Latest / The Dutch Investors / #72 | Cellebrite Deep Dive | Unlocking the truth in digital investigations w/ Heavy Moat Investments

Transcript

#72 | Cellebrite Deep Dive | Unlocking the truth in digital investigations w/ Heavy Moat Investments · The Dutch Investors

• 0:00
  SPEAKER_00: Welcome to a brand new company deep dive by the Dutch Investors.
• 0:05
  SPEAKER_00: As we celebrate the Christmas holiday and head into a new year, we thought it would be a good time to gift you all something.
• 0:12
  SPEAKER_00: So today we're giving you this premium deep dive into the latest company we've analyzed from the Dutchinvestors.com and we'll tell you all about it.
• 0:23
  SPEAKER_00: And to top it all off, we'll be doing this with long-term value investor Nicholas from Heavy Mode Investments.
• 0:31
  SPEAKER_00: We are unpacking a company that sits right at the intersection of technology, crime, and privacy.
• 0:38
  SPEAKER_00: I'm pretty sure most of you haven't heard of it before, which makes it even more interesting.
• 0:44
  SPEAKER_00: The business itself is a fascinating mix of high-tech forensics and deep ethical questions.
• 0:52
  SPEAKER_00: So sit back, grab a drink, and let's unpack this black box of a company.
• 0:58
  SPEAKER_00: If you like these sort of deep dives, check out TDI Premium over on thedutinvestors.com.
• 1:04
  SPEAKER_00: Would love to welcome you to the grown community of passionate and like-minded investors.
• 1:10
  SPEAKER_00: So enjoy this little sign of appreciation, a gift to you, and cheers to a wonderful 2026.
• 1:18
  SPEAKER_00: Enjoy.
• 1:46
  SPEAKER_00: Today, Nicholas and I are talking about Celebrite software, and its software is used in various cases.
• 1:54
  SPEAKER_00: The software solutions are used in child exploitation, homicide, anti-terror, border control, human trafficking, even intellectual property theft, and so much more.
• 2:09
  SPEAKER_00: We are um back, Nicholas.
• 2:12
  SPEAKER_00: It's been a while.
• 2:13
  SPEAKER_00: You're the author from Heavy Mode Investments.
• 2:16
  SPEAKER_00: You own Celebrite Yourself, you know all about it, and uh I'm excited to dive into the company with you.
• 2:24
  SPEAKER_01: Yeah, definitely.
• 2:24
  SPEAKER_01: It has been a while.
• 2:25
  SPEAKER_01: Last time was, I think, in in May or something with with Robert Tame.
• 2:29
  SPEAKER_00: Yeah, couldn't be more different, right?
• 2:31
  SPEAKER_01: Yes, different country, different industry, different growth profile, different valuation.
• 2:36
  SPEAKER_00: Everything's different.
• 2:37
  SPEAKER_00: So maybe uh just to start it off, how did you find Celebrite?
• 2:41
  SPEAKER_00: You own it quite a bit longer than I have.
• 2:44
  SPEAKER_00: I have started a small library position just to uh keep track of the earnings, to go a little deeper.
• 2:49
  SPEAKER_00: But maybe uh how did you find Celebrite in the first place?
• 2:52
  SPEAKER_01: I mean, I haven't owned it for that long.
• 2:54
  SPEAKER_01: I think it has been September, I think.
• 2:56
  SPEAKER_01: I basically found it how I found everything through through cloning.
• 3:01
  SPEAKER_01: So I saw it on on Twitter.
• 3:03
  SPEAKER_01: Somebody posted about it, I think it was in connection to Exxon.
• 3:07
  SPEAKER_01: Exxon is like, I would say probably the the company that got away.
• 3:12
  SPEAKER_01: I analyzed it around the bottom in 2022 and skipped because it was still too expensive and I didn't like their stock-based compensation and the typical reasons why you don't buy the uh the good fast-growing tech companies.
• 3:25
  SPEAKER_01: And Cellabright is somewhat comparable, or at least in a in a similar business.
• 3:30
  SPEAKER_01: Back when I first uh heard about it, it was pretty expensive.
• 3:34
  SPEAKER_01: I think it was around its all-time high.
• 3:36
  SPEAKER_01: And then it started to drop.
• 3:38
  SPEAKER_01: And I think I saw somebody posting about the share price decline, and I looked at the valuation, and it made more sense, so I started to dive into it, and I liked a lot what I saw.
