Cellebrite DI Ltd

NASDAQ:CLBT

Earnings Call Analysis

Cellebrite Targets Continual Growth in 2024

Cellebrite is poised for growth, setting an ambitious ARR target for 2024 of $380 million to $400 million, a 20% to 27% increase from the previous year. The company's full-year revenue is expected to grow 14% to 18% to $370 million to $385 million. Growth will be fuelled by software solutions like Pathfinder and cloud-based offerings, with cloud revenue growing rapidly and SaaS investments increasing. Moreover, the company is improving operational efficiency through AI and automation, and placing emphasis on mobile tech advancement. In Q4 of 2023, they achieved record Pathfinder deals and an ARR increase of 65% with one national police force. For 2024, forecasted adjusted EBITDA margins are above 20%, with Q1 projected at $12 million to $15 million.

Cellebrite's Strong Performance and Future Outlook

Cellebrite has solidified its market position through exceptional performance in the last year, highlighted by a 27% growth in Annual Recurring Revenue (ARR) to $316.7 million and a substantial increase in adjusted EBITDA margins to 19%. The company, under the guidance of its CEO and CFO, is positioning itself for continued success by expanding its offerings and striving for technology leadership.

Expansion and Product Development

A key achievement was the expansion of Cellebrite's Case-to-Closure (C2C) platform and the growth of Pathfinder to 200 agencies, reflecting less than 10% of the 2023 revenue but displaying rapid growth. The company anticipates future growth through additional SaaS infrastructure expansion and new cloud-native offerings, leveraging AI and cloud technology to boost customer efficiency.

Strategic Priorities and Workforce Expansion

Cellebrite's strategic priorities involve deepening its leadership in digital forensic units, accelerating growth with investigative units, expanding into the private sector, and harnessing the power of cloud technology. The company plans to grow its workforce, particularly in areas that will enhance its market approach and innovation capacity.

Significant Customer Wins and Geographic Reach

The company's reach extends globally, with the Americas as the largest market, constituting 53% of ARR. EMEA and Asia Pacific also saw healthy growth rates of 23% and 29%, respectively. One notable customer success story is a state-based military agency in the USA, where the deployment of Pathfinder and other software solutions has more than doubled the agency's ARR.

Financial Strength and Projections

Cellebrite showcased a robust financial standing with a 20% increase in revenue to $325.1 million for the full year. The company ended the year with high gross margins of 84.5%, non-GAAP operating income of $55.3 million, and non-GAAP net income resulting in a fully diluted EPS of $0.28. Looking ahead, Cellebrite is guiding an ARR between $380 million to $400 million, representing a 20% to 27% increase, and full-year revenue expectations range between $370 million to $385 million, marking 14% to 18% growth. The company also anticipates better operating profitability, targeting over 20% adjusted EBITDA margins.

Investor Relations and Governance

Cellebrite is committed to enhancing transparency with investors by offering quarterly guidance and planning its first-ever Investor Day. The company expects non-GAAP operating costs to be between $240 million to $250 million, with an anticipated adjusted EBITDA in the range of $70 million to $80 million, comprising 19% to 21% of total revenue.

Earnings Call Transcript 2023-Q4

[Operator]

Welcome to the Cellebrite's Fourth Quarter and Full Year 2023 Financial Results Conference Call. [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.

[Andrew Kramer, executive]

Thank you very much, Angela, and good morning, everybody. Joining me today from Washington, D.C. are Yossi Carmil, Cellebrite's CEO; and Dana Gerner, Cellebrite's CFO. Tom Hogan, Cellebrite's Executive Chairman, is also with us today and will be available to participate in the Q&A portion of our call.

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're referring to in our remarks. This call is being recorded, and a replay of this recording will be made available on our website shortly after the call.

Starting with Slide #2. A copy of today's press release and financial statements, including GAAP to non-GAAP reconciliations, this slide presentation and the quarterly financial tables and supplemental historical financial information for each quarter of 2023 and 2022 as well as 2021 data are available on the Investor Relations website at investors.cellebrite.com. Also, unless otherwise stated, our discussion of our fourth quarter and full year 2023 financial metrics as well as the financial metrics provided in our outlook on today's conference call will be done on a non-GAAP basis only, and all historical comparisons with the fourth quarter of 2022 or the full year 2022, unless otherwise noted.

In addition, please note that statements made during this call that are not statements of historical facts constitute forward-looking statements. All forward-looking statements are subject to risks and uncertainties and other factors that could cause matters expressed or implied by those forward-looking statements not to occur. That 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 any obligation to update any forward-looking statements to reflect future events or circumstances.

Slide #3 provides the agenda for today's call. As you will hear, we closed 2023 with another strong quarter. As a result of our accomplishments today for the near-term opportunities we see, we are excited about our prospects to build our momentum in 2024, which is reflected in our financial expectations.

With that said, I'll now turn the call over to Yossi Carmil, Cellebrite's CEO.

[Yossi Carmil, executive]

Thank you, Andy, and thank you all for joining us today. So Cellebrite delivered an outstanding performance in 2023, and we closed the year with another strong quarter. Our team did a great job executing on our plans throughout the year. We delivered impactful customer-centric innovation. We expanded our customer relationships, build our brand and thoughtfully managed all aspects of our operation. Our accomplishments and strategic progress enabled us to exceed our original and upgraded 2023 financial targets. We also surpassed Rule of 45 status in 2023 with ARR growth of 27% and adjusted EBITDA margins of 19%. We move into 2024 as an even stronger market and technology leader.

