -- workflow, we are adding here the full file system, which was part previously only part of the premium. Current plan is to begin sales and marketing activities which support the UFED Ultra before the end of 2023. And specific timing and general availability will be obviously shared with our customers. We believe that the future and functionality will be obviously substantially with greater value on the fly, I can say with a relevant, and it'll be priced accordingly, but it's too early because, it's still not there out there in the market. The expectations are very high and last word, let's not forget that the UFED Ultra represents a significant upgrade opportunity for thousands of existing UFED customers, but they owe over 30,000. So that an amazing business opportunity and an amazing improvement for mode of operation of the customers.

[Operator Instructions] We will take our next question from Louie DiPalma with William Blair. Please go ahead.

When Premium customers add Pathfinder to their suite, on average, how much does ARR increase by?

Well, it varies to the size of the Pathfinder that they will choose and the size of the customer. It can start with few 10 thousands of dollars and ramp up to hundreds of thousands and even more.

And that seems like it's a big catalyst for the increase in large deal sizes. My next question, we are under the impression that there were price increases that were implemented following the Grayshift and Magnet merger. Have you seen those price increases in the market and has this positively benefited Cellebrite?

Well, we've heard from customers that they've been encountered with a substantial price increase requirements by Magnet and by Grayshift throughout the year until now. Yossi more color maybe.

No, in that respect indeed both Magnet and Grayshift implemented, I would say fairly large price increase during the first half of the year. I can say that it was not well reviewed and perceived by the customers. We chose at this stage to do a rather modest one, which was well perceived by customers. Let's not forget that in the public sector, customers are living with fixed budgets and they need to do the relevant adoption and nothing to add beyond that.

And are you still the only software provider that can unlock the iPhone 14 or have competitors caught up on that front?

I would say that at the moment when it comes to the latest and greatest. So, I'm talking about operating system 16-ish. We have the best capabilities today unmatched to anything else that exists in the market.

And we will take our next question from Mike Cikos with Needham and Company. Please go ahead.

Thanks for getting me on the call here. And I appreciate the walked up guidance that we're receiving today as well. I guess I wanted to ask you a little bit about hiring, and it's more of a philosophy or strategy question. But when I'm thinking about or when you're thinking about the hiring trends in at Cellebrite, can you help us better understand the, I guess, the trade off you're making? Because obviously we're seeing the growth move higher as well as those EBITDA margins, and just what gives you the confidence when going through that hiring to ensure that you're appropriately adding talent to support the durable growth story here at Cellebrite?

If we're looking into the future in terms of our, I would say exciting challenges which are around continuous of investing in that best-of-breed in collection, in order to be ahead of the market, we've got today clear path of maintaining and maintaining, and based on our reputation, successfully hiring additional talents in that respect. When it comes to the area of Evidence Management, and I would say also Cloudifying and coming with a SaaS offering, which is related to what we do right now, Guardian, Premium as a service, but at the end of the day, we would like to offer everything on cloud. We are building right now successfully the relevant team in the house, and it seems that over there we are pretty much successful by hiring and bringing the talents that will help us basically to combine successfully. I would say on-prem and cloud in the future to come. So also they're very successful and I would say that we, if we look at our OpEx plans, we are capable to do it and we are doing it. When it comes to the go-to-market organization, we clearly need to invest in the good mix between product sellers and solution and value added sellers, and in customer success, especially when it comes to the implementation and cross-sell and up-sell of solutions such as Pathfinder and Guardian. And in that respect we have a clear view about what we need to recruit, and we are also very successful in doing that. I don't know if I answered the question, but that's what makes us busy at the moment in terms of variety of, I would say future challenges and what we need to bring on board. And we're pretty much about, we're pretty confident about what we are doing in that respect.

No, that's great. You're actually starting to feed into where I wanted to take this. So, I'm specific to the hiring for the go-to-market as an example, right? Can you help us think about the average tenure of the sales force, are new reps ramping at a similar rate or is there potential acceleration in the amount of time it takes for them to ramp? Just because I'm trying to judge that, I guess, some of the pieces under the hood and put that in the context of the execution that the Salesforce has obviously been demonstrating more recently in this environment?

First of all, I want to reemphasize the fact that our sales ticks, our sales machine works. If you remember last year we talked about lumpiness and people, which left and fluctuation. We could see that in Q2 and in H1, we're actually capable to bring things even quicker than faster than results. And in that respect, as I said, we need to make sure that we have a good combination between the people who will deal with transactional business and the people that we deal with, value-added selling and rather complex solutions. But the onboarding, I think you mentioned that. Well, here, nothing changed. When we bring people for the product selling, it's a pretty much quick onboarding of what we call the sales machine. That's great. Collect and Review on sale, prime customers, et cetera. When it comes to the onboarding, which is related to solution sellers, it goes more in the area of two quarters. But we are well positioned and well equipped with what we have right now, and we are putting a good eye on good people all the time. We are not waiting for challenges to happen. We are so to say, operating in advance.

This concludes today's call. I would now like to turn the floor over to Cellebrite, CEO, Yossi Carmil for additional closing remarks. Please go ahead.

Thank you. So first of all, thank you all for joining. As I said at the end of my pitch, we are in a very good momentum. Lots of hard work to do, but we increase the guidance we are pretty much confident about our ability to grow and to continue the journey and execute our strategy. I thank you for joining. I thank you for the trust and have a great day.

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