• 3:50
  SPEAKER_01: The quality was a lot better than I first thought.
• 3:54
  SPEAKER_01: And some of the moral issues I had were also swept away when analyzing it further.
• 4:00
  SPEAKER_00: So, what um what does Celebrite do?
• 4:03
  SPEAKER_00: Give the listeners some context on what this uh secretive company does.
• 4:07
  SPEAKER_01: Yeah, Celebrite first got started actually in a somewhat unrelated business.
• 4:13
  SPEAKER_01: So, what they do is they were helping uh phone retailers and telecoms to transfer data from one phone to another.
• 4:21
  SPEAKER_01: And then there was a big terror attack in the United States, and Apple was uh was not willing to give up its principles and crack the phone for them, for the CAA, I think it was.
• 4:35
  SPEAKER_01: And they used Celebrite software to transfer the data, like first crack the phone and then transfer the data from the phone to the software.
• 4:43
  SPEAKER_01: And basically, that got the company somewhat famous in the industry, and they started to switch from their legacy business back to what they're doing now, to basically helping police forces and private investigators to crack phones and to transfer data from the phones and to extract everything, and yeah, basically to enable them to work on criminal cases in a digital age.
• 5:09
  SPEAKER_00: Yeah, for those interesting in the cases that Nicholas is referencing, it's the San Bernardino case from 2016.
• 5:17
  SPEAKER_00: You can find it if you just Google Apple versus FBI, um, the terrorist phone or something like that.
• 5:24
  SPEAKER_00: You'll find it.
• 5:25
  SPEAKER_00: It's a it's a it's a very cool story, and that single event definitely puts Celebrite on the global stage.
• 5:32
  SPEAKER_00: They saw what they did and how they handled it, and it's a good story for those uh interested in wanting to know more about it.
• 5:41
  SPEAKER_00: So, Celebrite offers several solutions.
• 5:45
  SPEAKER_00: Maybe um you can briefly, and it's pretty difficult sometimes to explain what they do, it's also pretty secretive.
• 5:52
  SPEAKER_00: So maybe you can just very simply explain what sort of solutions they offer.
• 5:59
  SPEAKER_01: Yes, definitely.
• 6:00
  SPEAKER_01: That was also one thing I struggled with when initially looking at the company.
• 6:05
  SPEAKER_01: Because it is a very hard to understand business from the outside.
• 6:08
  SPEAKER_01: I mean, uh, most of us probably are not private investigators or working in the police force um battling crime.
• 6:17
  SPEAKER_01: So their main business is what I already talked about, basically uh extracting data from the phones.
• 6:24
  SPEAKER_01: That's the main business and accounts for around 90% of revenue, I think.
• 6:28
  SPEAKER_01: And it's it's basically a duopoly.
• 6:31
  SPEAKER_01: Besides that, they are currently building and um expanding into adjacent verticals, which is their um the reason why they are reinvesting so much right now.
• 6:42
  SPEAKER_01: So, what they saw is that there is not really a comprehensive solution which covers the whole case to closure process.
• 6:51
  SPEAKER_01: So basically, uh when there is a case in a law enforcement office, um they first obviously have to to crack the phone, get the data.
• 7:00
  SPEAKER_01: But then there is a lot of stuff that comes afterwards.
• 7:03
  SPEAKER_01: You need to secure the data and you need to be compliant.
• 7:07
  SPEAKER_01: If data changes hands, you need to have a trail.
• 7:12
  SPEAKER_01: And nowadays you obviously don't want to have a paper trail, you don't want to have paper signed and exchanged.
• 7:19
  SPEAKER_01: You want to have that all digital to be more secure and also a lot more efficient.
• 7:25
  SPEAKER_01: And then they also have another solution, Pathfinder, which helps them to also help solve the crime, to use um machine learning, artificial intelligence to aid in the whole investigative process.
• 7:39
  SPEAKER_01: So basically, they have all these um law enforcement um businesses and agencies who are already customers with their core uh offering insight.
• 7:52
  SPEAKER_01: And they now want to cross-sell.
• 7:55
  SPEAKER_01: And that's going well so far, and yeah, they're they're trying to expand there right now.
• 8:01
  SPEAKER_00: Yeah, I did a lot of digging here.