Now we began 2024 by announcing Cellebrite expanded Case-to-Closure, our C2C software platform. Our C2C platform is trusted by thousands of public and private sector customers in support of their efforts to close more cases faster. Now every day, our customers see that Cellebrite's solution deliver on our brand promise of justice accelerated for the entire digital investigation life cycle. Our solutions play an important role in helping our customers transform their investigative workflows and make digital evidence more accessible, more intelligent and more actionable. And as a result, we have built a strong foundation for us to continue thriving as a market and technology leader going forward.

But before I dive into the details, I want to say that it is definitely an exciting time for Cellebrite and Cellebrite shareholders. And we want to share more about how exciting our development is. And over the past years, we've taken important steps to [indiscernible] investor communication, and we are building on this effort in two additional important ways.

First, I'm happy to inform that we'll be holding our first-ever Investor Day next month, which will be great opportunity for us to share more about our healthy growing markets, about our value proposition that is resonating with customers, about our attractive opportunities for strong growth and our very bright future. And second, as of this quarter, we are providing quarterly guidance as a complement to the annual outlook that we have always offered.

Now while I plan to share more about opportunities that lie ahead of Cellebrite in a moment, I would like to turn to Slide 4 to recap our Q4 performance and selected KPIs. And more specifically, ARR grew 27% to [ $316.7 million ]. Total revenue of $93 million increased 26% on the strength of a [ 26 increase ] in subscription software revenue. We delivered adjusted EBITDA of $22.27 million or 24% for the margin base and non-GAAP EPS of $0.11. And lastly, we ended 2023 with cash, deposits and investments totaling approximately $332 million, an increase of 62% since the end of 2022.

Now looking at our full year performance, Cellebrite exceeded its targets and Rule of 45 status. We achieved record ARR and revenue, mainly due to our success in expanding existing customers' relationship and nearly doubled our adjusted EBITDA margins. We aim to build on these results going forward by delivering a balanced mix of strong ARR growth and healthy profitability in 2024.

Now there are a number of factors that reinforce our confidence about our prospects for continued success in 2024, let's move to Slide 5 to cover this. I'll begin with our markets, and we continue to operate in a healthy market. Now while overall spending on public safety continues to grow at a steady but I would say, moderate pace, we expect that customer spending on Cellebrite solutions will keep increasing at a much faster rate. That's because our customers remain resource constrained, they are perpetually understaffed, underequipped and under pressure.

Now against this backdrop, our customers increasingly recognize that disruptive technology like ours, like Cellebrite, will help them work smarter, faster and more effectively. Our Case-to-Closure platform, our C2C platform is designed to enable our customers to close more cases faster by addressing major challenges, challenges around surging data volumes and increased complexity, operational inefficiencies and building public confidence in low enforcement ethics and accountability.

The second prospect is around customer relationships. We are fortunate to have built durable expansive relationships with a wide range of government agencies at national level, regional level and local levels. And as a result, most of our growth come from upselling and cross-selling into our installed base. Now digital forensic software solutions are both trusted and pervasive within the digital forensic units of our customers. This privileged position in combination with our Case-to-Closure platform is unlocking further expansion with digital forensic units and opening the door for accelerated growth within investigative units. Now the fourth quarter saw a healthy attachment rates of sales, involving multiple side [ ship ] solutions within our Case-to-Closure platform.

And there is also the platform factor. Cellebrite has evolved from offering cutting-edge point products into a true end-to-end platform provider with solutions used throughout the digital investigation life cycle with deployment flexibility, spanning on-prem virtual private cloud or in full SaaS mode. Now this is a major differentiator in the marketplace, which enables us to effectively address a broader range of our customers' pain points. Our Case-to-Closure platform is composed of three primary tools.

First, within digital forensic units, Cellebrite is widely recognized for best-in-class digital forensic software that is used to access mobile phones, extracted data and [indiscernible] important digital evidence. Now building on this rich experience, Cellebrite is moving our industry forward once again with last month's introduction of Cellebrite Insights. Now Cellebrite Insight is a game changer, enabling customers of all sizes to complete an examination up to twice as fast as previously by leveraging improving Cellebrite technology and adding new capabilities that will allow our customers to access more devices, extract more data and [indiscernible] more important information. Insights represent a compelling upgrade for an installed base of [ 30,000 ] existing licenses for our legacy digital forensic software solutions. So the strong and enthusiastic interest we've seen from customers, combined with our success in swiftly upgrading our installed base in prior product cycles provide us with confidence about expected adoption rates over the next couple of years.

Now while the higher value provided by Insight Commands, definitely a higher price tag that will certainly contribute to our growth over the next several years, we do expect that more of our growth will come from upselling high-value Insights modules, modules such as advanced lawful axis, automation, extraction of complementary digital data sources, ensuring digital evidence support.

The second major solution on our C2C platform is Guardian, our SaaS-based case evidence management offering that delivers tangible benefits to both digital forensic units and investigative units. Guardian offers greater operational efficiencies for managing digital evidence workload. Guardian also enables better collaboration between examiners and investigators. Now we believe Guardian will be the go-to tool that investigators use as they advance cases involving digital evidence, and Guardian strengthens the overall chain of custody when it is used end to end. While we are still in an early stage of Guardian adoption, we are very pleased with our traction and confidence that executing on our road map will make it even more attractive for more of our installed base to benefit from Guardian features, functionality over the coming quarter.

And to the third solution, with digital evidence so integral to close in more cases faster, the investigative unit is an emerging Cellebrite second growth engine as we establish Pathfinder as an essential analytics solution to help investigators expedite their cases. Now by applying powerful AI technology and machine learning models, Pathfinder quickly surface leads and identified connection buried with a mountain of structure and unstructured data across multiple digital devices. Now we closed a record number of Pathfinder deals in the fourth quarter of 2023 to finish 2023, with approximately 200 agencies now using this solution. And looking ahead, we plan to bring Pathfinder on the cloud, which will make our investigative offering even more compelling and easier to deploy for our entire installed base.

