Hello, everyone, and thank you for joining us for our Growth Stock Conference and today's session with Cellebrite. My name is Jonathan Ho. I'm the analyst with Louis De Palma, who co-covers Cellebrite for William Blair and Company. Our speaker today is the CFO, Dana Gerner, who will provide an overview presentation of the company, and then we'll go into fireside chat. Before we begin, I'm required to inform you that a complete list of research disclosures or conflicts of interest is available at our website at www.williamblair.com. From a logistics standpoint, we will be remaining in this room following the presentation to hold the breakout Q&A. With that, I'll hand it over to Dana for the presentation.
Thank you. Hi, guys. Nice to have you all here. My name is Dana Gerner. I'm the CFO of Cellebrite for the past 11 years now and four days. It's a pleasure to be here and see such a very large attendance. I'm a little bit excited. We are going to go through our investor presentation slides, let's start, right? I'll skip the safe harbor if your permission. Where is the volume?
Often without that digital evidence, the only way for that victim to truly be heard is by what their phone says.
Text messages, communications, phone calls. We are able to really put together and tell a story.
Having the capability to investigate and do a deeper dive into that digital evidence is a crucial part. Cellebrite offers us that ability to do that.
Technology partner that we have in Cellebrite has been a great partnership for many years now.
The training we have for Cellebrite, it's paramount. It makes or breaks cases.
Without Cellebrite's tools, I don't know what we would really do.
The Black Box project was a way for us to use innovation and technology to prevent and predict suicidal trends between veterans.
The amazing thing about Black Box and the tools from Cellebrite is we're getting firsthand data.
I didn't have the hours or the people to do what Pathfinder did. We wouldn't have known things.
Being able to get this digital evidence out using our various tools, our Cellebrite software, different hardware, we're able to get really good evidence.
This is us in a nutshell. Cellebrite entered the digital forensics market 15 years ago. It's a me-too player and took leadership on this market through technological breakthroughs. We grew bootstrap. We never raised cash to grow our business. We are consistently providing both top-line growth and profitability and positive cash flow. We are serving 7,000 customers worldwide. Of them, 5,300 are law enforcement agencies and defense and intelligence government agencies. We make sure that one and a half million investigations can get to a closure in a very efficient manner on an annual basis. We, as a company, are very, very proud of what we are contributing to our world's safety. When we speak a little bit about what's happening in our world, you know, crime is not getting anywhere. It's actually becoming more complex, more sophisticated, and much more digital.
That means that also law enforcement needs to change the way that they are investigating crime. They are now relying in 9 out of 10 cases on digital evidence that is being collected, whether it's the mobile phone, which is our actual digital DNA. It's not only what we've done or where we've done it, but also what our thoughts are through looking at our search history. What we are trying to do is to help those customers of us close their public safety gap because data volume is growing dramatically. If you think about how much data you have on your phone now compared to three years ago, five years ago, think about how complex the data is. It's not any more data saved on the phone. It is application. It is wallet for cryptocurrency. It is search history and so much others.
How can you deal with that manually? First and for all, this is a gap that needs to be closed only through technology. Unfortunately to all of us, most law enforcement agencies are still working as they were before. They are actually taking digital evidence and putting it in a physical form, on thumb drives, or on disk-on-keys, or other physical storage. This is a very inefficient process, especially when law enforcement needs to collaborate between examiners in digital forensics labs, investigators in the field, and district attorneys. By that, they are losing their ability to maintain chain of custody. What we are trying to do with our technology is take all these gaps, analyze them, and make sure that our digital investigative platform helps them close and narrow these gaps on a daily basis. Time to data, time to evidence.
We all know and we grew up on the fact that closing a case or getting your hands on an evidence in the first 48 hours is critical. This is not a story. This is actual fact. When you look at what we are actually providing through our investigative platform, and you see at the bottom line of these slides are three bespoke and offering our Inseyets, Guardian, and Pathfinder. All of them are actually helping customers to get their hands on data faster. When they get their hands off the data, get the insights of the data. Think about you have around each and every person has around 50,000 chats on their phones, thousands of photos, hundreds and thousands of videos, and so forth. How can you go through one phone in a very efficient way and get insights? That is very, very difficult.
