Cellebrite DI Ltd. Price & Performance (CLBT)

Also, unless stated otherwise, our discussion of our fourth quarter and full year 2024 financial metrics as well as the financial metrics provided in our outlook will be done on a non GAAP basis only and all historical comparisons are with the comparable periods in 2023. In addition, please note that statements made during this call that are not statements of historical fact constitute forward looking statements All forward looking statements are subject to risks and uncertainties and other factors that could cause matters expressed or implied by those forward looking statements not to occur. They could also cause actual results to differ materially from historical results and or from forecasts. Some of these forward looking statements are discussed under the heading Risk Factors and elsewhere in the company's annual report on Form 20 F filed with the SEC on March 21, 2024 and as amended on 04/12/2024. The company does not undertake to update any forward looking statements to reflect future events or circumstances. Slide number three provides an agenda of the topics that we'll cover on today's call. And with that being said, I'll now turn the call over to Tom Ogan.

Tom?

Andy, thanks and thanks everyone for joining us today. As most of you know, I assumed the role of Interim CEO effective the January. I'm pleased to share that Cellebrite delivered a solid fourth quarter to cap a strong 2024 in which we exceeded our original revenue and adjusted EBITDA targets and delivered at the higher end of our ARR expectations. Donna will review our quarterly and annual financial performance in detail, but at a high level, Slide helps illustrate our continued success in expanding share of wallet across our installed base and converting that top line growth into year over year improvements in our profitability and free cash flow.

On a full year basis, we delivered a rule of 50 performance in 2024 with 25% ARR growth and 25% range of 45 to 50. Strong fundamental performance has once again resulted in another solid year of cash [indiscernible] with $122,000,000 in free cash flow in 2024.

As a cloud ready AI powered market leader, with a true end to end platform for accelerating justice the opportunity to help our customers make their communities safer while fueling further value creation at CelebRite remains significant. With multiple macro tailwinds we believe showed no signs of fading We entered 2025 with a commitment to sustain top line growth and to generate attractive profitability and free cash flow. Donna will share greater detail about our 2025 outlook in a few moments. In the meantime, I'd like to focus the balance of my commentary on key developments to start this year as well Cellebrite top strategic priorities for 2025. Let's start on Slide five with a topic that I'm guessing is top of mind for many of you, the status of our CEO search.

As previously shared on our last quarterly call, we're working with a Tier one executive search firm has the global remit to surface exceptional candidates. Our priority remains a proven leader with SaaS, cloud and AI software expertise a global track record prior exposure to the public sector, and preferably domain specific expertise. Interest levels have been high given the unique position of Cellebrite as a high growth market leader with equally strong cash flows and I think perhaps most importantly a clearly mission driven organization. We remain highly selective as we seek an executive whose profile is with the growth impact and quality of this company, and pleased with our progress thus far.

In the meantime, I jumped in as CEO on Jan one and I can promise you we're moving with continued pace and urgency. I've had the opportunity to lead three companies as the CEO, and have held senior leadership positions at several other market leading firms but I can tell you with complete conviction there is no other organization I've been prouder or more pleased to lead. Every man and woman at CelebRite from the Board down to our newest hires is committed to accelerating our journey. CelebRite is executing and is truly making the world a better, safer place. Simply said, what we're all looking forward to the appointment of a new world class leader We aren't waiting for that event. And we're operating with the speed that our customers, employees and stakeholders I want to briefly highlight a few other important milestones since our last call. First, we relaunched an expanded customer advisory board This forum brings together 12 to 14 senior level decision makers at some of our largest and most innovative customers to discuss topical forensic and investigative challenges review trends, policies and best practices, and explore emerging technologies. We held our inaugural meeting in December in Washington, D. C. And we'll host similar sessions this year in the EMEA and Asia Pac regions.

Second, in early January, we announced an keeping with the governance best practice of separating the Chairman and CEO duties, Adam Clammer, Managing Partner of TruWin Capital a former Lead Independent Director has assumed my former role as Board Chairman. Also announced the appointment of Michael Capellas, as a new Director assuming Adam's prior role as our lead independent. Most of you will know Michael's distinguished track record as a technology leader having led organizations like Compaq and MCI as the CEO as well as serving as a Director on multiple global leaders, including his current role as the Lead Independent Director at Cisco. Aside from his general management experience, Michael brings two specific skill sets that I think will be invaluable to our next chapter [indiscernible] As a legacy CIO, Michael brings to the Board unique technical depth and perspective. And just as important, his history of driving corporate strategy will complement the strengths and skills of our current Board. To further leverage those skills, our Board this week launched a new technology and strategy committee which Michael will chair with Adam Clammer and Troy Richardson as committee members. Third, hosted our annual sales kickoff event in Orlando in late January.

Nearly 400 CelebRite employees including many of our most recently hired sales representatives, attended this event, which included keynote from one of our many important partners, Amazon Web Services.