And there is the element of technology and I have to say that we are making really sizable technology investments that are elevating the value of our C2C platform. One important area of focused technology investment is the cloud. Now while we have historically delivered our software through on-prem deployments, our customers are increasingly interested in cloud-based offering. Although our cloud-based revenue was less than 10% of our total 2023 revenue, I have to say it grows very rapidly in 2023, and we expect that growth to continue. Now with the investments we're making, to scale our SaaS infrastructure, our road map for 2024 include cloud-enabling offering previously only available on-prem and developing cloud-native offerings that will further transform key elements of the investigative life cycle. Related to this, we are investing significant resources this year to achieve [ FedRAMP ] certification for our SaaS offering, a milestone that we believe will open up more federal opportunities and support large deployment at scale.

The second fundamental technology building block is automation. By leveraging AI, cloud technology and our unique insights into the workflows of our customers, we are helping customers increase operational efficiency by automating time-consuming manual tasks, by streamlining complex processes and by minimizing capital investment in [ computer ] systems that further tax limited IT resources. AI is an important foundational technology that is already deeply embedded within both our Insight solution and our Pathfinder analytics. Now by advancing and applying our proprietary machine learning modules while also exploring the potential of generative AI, our solutions can quickly capture powerful timely insights into digital evidence that's been collected, can support automation. Our solutions can expedite investigations more efficiently, and this is important, can also limit the [ emotional ] tool that viewing certain images can have on examiners and investigators.

And the final area of our technology priorities lies in mobile research. On that front, as always, we plan to continue applying our expertise in smartphones operating systems and security to ensure that Insights will keep pace ongoing changes in smartphone hardware, operating systems and applications.

And the last growth factor I want to talk about is our team. Now over the past year, we've added key leadership talent across our organization in many areas. More recently, we added Marcus Jewell as Chief Revenue Officer. Now under Marcus' direction, we recently took steps to intensify our customer-centric focus by establishing new global presales organization and [ post and customer ] success organization while also adding new sales leadership for EMEA and for the private actor. Our Board and senior leadership are also benefiting from the council of Tom Hogan, who joined us as an Executive Chairman in the past summer. Now we move into 2024 with plans to add up to our talent workforce, especially in areas focused on go-to-market and innovation initiatives.

I would like to move to Slide 6 to cover strategic priorities and customer success. Now last quarter, we shared our top four strategic priorities for expanding our business over the coming year. The priorities are: one, increasing our leadership in the digital forensic units; second, accelerating our growth with investigative units; three, building our business in the private sector; and four, harnessing the power of cloud. Now we had a number of fourth quarter customer wins that illustrate our success with each priority. So let's talk about it for a second.

Addressing the needs of digital forensic units has long been a major strength of Cellebrite. And our strong fourth quarter revenue, and ARR performance demonstrated our continued success in expanding within the digital forensic units of our customers. We've continued to see strong demand for our advanced analog solutions that deliver lawful access to the most advanced iOS and Android smartphones. For example, we closed a large deal with a national police in a Western European country that will extend its use of our advanced solution out into the field and thereby reducing time to evidence. Now this specific deal grew the account ARR by more than 25%.

In terms of the Insights, our new solutions, we are already seeing strong interest from our installed base. Now we've closed a handful of Insights upgrades [ at a level ], which were above our expectation at such an early stage. A great example of this was a national police force in the Benelux region, who upgraded to Insights in order to support its examiners with richer data through full file system extraction and cloud-based content and access, obviously, more devices through an unlimited under package. The Insight deal produced a 65% ARR increase at this agency.

The second priority is to accelerate our growth within the investigative units of our law enforcement customers. One existing cue for Pathfinder deal involves a state-based military agency in the United States. Now this agency is deploying Pathfinder and our software for advanced local access as part of its initiatives and at fighting against human trafficking. As a result, this agency's ARR is more than doubles.

The third priority is focused on building on our business in the private sector, where our solutions are currently used by enterprises and service providers in the areas of corporate investigations and [ in discovery ]. Now we delivered solid top line expansion in the private sector during 2023, and we do expect to continue this progress over the coming year. And with deployment flexibility ranging from SaaS to on-prem our integrated suite of solutions shine bright when customers' requirements involve a range of data sources, different work environments and diverse considerations. For example, our secure remote access software continues to gain traction within enterprises as an important part of our Insight for Enterprise Solutions. During the fourth quarter, we closed multiple deals with new customers who selected this offering, including a leading U.S.-based diversified media company that needed a defensible, repeatable process for collecting relevant targeted data from geographically dispersed employees in order to upgrade its e-discovery and corporate investigation activities.

And the fourth in our strategic priority is to help our customers [indiscernible] the power of cloud to address their challenges in a manner that is both cost-effective and secure. One of the largest [indiscernible] department is leveraging [indiscernible] across our C2C platform as they build our dedicated -- their dedicated digital forensic [ center ], focused on standing up [indiscernible] capabilities at scale to close more cases. Now in addition to our solution for advanced access and Pathfinder, this customer will use Guardian to manage judicial evidence and streamline how key findings and reports are securely shared within investigators. Now this deal produced 12x increase in ARR at this specific account.