• 8:03
  SPEAKER_00: I I wanted to really find an example of how the software solutions are used.
• 8:09
  SPEAKER_00: Um, so I read several in-practice interviews with former employees and uh directors, and I found this pretty good example.
• 8:18
  SPEAKER_00: Maybe you're familiar with it, but maybe not.
• 8:20
  SPEAKER_00: So let's say the New York police department seizes 100 phones from a Drux cartel.
• 8:26
  SPEAKER_00: They basically split the entire case to closure in like three steps.
• 8:31
  SPEAKER_00: It's unlock and extract.
• 8:33
  SPEAKER_00: So the first step involves like accessing these devices and pulling the raw data.
• 8:39
  SPEAKER_00: This can take a lot of time, up to an hour, two, three, four hours per device.
• 8:43
  SPEAKER_00: And the Celebrite hardware connects to the phone, pulls the data from the device.
• 8:49
  SPEAKER_00: But as you can imagine, this is very complex.
• 8:52
  SPEAKER_00: The phones are locked, they are encrypted, you're getting pictures, you're getting videos, you're getting files, downloads, whatever it may be.
• 9:00
  SPEAKER_00: It's a pile of random data.
• 9:02
  SPEAKER_00: Then you have the second step, which is basically the process and decode.
• 9:07
  SPEAKER_00: Um, can also take up to two hours per device.
• 9:10
  SPEAKER_00: So this Celebrite software decodes all this data and organizes it into neat categories.
• 9:17
  SPEAKER_00: So you have text messages and phone calls and photos and videos, uh, maybe locations.
• 9:22
  SPEAKER_00: It can also recover deleted data, it can create a timeline or relationship maps, it can analyze all these patterns.
• 9:31
  SPEAKER_00: And then the final step is the investigate and present step.
• 9:36
  SPEAKER_00: And it's the final step where customers, frequently investigators, which you talked about, review all this pool data and search for patterns and evidence to build the case.
• 9:47
  SPEAKER_00: So the problem Celebrite actually solves here is let's say if each phone takes around three to four hours to analyze and extract data from, you know, multiply that by 100 devices, and it can take th up to three to four hundred hours.
• 10:03
  SPEAKER_00: That's a a lot of lab work before investigators can even begin to investigate.
• 10:09
  SPEAKER_00: So they have this solution called Guardian, and instead of sending all these hundred phones to the lab, investigators can use Guardian's features at the crime scene to immediately see if a phone is connected to the investigation.
• 10:25
  SPEAKER_00: It's so that's pretty cool.
• 10:28
  SPEAKER_00: It saves a lot of time.
• 10:29
  SPEAKER_00: So uh within minutes, Guardian can view the call logs.
• 10:32
  SPEAKER_00: Has there been any communication with known suspects or geolocation data?
• 10:37
  SPEAKER_00: So was this phone at the crime scene during the relevant time window?
• 10:41
  SPEAKER_00: It's very cool.
• 10:43
  SPEAKER_00: So it solves uh very useful problems for the investigators, and it saves a lot of time.
• 10:51
  SPEAKER_00: And uh, I think those are some of the main problems they solve.
• 10:55
  SPEAKER_00: Anything to add there?
• 10:57
  SPEAKER_01: Yeah, I think not just complexity, also that, but also just the um underinvestment and understaffing and the whole uh industry is a big issue.
• 11:07
  SPEAKER_01: I found I found one interesting story where somebody was committing a crime and the guy was carrying a bag with like I think 20 or 30 mobile phones he just bought very cheaply used, and he just had all of those in a bag to ensure that when he gets caught, that they will have one hell of a difficult time to figure out what he's trying to do because of all that bad and misleading data.
• 11:33
  SPEAKER_01: Wow.
• 11:34
  SPEAKER_01: And yeah, there also is the issue that one interview I saw um I heard on on Spotify, I think, a podcast, was um that in a lot of US um agencies there are like rooms staffed with hundreds and thousands of different phones and hard drives and laptops and whatnot.
• 11:53
  SPEAKER_01: And they have basically like nine months of lead time to get them broken up and extracted.
• 11:59
  SPEAKER_01: So the whole process is still very underinvested, and there's just a very large gap between what they the police forces should do and what they can do right now.
• 12:10
  SPEAKER_01: And Celebrite is one way to improve that.