The energy and excitement as you would expect, were palpable and the event was a great start to our 2025. As we look forward to 2025, we'll maintain the majority of our priorities while complementing and augmenting them with new and important events and areas of focus. On the event front, we're very excited about the launch of our inaugural Case to Closure Summit This Cellebrite user conference will convene Roe from around the world. Event will take place in late March in Washington, D. C. And will deliver hands on training educational workshops, and insights from industry experts covering best practices and emerging trends. We believe this event will be a seminal moment in CelebRite's history and a harbinger of the trusted influence we bring to digital investigations. Slide six outlines our 2025 priorities. We'll continue the migration of our digital forensics installed base to the Insights product suite. 2024 exceeded our expectations from both financial and client satisfaction perspective. We closed 2024 with roughly 20% of the installed base migrated as compared to our initial goal of 10% and enter the new year with the objective of increasing this figure to roughly 50 plus percent. More importantly, the early feedback from migrated clients has been in in the speed and efficiency of their investigative processes.

Our Insights migration is also driving important growth with increased attach rates for our unlock capabilities. Our unlocked penetration increased to the high 30% range at the end of twenty twenty four.

Second, as we mature the power of the C2C platform, we're focused on the growth of our Guardian and Pathfinder solutions. Guardian is a key offering within the Cellebrite cloud platform, which is rapidly gaining traction with investigators analysts and prosecutors As part of the Cellebrite cloud platform, Guardian offers management, review, and analysis of digital evidence while protecting the chain of custody and meeting stringent data integrity requirements. Our Guardian ARR generated triple digit percentage growth year over year for the second quarter as the number of customers with both insights and Guardian nearly tripled in the volume of stored data quintupled. Pathfinder, which is our AI enabled analytics solution, also delivered strong results in the quarter with year on year ARR expansion in line with expectations of growth in the 35% to 50% range. This asset is critical to investigators, as they navigate the mountains of digital artifacts needed to identify high value patterns, connections and other evidential insights that are next to impossible to glean quickly through manual review. On the technology front, we'll continue to leverage our investments in the cloud [indiscernible] Which we view as critical for driving broader adoption of our solutions. ARR from our cloud based offerings nearly doubled to 17% of total ARR in 2024, aggressive expansion of cloud based ARR over the coming years will bring multiple benefits to both our clients and our shareholders.

AI is an equally critical technology for investigations enabling greater speed efficiency and efficacy We've been at the forefront of AI for over a decade, but see an enormous opportunity to advance our mission and our value as we further expand our capabilities. To that end, we announced just last week powerful new Gen AI features for our Guardian solution. Next, we continue to invest in This sector delivered strong results in 2024 with AR growth in the mid-twenty percent range. We expect that with our recently formed CELEBRIGHT Federal Solutions Unit, and its associated clearances through 2025 while expanding pipelines that will position us for acceleration in 2026 and beyond. A great example of potential pipeline expansion involves our FedRAMP initiative which enables to celebrate cloud platform to meet the U. S. Government's demanding security and technical requirements. We've made important progress on this front having announced just yesterday that we achieved FedRAMP ready status at a high level designation, which is reserved for only the most secure and rigorous suppliers. We're focused on achieving the final milestone of full authorization within the next one to two quarters. We will also maintain our important footprint in the private sector where CelebRite's data collection solutions help enterprises and service providers advance corporate investigations [indiscernible] We're encouraged by early progress in expanding our sales pipeline through our exclusive partnership with Relativity along with the broader adoption of our endpoint inspector offering. [indiscernible] In addition to these areas of focus, we've launched a company wide initiative to elevate the customer experience and to modernize our processes throughout the customer lifecycle.

We're advancing a range of programs including investments in new systems, incentives, dedicated and focused resources and new processes. Over time, we believe this effort will drive improvement in multiple metrics like time to value, agility, contracting ease, post sale support and more, all things that should ultimately drive continuous improvement in our gross retention rates. To be clear, these metrics are already strong but we're confident with added focus we'll have the opportunity to deliver further gains. I would add that all of these investments are fully contemplated in our 2025 outlook.

Ultimately, we expect this initiative will enable the scale we aspire to while protecting the service levels and trust we have built over the past two decades. Finally, underpinning these priorities is the ongoing commitment we make to support our most important asset the passionate and committed men and women at CelebRite Cellebrite. Our goal is to extend CelebRite's reputation as the place to be in enterprise software. Let's turn to Slide seven for the conclusion of my remarks. CELEBRIGHT continues to execute We remain positioned as the market leader in an important segment with sustained macro tailwinds. Crime persists and the use of digital technologies in the pursuit of crime and violence continues to escalate. Headcounts in Justice remain constrained while attrition rates in law enforcement remain high. There's only one solution to closing this chasm which is the application of advanced technologies. Our outlook for the coming year reinforces our conviction that linking our technology with the brave professionals dedicated to justice is the clear path forward. I want to thank our analysts and shareholders for their continued trust and support. I also want to thank my colleagues at CelebRite for their hard work, commitment and for their warm welcome as I transitioned from Chair to CEO.