Let's move to Slide 7. Now I would like to conclude my remarks by reiterating how proud we are of our accomplishments last year on behalf of our customers, our employees and our shareholders. We reported outstanding financial results that exceeded our targets throughout the year, and we plan to build on this progress going forward. We move into 2024 with powerful tail needs from a fundamentally healthy market, solid business momentum and attractive prospects that support the continued expansion of our business around world. Our financial targets for 2024 demonstrate the durability of our growth, as we expect another year of solid ARR and revenue expansion. Now we also see good potential for incremental improvement in our operating profitability as we drive for 20% plus adjusted EBITDA margins.

Now Dana will share additional details on our full year 2024 financial expectation, along with our view into the first quarter of the year in just a moment. As we further scale our global organization, we do believe that our ability to continue to enhance the flagship solutions within our C2C platform and execute on our go-to-market plans will enable us to more than double the size of our business over the next several years. At a high level, we do believe that our business should continue to deliver a combination of ARR growth and adjusted EBITDA at or around a baseline Rule of 45 with a focus on elevating our performance over the longer term.

I have to say it is really gratifying to see Cellebrite recognized as an essential partner to those who dedicate their lives to protecting our communities, stopping bad [indiscernible] and preserving privacy. We passionately believe in our mission and in the power of technology to make a profound difference. And perhaps nothing symbolizes our conviction more than Operation Find Them All, a collaboration between Cellebrite and three nonprofit organizations under a collective goal to accelerate investigations of online crime against children. Now this project is dedicated to helping law enforcement, finding missing children, sold crimes involving exploited minors, remove harm from online images and bring perpetuators to justice. I am incredibly proud of the role that Cellebrite is playing with Operation Find Them All.

And on a final note, I would like to express my sincere gratitude to my colleagues in Cellebrite for the focus, resilience, hard work and sacrifice. Now despite some very challenging circumstances, especially for our team in Israel [ with reserves ] and we delivered this year. We move into 2024 with confidence that we have great people, great products, great partners and programs, and we are excited about our perspective for making 2024 another successful year.

Now that concludes my remarks, and I'd like to turn the call over to Dana.

[Dana Gerner, executive]

Thank you, Yossi. At the high level, 2023, as Yossi said, was an excellent year. Satelite outperformed its [indiscernible] targets and exceeded the Rule of 45 milestones with strong ARR expansion and a significant increase in our adjusted EBITDA margin.

I will begin the financial review on Slide 9. Fourth quarter revenue of $93 million grew 26%. Our top line growth was fueled by a 26% increase in subscription, complemented by growth in either nonrecurring and professional services revenue. We exceeded our top line targets, primarily due to the combination of strong overall demand, favorable product mix and [indiscernible] demand for trading. For the full year, revenue increased 20% to $325.1 million due to subscription revenue growth of 30%. The 30% growth in subscription revenue was partially offset by a 36% decline in other nonrecurring revenue associated with our [indiscernible] license revenue and a 7% decrease in professional services revenue, which saw reduced demand for Cellebrite advanced services, a small customer added our advanced low full [indiscernible]. With subscriptions revenue [indiscernible] of total full year revenue, we move into 2024 with efficient to subscription now in our rearview mirror.

Slide 10 details our ARR growth, which we believe helps investors better appreciate our prospects for the future revenue growth over the coming year. Our ARR grew 27% year-on-year to $316 million at the end of '23. Looking closer at the bridge details provided on this slide, you can see that existing customers continue to fuel ARR expansion. This is largely attributable to ongoing success in cross-selling and upselling into the digital forensics units of our customers complemented by our progress in driving the adoption of our Pathfinder solutions within investigative units.

In terms of our geographic mix, the Americas continued to be our single largest geography at 53% of total full year '23 ARR, followed by EMEA at 36% and Asia Pacific at 11%. We are generally pleased with the full year ARR expansion in each major region, with the Americas growing 30%, EMEA increasing 23% and Asia Pacific up 29%.

The Slide 11 details the historical trends for our non-GAAP gross margin and non-GAAP operating expenses, which excluded share-based compensation, amortization of intangible assets and acquisition-related expenses. We reported a fourth quarter gross margins of 84.5%, which was in line with our plans entering the quarter and up 400 basis points from the same quarter one year ago. The improvement is due to higher trading revenue on a relatively similar cost base versus 2022.

In terms of operating expenses, fourth quarter operating expenses were $57.6 million, a 21% increase from the prior year, primarily due to higher incentive compensation costs, the timing of certain marketing programs and the timing and [ phasing ] of hiring activity. For the full year, operating costs increased 8% as we carefully managed our cost structure by also realizing benefits from a favorable ForEx environment. We ended the year with 1,008 employees, which was really [ consistently for plans ]. In addition to our hiring activity, we're delighted to welcome back a good number of [indiscernible] in Israel, who have been [indiscernible] into military service. These individuals have resumed the work for us in a full-time capacity and we are immensely grateful for their military service and they have completed their assignment safely. As Yossi noted earlier, we move into '24 with a strong team and a plan to expand the workforce by approximately 15% over the course of the coming year.

Now turning into Slide 12. The combination of higher revenue and disciplined spending resulted in outstanding fourth quarter profitability with adjusted EBITDA of $22.7 million or 24% on a margin basis. For the full year, we ended '23 with adjusted EBITDA of $61.9 million or 19% on a margin basis, thanks primarily to our top end growth, meaningful gross margin improvement and a focus on prudent managing our cost structure. Our Q4 non-GAAP operating income was $21 million, with non-GAAP net income of $22 million or $0.11 on a fully diluted basis. On a full year basis, we delivered '23 non-GAAP operating income of $55.3 million, non-GAAP net income of $60.9 million and fully diluted EPS of $0.28. We finished '23 with $331.8 million in cash, cash equivalents and investments up, $48.5 million from the end of the third quarter and $126 million higher than our cash position at the end of 2022. The increase for the quarter and the year primarily reflect a sizable increase in the net cash provided by operations.