When you do get insights and the examiner in the lab does understand what's on the phone, how does he collaborate with the detectives? How does he collaborate with district attorneys? How can he help them get to the evidence as fast as possible? How can they manage their investigator in a manner that is not manual? Most of them are working still with a writing pen and a pen. How can we educate them to work on platforms that use AI capabilities and flesh out what are those pictures on this phone? Who is speaking with whom? Where did they meet? When you take larger crimes and you have 20 phones or 100 phones, how can you create the case narrative and overlap all the information collected and understand what happened?
All of that is done through our offering and our double-click connection, every one of them, and explain in a second on how we are serving our customer with that. Inseyets. Inseyets is our most used solution with our customers. There is no one customer in Cellebrite that does not hold at least Inseyets solution. What does Inseyets suite of solutions do? It allows access to phone. If your phone is locked or the suspect's phone is locked and you need to access it, you will do it with Inseyets unlock capability. You will use Inseyets to extract 100% of the data of the phone, not just what your operating systems allow you to see, but also the deleted data, the hidden data, the tokens to your cloud applications, the geolocation, everything that there is on the phone that can support an investigation.
Take this binary data that has been collected and translated into readable data, decode it, and put it on a platform, AI-based platform, that examiner in the lab can double-click on the information and identify what is on that phone. It will tell him which chat applications there are. Are there any photos which related to drugs, guns, human trafficking? All of that through very intense machine learning capabilities that we have developed over time. It will help them deal with multiple languages on the phones. Not every criminal speaks English, if we want to think about it, or German in Germany and so forth. We need to help them go through that. They need to collaborate. They need to share this data with the detectives and district attorney.
Currently, 95% of law enforcement are putting it on a portable drive. The detective needs to drive to the lab, collect the data, drive back to their offices, and take two, three hours to upload it to an old computer and review it through a freemium solution that we provide them that allows them to review this data in a reasonable manner. That is not good enough. We introduced Guardian, which is a SaaS-native solution, which bridges the different infrastructure that each of the participants in investigations are working on, allows the detectives to see all the marks and remarks that the examiner in the lab are actually putting on the data, collaborate back and forth, ask questions.
Not only that, they can actually review the data on a SaaS platform that integrated into it almost the same level of, I would say, models of data analytics that the examiners in the lab can do, but in a way which is less technical because detectives are not the most sophisticated technological people, right? It will show them geolocations. It will show them what type of discussions have been discussed in the different chats and emails and so forth that are on the phone. It will provide chat summarization. It will provide any other information that will make it easier for them to understand what was this owner of the phone doing, whether it's the victim or the suspect or even a witness, and help them to get to the golden evidence faster.
Now, this Guardian is a great solution that is currently helping review one source at a time. But as I said before, what happens if you have multiple sources? This is where our Pathfinder is stepping in and is actually supporting multi-phone investigation by providing case narrative and answer the WH question: who, with whom, when, and in many cases, also the why, which is not less important when you want to prosecute a case. So when you want to be in a situation where you start an investigation and get to a prosecution, when you are using the Cellebrite digital investigative platform, you have the highest probability to be able to actually close a case in a timely manner. And we take very proud on our ability to support law enforcement in doing so. Now, as I said before, we have 7,000 customers globally.
We are serving the largest law enforcement agencies in the Western world, in the largest countries in Asia-Pacific, and in South America, in which we decided that we want to do business with. Cellebrite is not doing business with everyone. Cellebrite is selective with which agencies and in which country we are going to do business with. We have our own ethical guidelines, and we adhere to that in a very, I would say, almost religious manner. Those customers and us are only the basic basis for our future growth because while all of them have the ability to investigate a phone through our digital investigative solution, through our Inseyets, they need more and more of those solutions. They need our automation processing that we are introducing to be able to deal with the increased backlog that is knocking on the doors on a daily basis.