We're all inspired every day by the good we do. Democratized nations around the world depend on all of us to accelerate justice and we're energized by that challenge. With that, I'll ask Donna to take you through the details and outline our commitments for 20 Donna? Thank you, Tom. Well, I'm excited to walk you through the drivers It supported a rule of 50 performance in 2024. This is a type of balanced mix between top line growth and profitability that we envisioned when we went public in mid More importantly, I'm pleased that our outlook for 2025 is aligned with our long term objectives of consistently delivering a rule of ex performance between forty five percent and fifty Let's start our review on Slide nine. In addition to reviewing our fourth quarter results, I will highlight our full year performance when appropriate. Our ARR grew 25% year on year to $396,000,000 largely driven by increased spending between our customer base. Our growth retention was approximately 92% which reflects a notable meaningful improvement over 2023 due to a lessening impact associated with our voluntary exits from certain markets in prior years. And strong public sector renewal rates most notable within our U. S. Federal customers.

Geographically, the 2024 ARR mix was in line with the prior quarters and mirrored the full year revenue mix. Americas represented 54% of total ARR with EMEA 34% and Asia Pacific at 12%. In terms of growth rate by geography, The Americas grew 29% thanks to a strong finish with our federal state and local and Latin America customer segments. ARR grew 31% in Asia Pacific region, followed by 18% expansion in EMEA. Let's turn to Slide 10 to dive a little deeper into the ARR growth drivers from a product family This slide also highlights several specific deals that have contributed to our growth. As reflected in the chart, it's clear that Insight continued to be the single largest contributor to Cedera's ARR growth in absolute dollars. We feel the impact, we continue to experience very strong demand for our offering, [indiscernible] examiners used to lawfully access the most advanced smartphone All three of the deals on this slide involve customers who upgraded to Insight while leveraging our advanced Anoc technology. We're also pleased to see certain customers expanding their use of insights beyond traditional lab environments out into the field And just as important, we made good progress with cross selling and up selling Guardian and Pathfinder into existing and new buying centers within our installed base.

Two of those deals reflect the growing interest we see in our broader C2C portfolio. On a combined basis, ARR for Guardian and Pathfind grew close to 50% in 2024, and the Turks areas are now approaching 10% of our ARR on a combined basis. Up from the mid single digit only just one year ago. Turning to Slide 11, we delivered fourth quarter revenue of $109,000,000 enabling us to finish '24 with full year revenue of $401,000,000 17% growth in total Q4 revenue over the same period last year was primarily fueled by a 28% increase in subscription services and a 21% increase in total subscription software.

Severite's 2024 full year revenue growth of 23% primarily driven by 26% increase in total subscription software augmented by modest growth in unrecurring hardware revenue and partially offset by flat professional services revenue. Consistent with historical trends and our expectations at the start of last year, we generated 54% of our total 24 revenue in the second half of the year and I will make sure to cover our business seasonality in the context of our twenty twenty five guidance. Let's move to Slide 12 for a review of our non GAAP gross margin and non GAAP operating which exclude share based compensation, amortization of intangible assets, and acquisition related expenses. Our Q4 gross margins of 84.4% reflects slightly higher incremental cost for hosting and the impact of increased hardware sales associated with Spafinder deals and insights adoption. Our full year 2024 gross margins were 85% up from 84.2% in the prior year due primarily to the growth in high margin A slight improvement within our professional services. In terms of operating expenses, Q4 operating costs were $65,100,000 a 13% year over year increase. This primarily reflects higher personnel costs across research and development and sales and marketing and increased IT expenditure associated with scaling our business.

For the year, operating costs increased 14% primarily due to increased personnel costs Higher spending on marketing activities and a greater investment in model research programs. Ended 2024 with 5,167 employees which was in line with our plans entering the year. We are currently planning to expand our workforce for approximately 15% in 2025. Slide 13, refused our profitability and cash position. We generated meaningful operating leverage for both the quarter and the year. We delivered Q4 adjusted EBITDA of $28,800,000 or 26% on a margin basis. Year over year improvement of two full percentage points primarily reflects solid gross margins and prudent spending across the board. For the full year, our adjusted EBITDA of $99,400,000 percent from the prior year. Enabling gas to produce a 24.8% margin a significant improvement from the 19.1% in 2023.