Our free cash flow -- from '23 define the cash flow provided by operating -- by operations, risk capital expenditure and the purchase of intangible assets and was $94.1 million. As we reflect on our 2023 progress and performance, it has been gratifying to see interest in our company from the investment community goal. As Yossi noted earlier, we are continuing to evolve and enhance our disclosures to help current and prospective analysts and investors better understand our business. We will focus on providing greater transparency into our prospects for driving sustainable, profitable growth over the long term. To that end, we will host an Investor Day on Wednesday, March 27 in New York City. Information about this event has been posted on our Investor Relations section of our website, an invitation to attend the event in person will be sent next week. Our commitment is also reflected in our guidance, which we've expected to include our quarterly expectations for ARR revenue and adjusted EBITDA.

Slide 13 details our financial expectations for the first quarter of '24 and for the full year. More specifically, our 2024 ARR target ranges from $380 million to $400 million or 20% to 27% increase over '23. On a related note, we are optimistic about the potential for modest improvement on our churn level is the impact from our decision to withdraw drew from certain markets and see selling to certain customers [indiscernible]. Our first quarter of '24 ARR target ranges from $325 million to $335 million, which would equate to 24% to 28% growth over the first quarter of '23. We expect full year '24 revenue to range from $370 million to $385 million, which represents 14% to 18% growth over '23. As we look forward our revenue and ARR expectations are further supported by a healthy pipeline, including opportunities to drive [ impact upgrades ] and related and on modules upsells, cross-selling and upselling Pathfinder and Guardian into the installed base in private sector expansion. We expect Q1 of '24 revenue in the range of $83 million to $88 million or 17% to 24% higher than the first quarter of '23.

In line with these historical trends, we expect approximately 52% to 55% of fully revenue to be generated in the second half, along with higher quarterly revenue growth rate in the second half of the year. These dynamics primarily reflects our expectations for product mix in conjunction with the timing of typical year-end spending activities associated with our U.S. federal customers in September and most other accounts in the December [ year-end. ] We expect our '24 gross margins to be in the 82% to 84% range as we increase the investment required to build out the hosting infrastructure to further scale our [indiscernible] offering. We expect Q1 gross margins to be in line with or slightly above the full year target. We anticipate 2024 non-GAAP operating costs in the range of $240 million to $250 million, with a marginal sequential increase from Q4 '23 into Q1 '24. We are optimistic about our potential to continue improving our profit profile and currently anticipate adjusted EBITDA in the range of $70 million to $80 million or 19% to 21% of total revenue.

Consistent with historical trends and in connection with our '24 top line outlook, we expect higher adjusted EBITDA and higher adjusted EBITDA margins during the second half of the year. We expect Q1 adjusted EBITDA ranging from $12 million to $15 million or 14.5% to 17% on a margin basis. Strong cash flow from operation has been a hallmark of our company, and we expect that to continue in '24. Our business has minimal capital intensity and we expect capital expenditures between $8 million to $12 million in '24.

In summary, we are pleased with Cellebrite's performance and progress in '23. We are also excited about our prospects to expand our business around the globe and look forward to sharing our progress with you over the coming quarters.

Operator, that concludes our prepared remarks. We are now ready for Q&A.

[Operator]

The floor is now open for questions. [Operator Instructions] Our first question comes from Brad Zelnick with Deutsche Bank.

[Brad Zelnick, analyst]

Great. Thanks very much, and congrats at a strong finish to the year. I've got one for Yossi and then one for Dana. Yossi, see the innovation that you talked about with Insights driving the seat of investigation sounds really powerful and I picked that on your example of the agency that saw a 65% increase in what they were spending. But can you talk a little bit more in terms of how it's priced? And we look forward a year from now, the percentage of new and expansion coming from Insights will make you leased? And maybe also as well, what's the risk that it make investigators so much more productive that your customers actually need fewer units?

[Yossi Carmil, executive]

I would ask you to repeat the last part of your question. What was the add-on at the end? I didn't hear it properly.

[Brad Zelnick, analyst]

If it makes investigators is that much more productive that they're able to achieve what they're trying to do at 2x the speed that the customer needs fewer units because they have fewer people doing the same job.

[Yossi Carmil, executive]

So okay. So first of all, I have to say that in a bigger scheme, Insights is a part obviously of a value proposition and a really differentiated Case-to-Closure platform. And with the Insights, everything starts all the attractive elements of collect and review with special capabilities in a way that we didn't offer before. The Cellebrite Insights is a leading collector review piece, offers, first of all, more value than any other legacy software that we are providing in the past. It brings higher value because it combines capabilities that were pretty much spread in several, I would say, stand-alone solution that we're offering only part of the entire scheme, either collection or stand-alone or the review stand-alone. It combines everything under one roof. This is one.

It's definitely the good news, by the way. It brings higher value to the customers and higher value can be translated to a higher price tag and we anticipate and you were asking about the price that we can offer that part in a range of 20% to 25% higher than what we used to price the former solutions in the past. And obviously, part of the scheme is that we are coming with additional models as part of it. There are models and capabilities. And I mentioned a few of them in the past, like, for example, automation that can basically increase the value and justify basically value pricing and on top of that, the element of the unlock.