Our penetration within investigative units is only at its early stages. Around maybe 5% of our customers can actually afford currently our Pathfinder because it's a very powerful on-prem ise solution. As part of our journey to the cloud, we expect that we'll be able to offer these capabilities to our entire install base in the future. Our growth and our existing customers are actually the ones that support most of the company ARR growth. This is how we expect it to be in the near future because we don't have a lot of new customers to add. What we do have is a lot of new budget departments that currently are not being served by Cellebrite. Our profit is very good. We have delivered a very strong Q1.
We continue to deliver those committed rule of X that we have shared with the market last April, last March, actually March 2024, in our first investor day, which means that the ARR growth plus EBITDA will be anything between 45%-50%. We continue to generate cash flow from operations in a very constant manner. We are currently sitting with around $500 million generated by operation in our balance sheet, which will support the company's growth both organically and inorganically in the near future. I know that I'm almost out of time. I would just like to summarize that although we do have now a little bit of challenges with the federal government budgetary process, our market is very healthy.
We are seeing growth in almost every region that we are working, which is exceeding the 20%, whether it's Latin America, state and local, U.S. government, federal here in the U.S., regardless of the hiccups that we have now with the federal budget, Asia-Pacific, and EMEA, which is a little bit soft currently, but we will catch up for sure. The platform that we are providing is a top-notch platform, great technology, handling exactly what our customer needs, powered by AI capabilities because you cannot deal with so much data otherwise. We are on a very solid cloud journey with 20% of our business at this stage being generated by cloud-based solution. I would say just for clarity that we don't expect it to get to 100% because some of our customers will always work in an air gap environment due to their mode of operation.
This is a great journey that we started a few years ago and growing very nicely. We are fired by our passion to continue delivering innovation to this market. I want to thank you all, and we'll go to Q&A.
Yeah. Just to maybe start out with the fireside chat, Dana, thank you for that presentation and great overview of the company. Can you also speak a little bit to the longer-term strategic opportunity that you see for Cellebrite ahead?
Yeah. I think if we look at where we are now, we see a few lines of growth within our customer base. One, and I'll start with the investigative unit. If you go to any law enforcement agency and ask them, "Do you have a budget line of digital investigating software?" Most of them will look at you like, "What are you talking about?" Right?
They cannot stay in the way that they are doing their business now. There is no way to investigate digital crime in a manual manner. What we see is a great potential. Currently, we are setting our digital investigative solutions to maybe 5% of the install base. We see great opportunity to grow there. When we look at the term of the evidence management and investigative analytics, this is the biggest term of our entire business. We believe that our customers will continue subscribing to our Pathfinder at its current on-premise stage, but moving to the cloud will actually allow us to offer this solution for the entire install base. This is one thing.
The second thing that really encourages us is the level of adoption of our Guardian as an investigative process manager and the ability to bridge between the digital forensics unit and investigative unit. We are seeing it's a very new solution, but it's growing more than 100% in the last three quarters, our ARR growth. Great potential to continue growing at the same pace. Of course, unfortunately, digital forensics unit, although we are serving them from day one, their needs are growing. Their needs to automation are growing. The number of examiners in the lab is not growing, in many cases growing maybe 1%-2% year-over-year. There is the challenge that now defense and intelligence are facing with border control, illegal immigration. All of that would allow us to introduce more field use cases to those customers.
The future is bright in our eyes.
Yeah. If you look within, let's just take the top 20 police departments in the U.S. You look at those budgets. They do not grow significantly year to year. Headcount is stagnant. In a constrained environment like that, for the past five years, our revenue has grown at a compound average rate of 30%. Even with that type of very strong, consistent growth, we are rounding error to zero inside of those budgets. There is considerable headroom for continued growth and expansion. As Dana highlighted in her slides, the drivers of data complexity, data volume, operational efficiency, ethics, accountability, all of those open up incremental opportunity for us with our customers.