Our Q4 non GAAP operating income was $26,900,000 with non GAAP net income of $26,100,000 or $0.1 on a fully diluted basis. It's worth noting that our average weighted diluted shares outstanding for the Q4 grew 21% due to the combination of the warrant redemption tied to various price triggers. For 2024, we generated non GAAP operating income of $92,100,000 full year non GAAP net income of $97,800,000 or $0.42 per diluted share. We delivered a 50% increase in diluted EPS this in our weighted average number of diluted shares outstanding. Resulting from various capital markets milestones in the second half of last We ended 2024 with $483,800,000 in cash, cash equivalents and investments an increase of $70,200,000 from the third quarter and an increase of $152,000,000 from year end 2020 Free cash flow for the fourth quarter which we define as a net cash provided by all operating activities less capital expenditure and the purchase of intangible assets was $61,700,000 a 59% increase from last year's Q4 due primarily to strong fundamental results and effective management of our working capital. For the full year, our free cash flow was $121,500,000 a 29% increase over the prior year. Now let's move to Slide 14, for our outlook along with some insights on the factors and trends that we believe will shape this As a reminder, we have historically generated the majority of our ARR revenue and adjusted EBITDA in the second half of EBITDA in the given year and we anticipate that this seasonality will continue to shape the complexion of Cerrobyte's 2025 performance.

More specifically, our 2025 ARRx expectations range from $480,000,000 to $495,000,000 or 21% to 25% increase over '24. This reflects our expectations for continued progress in several dimensions such as upgrading customers who use our legacy digital phoretic solutions to insight further growth for our cloud based solutions and increased penetration of Guardian and PAS5. For the first quarter, we expect solid ARR growth despite the capital of transitory headwinds. First, as you know, we set a high bar for ethics and integrity in terms of where we conduct business. Our decisions to exit certain countries are expected to modestly impact our first quarter results. This has been factored into the Q1 guidance. Nevertheless, given the broader strength of our customer relationships, we see potential to drive modest continuous improvement in our retention rate in 2025 against the 92% level reported in 2024. Second, although we review certain and ongoing geopolitical changes in The U. S. And elsewhere, is a potential net positive for Cerabrite over the next several years the timing of these real time regime changes is Again, this dynamic is fully contemplated between our Q1 outlook Even with these short term headwinds and normal seasonality, still expect ARR to grow between 2224% to $4.00 $6,000,000 to $411,000,000 in the first quarter. [indiscernible] We expect full year 2025 revenue to range from $480,000,000 to $490,000,000 represents 20% to 22% growth over '24.

Anticipated growth from subscription software will be complemented by modest expansion of nonrecurring professional services and hardware Let's We expect Q1 twenty twenty five revenue in the range of $107,000,000 and $112,000,000 which is 19% to 25% higher than the first quarter of twenty twenty four. In line with historical trends, we expect approximately 53% to 55% of full year revenue to be generated in the second half the year. These dynamics primarily reflect our expectations for product mix in conjunction with the timing of typical year end spending activities as associated with our U. S. Federal customers in September and most other accounts at the December year end. We expect our 2025 gross margins to be in the 84% to 85% range as we increase the investment required to build out the hosting infrastructure to further scale our SaaS offering and expand our customer success organization. We anticipate 2025 non GAAP operating costs in the range of $295,000,000 to $310,000,000 a relatively moderate sequential increase from Q4 twenty twenty four Q1 'twenty five. We are focused on maintaining a very attractive profit profile. We expect 2025 adjusted EBITDA in the range of $113,000,000 to $123,000,000 or 24% to 25% of total revenue.

We expect higher adjusted EBITDA and higher adjusted EBITDA margins during the second half of the year, aligns with historical trends in our 2025 top line outlook. We expect Q1 adjusted EBITDA ranging from $22,000,000 to $24,000,000 which supports eOverview margins improvement to approximately 21%. In terms of a weighted average diluted share count, we expect Q1 to be approximately $250,000,000 to $255,000,000 shares with $255,000,000 to $265,000,000 outstanding for the full year. In summary, we closed a very successful 2024 with a solid fourth quarter performance. We made considerable strategic operational and financial progress in twenty twenty twenty four, the combination of which leaves us well positioned to sustain our momentum in 2025. We move forward focused on capitalizing on the opportunities we see to further expand our business in ways that we expect will drive long term shareholder That concludes our prepared remarks. Operator, we are now ready for Q and A. The floor is now open for your questions. At this time, Our first question today comes from the line of Shaul Eyal at TD Cowen. Please go ahead. Thank you. Good afternoon Tom, Dana, Andy. Good morning. Congrats on the consistent execution great 2024 and the initial 2025 guidance.

Tom, thanks for the color on the CEO search.

Maybe can you double click for us, what do you guys stand in that respect Have when we think about like the interim nature of your current kind of tenure, Have you met already with some candidates or what does it currently stand? And maybe my follow on question Tom, a number of U. S. Based companies with a specific cyber focus have brought up growing uncertainty as it relates to federal and government spending. Given the incoming administration. But it would appear this topic bears very little impact, if at all, when I'm listening to the commentary kind of looking at the results and guidance. So maybe can you share with us what your customers are relaying to you in that respect? You so much.