I'm glad to say, by the way, we launched it two months ago in the private sector, one month ago in a public sector, and there is a huge interest, okay? And we believe that right now in a phase of, let's say, probably 3-year cycle, we can basically cover most, if not all, of our current installed base. As for the need, the pain by our customers, and we talk about it a lot, is clearly about the huge amount of data quantity and the amount of data per digital source. But to your question specifically about the increasing it, there is an element of backlog of, I would say, old way or inefficient way, the way investigations and data is being managed, and that obviously increased the need for more licenses in that spectrum.

[Brad Zelnick, analyst]

Very, very helpful, and I appreciate all the color you've shared. Maybe just for Dana. It's great to see the ARR guidance in excess of what we expected reflecting the confidence that you guys have and all the good things happening in the business. Can you maybe just give us a little bit more insight into the key assumptions underlying the ARR guidance? And specifically, the assumption that you have for net retention, which I'm not sure we saw for Q4, but any insight there would be helpful.

[Dana Gerner, executive]

Right. So if we look at the ARR growth expected for '24, it actually for [indiscernible] exactly what Yossi discussing in his prepared comments about the three main offering contribution to the growth of the company. So when looking at the market and the market is healthy, we continue to see demand for our inside offering to the digital forensic unit. We've been growing it substantially in '23. We'll continue to grow it by the introduction of Insights in '24. Pathfinder and Guardian are getting increasing traction in the market. We believe that they would grow faster than our collection and review insights offering will grow. And both -- all three of them together will provide the ARR growth in '24. When we look at net retention rate, our increase of ARR related to new customer ranges from 2% to 3%. So if you look at an ARR growth in '23 of 27%, the net retention rate is around 125%.

[Brad Zelnick, analyst]

Okay. Thank you.

[Operator]

The next question comes from Mike Cikos with Needham.

[Michael Cikos, analyst]

And I did just want to double check on the revenues in this quarter as well. I noted that Dana, I believe you opened up your remarks by calling out some of the strength being in, let's say, perpetual or pro serve, which were both stronger than we had modeled. And I'm just trying to get a better sense like for the pro serve and the training dynamics specifically. Is this in any way underscoring the benefit of the learning management system that Cellebrite unveiled as part of its customer portal back in mid-October? Or is there something else to think through as far as the strength in training that we're seeing there?

[Dana Gerner, executive]

I think altogether, Q4 was a very strong quarter. We grew our subscription business very highly 26% and [ with good impairment ] of the offering is all at the same rate. Training was also forming [indiscernible] is launched in October, actually supported the ability to bear deliver the training that is being required by the customer, and we believe that it attributed to some of these growth with a better platform. I hope this answers your question.

[Michael Cikos, analyst]

It does. It does. And I guess a bit of a 2-parter. I want to build off that last one with the training. But maybe you or Yossi could touch on this. It's more of an industry dynamic. So I'm trying to get a better sense. Is training considered a gating factor to broader adoption of the technology? And what I mean by that, like I don't expect -- let say, the NYPD is an example. I don't know if they're an agency or not, but just because they're readily available. So if NYPD is going to make cuts through its budget somewhere, I imagine the budget cuts might be more in training because that's considered as soft skill and maybe a hang up for having technical expertise to use Cellebrite, whereas I don't expect the NYPD to maybe making cuts around, let's say, patrol cars or bulletproof vest as an example. Can you talk about that training element as far as what it means for a [ feeder ] system into Cellebrite's demand? I hope that makes sense. I know it's a bit of a long-winded question.

[Yossi Carmil, executive]

No, no, no, that's cool. That's fine. At least I'll try, and I'll take this from the customers' point of view and element of training in our customers' lives. It is an essential elements, especially in the United States, imperatives. At the end of the day, our game and the quality of our C2C platform is to enable customers. We're talking about law enforcement, and I'm talking about public sector to go to court and stand behind the evidence. And as such, training is an essential element was, is and will continue to be. I'll touch in a minute what we are going to do with it.

When it comes to Cellebrite, I see the training as I would say something with two heads. One is a base to educate the customers in order to sell more software. And by the way, that's dynamic and trend is something that exists that was exiting this year and throughout years. And second, it's a revenue source. That's obvious. As for the budget, I am less concerned. First of all, in the generic statement, you mentioned NYPD or others. We do not see any change in the trend of healthy budgets related to what our customers are offering. I also want to say that while the budgets are growing and the part of budget for digital investigations, Cellebrite, with what we do, it represents what budgets which are related to [indiscernible] a fraction of the overall budget of police forces. So I'm not concerned about any mega development. We are not going to be [indiscernible] the budget factor is going to remain healthy.

Last word, we see train part of a much bigger scheme of investment in post-sale customer experience and customer engagement in order to educate and push the C2C by the way customers are requesting for that. This is why I mentioned earlier, as part of the new structure under the new CRO, we are building or started to build a dedicated post-sale customer experience and the training is part of it. So we see lots of value customers see a lot of value and I hope that I gave you some perspective here.

[Michael Cikos, analyst]

No, very clear, Yossi. Very clear. I appreciate you calling that out. And I know it's just -- it's a small piece when I think about the revenue pie. I'm not trying to take away from that at all. I just wanted to highlight that as I'm trying to piece together this broader industry dynamic and what the training means to Cellebrite specifically. I appreciate it.

[Operator]

The next question comes from Tal Liani with Bank of America .

[Tomer Zilberman, analyst]

It's actually Tomer Zilberman on for Tal. My first one, you talked a little bit in your prepared remarks about the success you're seeing on Pathfinder and Guardian. Just wondering what the overall contributions are of your analyzed and managed solutions. I think in one point in time, we knew that analyzed, I think, roughly 5%, 6% of your revenue managed was close to 0. So curious how that's trending now and where you expect that to go to in 2024 and beyond.