Excellent. Excellent. Maybe Cellebrite has historically been the dominant player in the extraction part of the business.
Over the past year, you've also started to bundle this capability as part of Inseyets. Can you talk a little bit about why this is such a powerful offering for customers when you combine these elements?
You want to speak about your happy meal?
Yeah. Maybe the end.
Yeah.
Sure. Previously, when you think about some of our legacy technology, we had a core set of capability, the legacy product brands were UFED and Physical Analyzer for basically collecting and reviewing the digital data and digital evidence from mobile phones. That was paired with a half dozen or more bespoke offerings, whether it was for advanced access and extracting all the data off of the most modern smartphones, cloud extraction, the ability to do computer forensics, and more and more. What Inseyets does is it takes those core capabilities.
Think about that as the equivalent of a burger and fries. All of our customers want burgers and fries. Many want all of those other bespoke capabilities, but selling them individually created a level of spend that was simply too great for all but the largest of customers. What Inseyets does on a much more modern tech stack with a better UI, UX is it allows for the integration of features, functionality, and capability from those bespoke products to be paired with the legacy UFED and Physical Analyzer so that you get the equivalent of a happy meal at a much higher price point, significantly more value. We are seeing customers recognize, and they'll pay for value. We have launched Inseyets at the start of 2024. Approximately 30% of the installed base has been converted.
We expect that to go to 50% and to move the substantial majority of the customer base over the next couple of years. There'll be sort of multi-year agreements and stragglers that come in as a longer tail to that three-year migration or upgrade cycle. We are very optimistic that there is. What Inseyets does also is it's a cloud-enabled capability, and that creates much tighter integration with the Guardian and Pathfinder capability. For us, not only is it a growth vehicle in and of itself, but we believe that it'll result in much more upsell of advanced digital forensic capability, like unlocking a locked device, as well as cross-sell , upsell motion with Guardian and Pathfinder.
That makes a ton of sense.
I mean, as you embark on this journey, can you talk about how Cellebrite can be more than just a digital forensics provider, but also a platform longer term as well?
I think the journey to the cloud is one of the things which is very important for us to introduce to our customer base. Most of our customer base, I would say, are conservative in nature. They are used to work on an on-premise environment. Until three, four years ago, they used to work with a perpetual license. We have taken this customer base from a perpetual license, I would say, legacy way of doing business to a subscription. Now we want to help them move towards the cloud and better use of AI to efficientize their processes. What we are trying to do, the introduction of Inseyets is also cloud-enabled.
With the rest of the offering is actually making sure that we can modernize the way that our current customers are working. Again, it's public sector. It doesn't happen overnight. You need to be patient. You need to introduce the capabilities one by one and educate them. We believe that the potential is really enormous. The level of stickiness that offering like Guardian that actually manages the entire process end-to-end of the evidence management will allow us to be the number one or continue being the number one vendor in this market also for the future.
Great. You guys are tremendously innovative with Guardian, Pathfinder, and Inseyets. Investors here in the audience and on that webcast, they want to know what's next after all these existing products. AI is a big theme, obviously, in my capacity as a sell-side analyst.
We're always concerned about how we're going to compete with AI. In that context, when are we going to see an AI detective that plugs into your software and that you have access to a treasure trove of data? You have access to all of the text messages for a cell phone, the location data, bank transaction records, all of the call location history. You have access to Snapchat messages, Telegram, all of that treasure trove of data. It seems the natural evolution of your software would be to have a language learning model plug-in that could be the AI detective. Could this be on the roadmap as we've seen other software providers that plug into ChatGPT or Anthropic or Llama or these others? Is this a possibility for Cellebrite on the roadmap?