Yes. Let me take so I'll take them in order. As I said ninety days ago, first, having me join eighteen months ago and the exec Chair role and committed to kind of a 50% workload and engaging closely with EOC and the rest of the executive team allowed us to be very deliberate and thoughtful and selective in this transition And so we have not kind of blinked on that. And so the play that we're running here is We will continue to do that until we feel satisfied that we have a world class person worthy of leading the men, women and mission at CelebRite Cellebrite. A click down to your question, I'd say the search firm would probably tell you that the first they cast contemplated probably north of 150 potential candidates. That was then sort of down selected to 30 to 50 We've interviewed I would say probably at least a dozen And all of these people or most of the people we've met with are are qualified to do the job. And so the thing so we're we are very optimistic that we will land the proverbial book the joking proverbial God spec and somebody that's That's that checks all those boxes.

The only thing I can't tell you right now, which sure everybody would like to know is, well, what's the estimate for time what timeline should we expect? I don't want to make that commitment because it takes two to tango and given our selective approach and the fact that there's two parties to that transaction We will fill it as fast as we can with those criteria, but I can't and I won't commit right now to what specific timeframe. So hopefully that gives you a little bit of color. The second question basically what's happening and as Donna mentioned, modest and I would underscore modest headwinds. And it's not just in The U. S. We've there's been some regime changes and disruption in other countries in Europe.

Has delivered again a modest headwind. And if you're if I read the between the lines, sort of I think the question you're asking is, gosh, we just saw a print from Palantir with some blow away numbers. Why do you have any headwinds? And I would emphasize two things. Number one, in Donna's comments, she also We are highly convinced that these changes are actually going to lead to upside and tailwinds for us once all the settles down, And the reason is very topical issues like Fentanyl traffic and deaths or you look at issues around border control, I mean these are areas where CELEBRIGHT's assets can play an enormously helpful positive role. So we think the themes from the administration changes will actually help us But there's been as we I think we all know if you follow the news, there's been a fair amount of disruption in leadership in a lot of these key agencies that's caused in the last, I guess, actually the last point I'd make is those That short list of things are not things that are at risk. These are opportunities and transactions that we have very high confidence will will still close. [indiscernible] that's it.

Thank you so much. Good luck. Appreciate it.

Our next question comes from Bhavan Shah at Deutsche Bank.

Great. Thanks for taking my question. Tom, earlier in your remarks, you spoke about kind of launching the Executive Advisory Board. Kind of exiting that event, what were some of the biggest pain points your customers are kind of talking about dealing with and how is Cellebrite helping solve some of them? How are these conversations kind of impacting thoughts on product roadmap? Yes. I might ask, I think Marcus is on the line, who is our Chief Revenue Officer I was not at the first meeting because I was still in my board role, but I believe Marcus participated in probably give you I got the second. He'd probably give you the first hand. Yes. Thank you. Thanks for the question. So look, there's three main drivers which our customers are seeing. One is 90% or so of cases now require digital assets for proof in public safety. And so there is an explosion in the capacity of the phone. You all know phones are getting more powerful, apps are getting more powerful. And the funding of the DFUs in terms of people can increase. Dramatically. So what we're looking at is efficiency tools. That's really the driver of what we do.

Time time of prosecution is key. And therefore, the main drivers are not only the extraction of the phone, but then our analytical platform closure. That's really the overriding driver that we're seeing. The second thing then is more lightweight product requirements for investigators in the field to be able to make insights a lot quicker without necessarily having to do full extractions of the cell phone. So both platforms for Insight and Pathfinder for our terminology are taking us to those areas.

And Ralph, just as a follow-up to Donna, just any way to quantify the decision to exit specific countries and what that impact is for 1Q? As you think about that 30% unlock attach that you're seeing the insights, what can you do that's maybe a little bit in your guys' control to drive that adoption higher? [indiscernible] stepping out of certain countries is still something that we look at very closely. It was less than 2% in 2024. We still have some coming and joining the list this year, but we are seeing lesser and lesser sizable countries from a business perspective. And as such, we believe that this will contribute to our gross retention rate, anything improvement of anything between 0.5% to a little bit less than 1% in 2025 and 2026. Can you repeat the second question because I couldn't hear you well?

Sorry, just the 30% unlock attach that you talked about to to your insights customers, what can you do to drive that attach rate higher?

So we believe that each and every customer of ours in the public sector must have an annual capability. What we've done with the introduction of free insights, we have actually introduced a wider variety of packages of insights to address the smallest of agencies to the largest And we actually see that one of the drivers of growth in 2024 was the fact that also the smallest agency started onboarding themselves to these capabilities. We believe that this trend will continue with the continuous transition to Incyte.

Great. Thanks for taking my questions.