[Yossi Carmil, executive]

Okay. So first of all, I would like to say, I go back to the Case-to-Closure platform. And one needs to understand that we went in this direction and we went in the direction of streamlining our entire portfolio because today, talk about one stand-alone without the others doesn't make much sense from our perspective, but I'm glad to say also from our customers' perspective. The entire element of integrating or looking at one integrated platform, which serves one integrated flow in the investigative world is critical for the success of our customers.

And obviously, as a result, as we look into the future, the Pathfinder and Guardian both will have a much bigger room in our total top line and portfolio. I can say that we had for both Pathfinder again, investigative analytics and Guardian, our evidence management, pretty much strong growth in Q4 and throughout the entire 2023. And as I said, we are serving an emerging need. At the moment, the volume of both solutions is around 10% of our entire results in 2023. And we expect, basically, I would say, a greater pipeline and potential to accelerate both solutions.

The Guardian specifically, the meaning is not mostly in the volume of business. Clearly, it's something that it's about to grow 50% and even more year-over-year. But it's the fact that this is an integrative component that combines together the entire C2C. On the digital forensic unit side and on the investigators unit side, [indiscernible] strategic meaning. So I'll stop here and see if I answered your question properly.

[Tomer Zilberman, analyst]

Yes, absolutely. And then just as a follow-up. You talked about subscription now being 85% of revenue and transition to subscription being largely in the rearview mirror. Question, should we assume that 85%, [indiscernible] or take, is a benchmark for where subscription will fit? I mean your perpetual grew much stronger than anticipated this quarter. And I assume that you'll have some level of government customers that will still require perpetual. So the question is really around where do you see the benchmark for subscription going forward?

[Dana Gerner, executive]

So maybe I'll take the answer. And I'll start with the first, we are very [indiscernible] to see that our customers all around the globe are actually accepting the Subscription business. And our Perpetual business in the last half year was almost none. So that means that even the strongest part of our selling portion of the year, they have to -- we federal government and with larger agencies, they all accepted our subscription offerings and the advantages that are coming with it.

85% is a good point for our Subscription business to be out of the total revenue. Considering what Yossi said before on training and the importance of training, professional services that will be attributed to the future to our enterprise solutions and the fact that we still have some harder components in our ARR product mix.

[Operator]

The next question comes from Jeff Van Rhee with Craig-Hallum.

[Jeff Van Rhee, analyst]

Great. I'd echo my congratulations, obviously, with [indiscernible] and the conflict you guys are in the center of just really impressive performance by the team. Three questions for me. One, on the sales motion, Yossi, where would you grade yourself in terms of your efforts to get from the DFU to the IU? How dialed in do you have that motion -- just maybe put that in a little context.

[Yossi Carmil, executive]

Let's put it this way. There is a clear growth engine for the company. And this is the leading growth engines for years by now, and that's the DSU. And the digital forensic unit with the relevant portfolio, which is on our entire offering of Insights as a flagship solution and the Guardian, that motion, we'll continue to grow. We continue to invest in that direction. And with, by the way, dedicated sales force in each one of our subregions, America, EMEA and Asia Pacific. And by the way, not to mention the collection piece as part of the private sector.

The investigative units, the more we grow, we -- I'm glad to say that we see that and we take it very seriously as a, I would say, another growth engine by itself. The KPIs over there for the end users are different. The budgets over there are impressive and the pains and the needs of the customers force us basically to manage it in an upgraded way with a dedicated sales force and by the way, dedicated marketing and so on and so forth.

So on the one hand, one need to understand, we are working with an agency. And as I said, there is a C2C platform. But when it comes to the investigative world, we will add more forces along the road in order to make sure that we are, I would say, fulfilling the potential. And just to remind, potentially in that space only if I take the Pathfinder alone is a [ pace ] or anticipated growth pace of 35% to 50% year-over-year. I'll stop here just to see if I -- my answer was in your direction.

[Jeff Van Rhee, analyst]

It was. And Yossi, just shifting gears. M&A, obviously, real nice cash generation. I think as you look at the digital tools that are relevant to law enforcement, federal agencies and incorporating them into your platform, it seems like a lot of opportunity. How should we think about M&A and the role it's going to play maybe in '24?

[Yossi Carmil, executive]

It's a great item, let's put it this way. In that -- in a wider context, one need to look at Cellebrite -- and as you said, right now, it is a platform company. And the C2C platform and enable us basically to map much better our decisions regarding make or buy. There is also, if you look at our market and [indiscernible] that we are dealing with, and there is a big growth opportunity over there. And on top of that, clearly, there is the element of the Cellebrite balance sheet. And we have a very strong balance sheet, as you mentioned. And that enabled us to make smart moves, but in the right target and in the right army.

I would like to say clearly that inorganic growth is a clear part of our long-term strategy, but with both technological pack-ins and maybe some larger opportunities if that would make sense. And clearly, as I mentioned, the [ TAM ], doing an inorganic move while we are investing a lot on innovation, we'll help us to build the market presence. Just to emphasize all the numbers that you see right now do not include or include only organic elements. But clearly, we have some targets that we are looking at. And if something will be relevant, we'll update.

[Jeff Van Rhee, analyst]

Great. And if I could sneak in two last smaller questions and briefly, Dana. You touched on churn, I might have missed a little bit of it. I know you've had some intentional pruning of the customer base, but just give me a little more context, how do you see churn playing out during '24?

[Dana Gerner, executive]

So if you look at our churn, which is slightly above 9%, around 2% was associated with customers that we've decided to stop our business with. This will dissipate over the next 1.5 years, I would say. And so we believe that our normalized churn should be anything between 7% to 8% on an ongoing basis or diligently to improve it on an ongoing .