You need to be a fly on our customer advisory board wall when we have those meetings with them. Because one of the things that we are really discussing with them is how can we apply AI in a way that our customer will trust the outcome, right? AI is not new for us. Large language models are being integrated in our solution, both on the Inseyets and the Guardian and the Pathfinder. Same goes now with GenAI that we've introduced into Guardian. Geolocation, persona recognition, and so forth. All of them are actually part of our solution now. The major thing that we hear from our customer advisory board is that, guys, we don't want an AI detective.
We want you to build something that then a detective can follow up to the source of the evidence because we are not sure that we can trust AI, at least not now. We know there is bias. We know there are mistakes. We need to make sure that we can track down whatever you are giving us to the core of the evidence. If you would go now into our Guardian as a detective and review the data and ask the questions, what are the relationships between Louie and Andy? I will give an answer. The GenAI will analyze all the data and provide an answer. You will see a screen opening on the side and showing all the underlying data that this answer has been relying on and being calculated based on. This is what our customer would like to see.
I don't know where AI is going to be in the future. I do know that Cellebrite is always one of the most advanced vendors that are utilizing AI, machine learning, and language models, and will continue doing so.
You're working on it, right?
You're always working on something. I will not tell you. It's a future-looking data, right?
Today, when we look at AI, and I think that, look, if those of you who can watch 1970s detective shows, Barney Miller is not walking in with an AI on his shoulder, but he's not going to rely on a pen and paper anymore. From that standpoint, you think about the opportunity that we have. AI is going to enable higher levels of productivity and efficiency and will keep humans in the loop. The detective is critical to advancing the investigation.
As you think about those different dynamics from a monetization standpoint, today, these are product features and enhancements that for us will help us validate and support price increases, will help us sell a solution. Over time, if you look 12, 24, 18 months or longer out, we'll determine whether or not new features and functionality represent an entirely new offering or whether they'll just be embedded in the existing feature product set that we have today.
I think the move to both subscription and to SaaS compared to the perpetual licenses we used to sell in the past allows us much better flexibility in packaging and pricing. If before it was all or nothing when you bought a perpetual license, with subscription and SaaS, we can layer offering on top of offering in a very natural manner for a customer.
That goes directly to what Andy said before.
The other thing that you want to keep an eye on is how AI is helping criminals do bad things, right? They're taking images and they're manipulating images of children and individuals in ways that are just terrible. How do you know that that individual either granted permission or how that image was manipulated, right? Our technology is not only AI-driven to support investigation, but our technology and tools are being used to uncover and validate that certain content has been manipulated.
Yeah. Along those lines, do you have deep fake analysis capabilities?
We have some fake analysis capabilities, and we continue developing them.
Great.
Related to another topic, you were discussing the traction of Guardian in that I think you said for the past several quarters, Guardian has been growing greater than 100%, which is a pretty staggering growth rate. Jonathan, you cover Axon, which has evidence.com, which similarly is a digital evidence management system. Can you discuss how these products compare? Evidence.com had a very long trajectory of fast growth. Do you envision something similar?
I'll start speaking about Guardian and then I'll compare it too because I prefer to speak about us, right? Guardian is an evidence management system that helps collaborate between the different parts of the investigation, as I said before. The storing of the evidence is only a means to an end and not a target per se.
We are enriching the evidence that is being collected through our Physical Analyzer and Inseyets solution in the lab. We allow customers to collaborate and continue investigating it through our Guardian review solutions. If you think about evidence.com, evidence.com mainly stores body-worn camera data. I do not think I will be wrong to say that 99% of this data will never be reviewed, and certainly not as part of a criminal investigation. It may be part of an ethical and misconduct investigation against policemen, but being part of a real criminal case investigation, this is rarely happening. While what we are doing is actually dealing with investigation itself and our data is critical for the investigation, Guardian is processing and helping doing that and using storage as a means. Evidence.com is mainly storage.
Great. We are going to stop there in terms of the main webcast.
We are going to continue the conversation right now in this room as part of the breakout. Thanks, everybody. You can stay here for the breakout session.