Our next question will come from Eric Yes. You talked about the C2C penetration, the goal for 2025. Taking that 15% up to 50%, I was just curious if you've got any new initiatives lessons learned from 2024 that you're rolling through to meet or exceed that goal in 2025? [indiscernible] start and then Markus will speak about few things that he's doing in his go to market organization. I think what we've learned in '24 is the importance of the C2C platform, the connectivity between our offering, which insights actually reads very naturally connection between the insights for collection and first analysis to Guardian to the management of of digital evidence and the collaboration between digital forensics unit and investigators and from there to the face finder. Markets would you like to speak about your go to market adjustments?

Or changes?

Yes.

Of course. Yes. So continuing to evolve from a very well established point solution into the platform, We are investing in specialist sales into the investigator persona.

We are now changing our go to market approach as well. We used to be very heavily involved in industry events. We now run our own events. And I can only tell you that I I've been shocked in my career to see the attendance. We are literally sold out at every event. And we believe that we will be heading to be sold out for our major customer event that we're holding in April in DC. There is a lot of pent up demand and so we're addressing those people with vertical experts in order that can walk the walk and talk the talk of how an investigation works. And take them through how the tools and demonstrate some of the AI personas that we have which can speed those processes up. So ensure it's a combination of making our message a lot clearer by pushing it out directly ourselves and then using a very specialist sales force, which are very focused on the investigative flow and extending our presence outside of the lab where we're well known. They're the two factors.

Got it. Thank you.

Our next question will come from the line of Brian Essex at JPMorgan.

Hi. This is Charlotte Biedek on for Brian Essex. Congrats on a great quarter. Overall, it was great to see roughly 20% of the installed base migrate to Insight compared to your initial outlook for 10%. Overall, are you are you viewing the trajectory of the installed base converting to be a quicker timeline? And should we how should we expect that over the next couple of years? I know briefly about next year, but is the overall timeline going to be quicker than expected? Thank you. Well, we still believe that transition or most of the transition is a three years journey. [indiscernible] we believe that we will transition most of our customers by the end of twenty twenty six, 2027. We always have a I would say around 10% of a tail of multiyear deals and late leggers to adopt the new solutions. So we are still looking at intensify the conversion in twenty twenty five, I believe Tom mentioned reaching 50% of the installed base already on inside by the end of twenty twenty five.

Great. Thank you. And I know your Gen AI you just announced it like a couple of days ago if anything, but has there been initial feedback overall like what it's have you heard from your customers Any detail will be great. Thank you. I'll ask Ronan to jump in on that one. [indiscernible] to take it. So look, our customers definitely excited about the leverage of AI, especially in the realm of Boosting efficiency efficacy and really helping across the full value chain. CelebRite has been in delivering AI capabilities for a decade now. Obviously, there is a renewed interest [indiscernible] we are sharing with our customers an exciting vision for that and are fully receptive of that. Maybe I'll say the most important thing that they look for that is not just that we're delivering great egg capabilities, but we can always ground our conclusions and influence Back to the regional EBITDA, that's the most important thing that we keep utmost defensibility of what we have and there is always an officer in the middle as we call it to make sure that what AI delivers is actually something that can hold in court in the utmost standards.

Yes. The other thing I might add and team can make sure I get the numbers right, but we just published the results of some industry surveys that we conduct annually and we specifically asked that group about that question. How do you see AI and the numbers were roughly a third of people said AI will be a contributing element of crime so be used in a nefarious not so good way.

But they also said that we think I think the number was in the 60s felt like AI would be a major enabler in the pursuit against crime and leveraging it both from an effectiveness speed efficiency perspective. So that community is already raising their hand and basically two out of three are saying, we want and we need advanced AI to help combat the case volumes in the proliferation of of technology and digital assets in the pursuit of crime. So I think that's a data driven answer that I think is pretty positive. Thanks and congrats on the good results.

Thank you.

Our next question will come from Jeff Rhee at Craig Hallum, Great. Thank you. Hi, guys. So a couple for me.

First, maybe Tom on the Fed ramp.

Thanks for the update and the timeline. Talk for a minute if you would about the opportunity in federal. I get a lot of questions on it, where you are now as a percent of revenues You've clearly got some pretty impressive federal customers already. So what does FedRAMP gain you from where you are? Maybe fill in a few gaps there, if you would.

Yes. So your point is spot on. We have a very high profile across federal currently. But the change that I think this brings number one, there are certain programs that require Fed ramp, certification. And by the way, I want to make a point those that aren't familiar, there are various levels of FedRAMP certification. They're tied to the complexity and sophistication and security requirements And as you would expect, it's easier to get low than it is to get medium as it is to get high. And when we embarked on this journey, we said, look, if we're going to be a bear, we're going to be a grizzly.