[Jeff Van Rhee, analyst]

Okay. And then I guess just lastly, overall backdrop. You talked about budgets, but in particular, been talked from time to time of peers getting fairly aggressive on price increases. Just any observations on what the peer are doing. I mean, obviously, Insights puts you in a different value proposition. I get what you're doing, but I'm just kind of curious what the competitors have been doing.

[Yossi Carmil, executive]

Generally speaking, I'll take at least for a start. I'm glad to say that this is a value-based market. Budgets are there. This is clear, and there is a clear readiness to pay more for value. If we look and based on what we know, our competitors are doing the same. Some are increasing prices on an annual basis as part of the systematic approach, sometimes per version. And some are increasing prices as part of, I would say, long-term strategy. So one, we are no different. We are different in the fact that we bring a differentiated offering that basically justify higher pricing. But I would say that's applicable to the entire industry.

[Operator]

The next question comes from Doug Bruehl with JPMorgan.

[Douglas Bruehl, analyst]

Maybe one around your FedRAMP authorization announcement. Any sense of how large of an incremental market do you expect at eventual approval to unlock?

[Yossi Carmil, executive]

So first of all, I would like to say that FedRAMP is a meaningful part as part of the expansion of our value proposition and making even stronger differentiation in, I would say, our compelling C2C, Case-to-Closure platform. Specifically, that part of activity is more aimed to the area of the federal business in the United States. And clearly, we are investing in FedRAMP in order to open more doors in that space and practically increasing the total available market. By the way, I have to say that our federal business is very strong as it is right now. And that only strength that we have is a very strong base in order to expand.

Specific to your question, we assume that this is something that can even double the size of what we do today because with FedRAMP, it will enable the company to access definitely additional buying centers within existing logos that we have already today. And if we will be quick enough and we intend to be in the middle of 2024, we believe that we'll be in a situation that we will pass certain processes in order to talk about it, so in the second half of 2024. And with that, we can guarantee or capture budgets of 2025.

I have to emphasize the final statement that FedRAMP is not specifically to one or other solution. It's applicable to the entire offering of our Case-to-Closure platform. So both for Insights and Pathfinder and the Guardian, everything can be offered not only on-prem, but then also on the cloud and [indiscernible] [ the final rule ] to show a level of security, which meets the hard demands of this specific segment.

[Operator]

The next question comes from Jonathan Ho with William Blair.

[Jonathan Ho, analyst]

Congratulations on the strong results. I wanted to start out with a little bit more detail into the Insights sort of a change here. Can you -- maybe help us understand what's changed with the product and how you're able to speed up investigations and sort of raise productivity with customers?

[Yossi Carmil, executive]

Sure. Insights is -- and I'll talk specifically about the Insights collection review. Basically [indiscernible] table capabilities, which were, well, stand-alone disconnected within some -- few solutions. On the access part, it enables a much quicker access and it also enables to access via ways or in collection that used to be part of our high-end [indiscernible] only. For example, [indiscernible] system, and I remember we talked about that in the past.

Then it's about the processing and review elements. We are talking here about [ Factor IV or Factor VI in ] terms of speed. At the end of the day, if you think about the major KPI in a typical lab of our customers, it's how to reduce backlog and how to access more devices faster as part of a piling element of digital sources as part of piling investigative open cases. So when we bring together methods, which were only on the premium, together with the higher speed, combine that with a much better [indiscernible] that's the result that you get. And that's basically the value that it's going to bring to our customers. As I said, by the way, since launch, we are getting really terrific feedback about how Insights improve mode of operation within labs and within investigative units.

[Jonathan Ho, analyst]

Excellent. And then with regards to the C2C platform, do customers today purchase these solutions as a bundle? And how do you think about the go-to-market motion and investments that you need to make to maybe shift this to be a bit more of a strategic discussion?

[Yossi Carmil, executive]

So I think it's important to understand that today, Cellebrite offers a real end-to-end platform. And not just, I would say, a pile of stand-alone because on the tactical level, clearly, a lab will continue to buy, collect and review, will continue to buy Insights as such. But as I said in the beginning or as part of an answer to another question, for the Commissioner or for the Head of Investigation and Intelligence within police, it makes less sense today to talk about collection as stand-alone because the reason need to see the entire scheme of things, how do I collect. But then with a streamlined platform like ours, how do I share and review as quick as possible? How do I improve speed and quality of discovery? How do I deal with chain of custody, something that we do with our streamlined Guardian, which connects both collected data from Insights and analyze data from Pathfinder.

So this is not only something that we position. It reflects a [ pain ] and the entire direction of our customers is going into a streamlined environment, which forces basically or enforce and makes a necessity for an end-to-end platform and not just, I would say, pile of stand-alone solutions.

[Operator]

This concludes the Q&A portion of today's call. I would now like to turn the floor over to Cellebrite CEO, Yossi Carmil, for additional or closing remarks.

[Yossi Carmil, executive]

All right. So first of all, thank you all for joining us, and thank you for taking the time. I would like to emphasize it was a very [indiscernible] company, especially from background of several challenges, it was really a very good year. The future will be even better. And I have to say that we are excited about the opportunity and about what is expecting us as part of the future of Cellebrite.

I would like as a final word to thank again to all the Cellebrite employees for their professionalism, for their resiliency and for the engagement and obviously, for the great results of 2023. Thank you all. Have a great day.

[Operator]

Thank you. This concludes today's Cellebrite's Fourth Quarter and Full Year 2023 Financial Results Conference Call. Please disconnect your line at this time, and have a wonderful day.