And we don't want to be locked out of anything where we can be helpful in the federal government. So we spent the money, spent the time and pursued high and the fact that we got FedRAMP ready means most of the heavy lift is done. And now we have the ability to start talking to end customers or some of the big GSIs that are running these programs and they now know that it's just a matter of time before we get the ATO to actually operate. So If you asked gosh, what does that do to your TAM? [indiscernible] Our estimate is it roughly doubles our TAM. Now we don't we don't know that for fact. But it's our sense that just based on the tentacles and the relationships we have in federal, that once we get fully authorized to operate, It doubles the aperture of opportunity. So we're which is as you know, given that federal is roughly down to what 20% of our current business, it gives us some nice opportunity and headroom for growth in federal. Yes. Okay, great. That's very helpful. And then one last question. As it relates to the investigative unit and the migration there, obviously massive new TAM there.

You've got a dominant installed base. And if you can break that open and directly connect into the [indiscernible] just you commented we've got some data points. I mean it's shown some good growth rates albeit from relatively small basis as a percent of mix. But I just want to dial in a little closer like give us a sense of your satisfaction with how dialed in you have the methodology IU? I think you said you're putting in some specialists but just kind of where are we in innings wise in terms of sort of hey, we've got figured out now we can really stomp on the gas versus we're still in the early innings of figuring it out? Just some color there would be great. Thanks.

Yes, sure. So thanks for the question. It's It's a good catch. So I would say we're mid innings, like if you want to use the baseball analogy for a Brit, we'll give it a go. We basically have a thesis, which is proven out now. We have enough of a sample size. The end number is big enough to know what the transaction type looks like, what the route to market is. What I will say that we still need to discover is the Investigate unit is is interesting because each company has it set up slightly differently.

So we're taking a multi faceted approach to that to make sure that we understand the learn [indiscernible] side. And I think this year will be the final tuning. And as we enter into 2026, we will have a very, very easily repeatable stream, a much easier repeatable stream that we can get more wood behind. So I would say we've got a good thesis. We're proving our thesis. It's still early in that market. As you know, the TAM is immense. And the final thing, I'm never satisfied with the growth rate because it's my job to grow faster as possible. So we're always trying to find ways to grow that customer.

Got it. Much appreciated.

Thanks, Jeff. Thank you, Mr. Rhee. Our next will come from Mike Secos at Needham. Great. Thanks for taking the questions here guys. And just to continue on the theme on the go to market and the the opportunity there with that investigative persona. Just wanted to soundboard this. Where are we in building out that that investigative persona sales motion like our is that supposed to be a specialist sales overlay or is this a separate speedboat that's going alongside your existing team that's historically pursued those DFUs?

Yes, it's a great question. So when you look at the unit, they can actually buy all of our technology. And so what we because our specialists are on is the higher level and the larger deals. So looking particularly at the expansion of Guardian and Pathfinder, if you're familiar with those products, would be what those people drive. But we can also, insights is also acquirable and we're seeing that from investigative units. There's some functions in there that you saw earlier in our customer announcements with QuickView and Triage and other bits which allow investigators to use that technology as well. So at the minute, we have a combined motion where it's not an overlay team, it's a specialist team. They are calling directly on the the heads of those units and demonstrating. And all I can say is the uptake of interest is huge. I mean, every time we do an event, we are literally with no blusters sold out. And we are quickly assigning budgets and granting getting budgets granted to us for that. In The U. S, we're also doing some very smart work on the grant side.

Linking into major crimes to make sure that the investigators are aware with our grant writing team that there is money available from federal government to fund state and local So we're approaching it from a demand creation and a budget creation and an awareness approach and we're satisfied with where we are.

Awesome.

Awesome. And then if I could just cycle back to the the U. S. Federal great to see that mid-20s ARR growth putting you call it about in line with overall company growth.

I know the company just set up Celebrate Federal Solutions this past summer. And the Beltway can take right? So is it fair to think that CFS and U. S. Federal are still largely in pipeline building mode this year? Or does guidance in any way contemplate early green shoots following the launch when we think about calendar '25.

Yes.

I think you've you've nailed it. So do we think we might benefit from these changes to some we really think the bulk of the benefit and the acceleration in the business starts to flow in 2026. And again, that's this is all part of the modeling for our guidance for 2025. And it's exactly for the reasons you described The federal government and their budget cycles we might be able to sneak in on some existing programs now that we have proxy company and FedRAMP certification but the real the real measure that we're driving the year is to sustain the growth we've enjoyed but we want to see a big uptick in pipeline and deal size and opportunity for 26.

Terrific.

Thank you very much guys. Appreciate the time.

Yes.

And our next question will come from the line of Tobir Zilberman at Bank of America.

Hey guys, If I take a look at the numbers, the magnitude of your EBITDA beat is a little bit lower than it was in previous quarters. And when I look at guidance next quarter, it's more or less in line with The Street. Just wanted to get your puts and takes there.

Yes. So I'll take your title. Tomar. Thank you. Well, Q4 is in some cases a heavy loaded [indiscernible] we have had some higher expenses in comparison to previous quarters to close the year. Especially around marketing activities and IT infrastructure and security activities which will go with us into 2025 and will impact the following quarters. I would say that Q1, as usual, is from a seasonality perspective, provides lesser top line and while the OpEx is growing subsequent from the previous quarter. So we traditionally see lower Q1 EBITDA than the rest of the year. And this is why it was my comment around seasonality to make sure that when you look on full year and you look at previous years, seasonality of EBITDA, it will be more accurately spread over the year.

Got it, Donna. And you also mentioned earlier that you expect modest improvement against the 92% gross retention rate. This year. And I think earlier in the Q and A, you mentioned that you expect 0.5 percentage benefit from lesser citable countries Can you give us directionally how much I guess, upside or whatever you want to call it to that 92% number? Is it only going to be this 0.5% to 1% from this intentional churn? Or do you see other levers to grow that?

In our Investor Day, we spoke it's a long term target 92%. We've reached it in 2024. Through very hard work of our sales organization and customer We believe that most of the improvements will come from those abandoned customers, we call them, and I would like to leave it to see if for this time Yes.

I would just I'll add that there's guidance but also internal operating plans that then govern the spend for the company and we want to be good stewards of cash flow and profitability and so on. All that said, do we think there's an opportunity to to take that number up the answer is absolutely yes. And one of the priorities I highlighted in my front end is a string of things we're doing that I think will fuel that and depending on timing, it could help us sooner than planned, but we think it's prudent to plan at the numbers that Donna shared Got it. Thank you very much. Our next question will come from Louis DePalma at William Blair.

Blair, Donna, Marcus, Ronan and Andy, good morning.

Good morning.

I guess, good afternoon.

It's seems, Tom, that the transition from Chairman to CEO has gone smoothly. My main question is, main alternative to customers using Guardian today, it seems that the growth there has been pretty staggering. But is are many of the your existing installed base using USB thumb drives, local storage and Online cloud storage, so is low hanging fruit for you guys to Cellebrite?

I'm going to let Ron add to jump in on this. And then I'll add some color commentary context because I have a couple of thoughts, but I'll let him make point. One thing I will tell you is from a packaged offering enterprise class software perspective. It's our view and clearly we have a bias that we are the best and arguably the only call it, repository for collaboration and rigorous chain of custody that's tailored to true evidence in some of those requirements versus other deposit optimized for lower level storage, rich media, high volumes, So [indiscernible] is a different question than what's the alternative today. And maybe what are the obstacles, but we do think the observation that we have an enormous opportunity here given the unique strength of our IP and the fit The purpose nature of the product perfect fit for the market, but Yes. Thanks, Tom. Louie, thanks for the question. Look, [indiscernible] are meeting so many customers And the one thing that you get again and again, they are looking at us as a digital investigation leader in that respect, they are not looking for a storage solution. They don't look for a place to somehow shut the data.

It It's true that there are they want to process a lot of data, want to understand it want to disseminate it to the right people. And for that, end, they need much more than another alternative to where to put the data. There are multiple solutions for that, but when you look for a solution that actually drives [indiscernible] needs, which is a digital investigation solution, That's where CelebRite comes in and they might have other solution for other things And what we deliver is not just the way to how to extract the data, manipulate it, understand it, store it, disseminate it, analyze it, that's the full thing that they look for and that's where we want to be.

Great. And can I just have one follow-up as the the stock price appears to be down 7% on the comments of a federal disruption And so I was wondering what percentage of revenue generally comes from The U? S. Federal vertical and generally speaking is is the revenue on a recurring nature subscription Economic models such that like most of the revenue impact would be new bookings rather than existing [indiscernible] being disrupted I think what is clear in markets, feel free to back me up is that and we said before, the federal government in The U. S. Is around 20% of our revenue. It is almost entirely, except for services, subscription business, And most of the business usually come new business, not I'm not speaking about renewal is coming mostly in Q3 Of The Year. With This Current Situation In The In The U. S, what we see is a little bit lagging behind on signing on new business. We don't see any impact on our renewal business, which means that federal government is continuing doing business with us on an ongoing basis. And we feel very comfortable to see that the moment things will stabilize a bit, we'll continue seeing a very healthy growth this year.

We've seen previously.

Great. Thanks, Donna, and thanks everyone.

Team for any additional or closing remarks. Thank you very much, Jim, and thank you very much to all of our analysts, shareholders, prospective shareholders and others who tuned in this morning. We look forward to continued discussions, dialogue and meetings with you over the coming weeks and months. Look forward to speaking with you then. Thank you. Ladies and gentlemen, this does conclude today's Cellebrite Fourth Quarter and Full Year twenty twenty four Financial Results Conference.

Call. Please disconnect your line at this time and have a wonderful day.