• 12:14
  SPEAKER_00: So we know what they solve, we know a little bit about what they do.
• 12:18
  SPEAKER_00: So, how does Celebrite actually make money from the solutions they offer?
• 12:23
  SPEAKER_01: Yes, so they basically um charge fees, but it's also related to um the amount of work they're doing.
• 12:31
  SPEAKER_01: So they have broken down roughly what they expect to do per case.
• 12:36
  SPEAKER_01: It was in in 2024 around$225 per case, and they are aiming through cross-selling to get up to 300 euro um dollars per case in 2028.
• 12:50
  SPEAKER_01: So basically a combination of higher usage of their software.
• 12:55
  SPEAKER_01: Basically, for every device they they need to crack, they can get a fee, and also, of course, the other solutions where they uh get usage fees, and yeah, so basically that's how they generate their revenues.
• 13:10
  SPEAKER_00: So we talked about some of the solutions inside jets, guardian, pathfinder.
• 13:16
  SPEAKER_00: They now have the case to closure platform, it's the overarching platform that integrates the three I just mentioned.
• 13:25
  SPEAKER_00: It solves the workflow inefficiencies.
• 13:28
  SPEAKER_00: Where do you think Celebrite can grow its revenue from?
• 13:32
  SPEAKER_00: You know, they sell to these government agencies, these investigators, there's only so many, so it it seems like the only way to grow is to increase prices.
• 13:43
  SPEAKER_00: Or how do you think about um growing revenue for Celebrite?
• 13:48
  SPEAKER_01: I mean, as long as there is a backlog of sometimes months of devices that aren't locked uh unlocked, there is just a lot of backlog to fill.
• 13:58
  SPEAKER_01: And they eventually need to either um submit to having this large safety gap and not being able to do their work, or they are investing into more devices and more um investigators.
• 14:11
  SPEAKER_01: So that's one of the reasons.
• 14:13
  SPEAKER_01: Also, cases are getting more complex, people are using more devices now, also with with all the uh cloud solutions, there's just a lot more complexity within it, and the more complexity, the more uh Satellite can earn from it.
• 14:28
  SPEAKER_01: So those are some combinations.
• 14:30
  SPEAKER_01: You're right that they are almost in all of their um large clients, but for example, in the US, there is still an issue where they aren't in a lot of the big agencies like the FBI and CAA, I think they are not really present that much because there is a legislation um um a certification that they just got uh a while ago.
• 14:54
  SPEAKER_01: And uh with the whole uh Trump terrorists and uh the uh efficiency thing they were doing, a lot of the processes were disrupted because people did not know what kind of budget they actually have, they could not buy it, even though they wanted to.
• 15:09
  SPEAKER_01: So once the budget situation there gets better, that will be a good new funnel as well.
• 15:15
  SPEAKER_00: I don't think people really understand how outdated some of these investigations are.
• 15:22
  SPEAKER_00: Uh, I believe in your report, but also in the in-practice interviews with insiders.
• 15:28
  SPEAKER_00: I was so surprised to read that like 40% of all like data is still being transferred by a USB drive, for example, which is nuts, right?
• 15:42
  SPEAKER_01: Yeah, and that's why they need these solutions, and that's why there is a lot of potential still.
• 15:49
  SPEAKER_01: Because even if there is some department which has a cellbrite already, they can then cross to all the other departments, and yeah, you don't want to hand around USB sticks and then sign a paper confirming that you got the stick, and then you forget it, the trailer's gone, and then there is some uh compliance issues, so yeah, yeah, it's basically not worth it to not upgrade eventually.
• 16:13
  SPEAKER_00: There were employees that that had to travel like 12 hours just to deliver a USB drive to the other side of the country, which is crazy from an efficiency standpoint is is so dumb, right?
• 16:26
  SPEAKER_00: Yes, yeah.
• 16:28
  SPEAKER_00: So about uh 55% of revenue comes from the United States.
• 16:32
  SPEAKER_00: You already mentioned there are in a lot of large investigations um being used in lots of investigations in the US already.
• 16:41
  SPEAKER_00: About a third comes from Europe and the rest from um Asia Pacific.
• 16:45
  SPEAKER_00: Where does future growth come from for Celebrite?
• 16:48
  SPEAKER_00: Is it mostly from the US?
• 16:52
  SPEAKER_00: Is there still enough room to grow inside the US or is it outside?
• 16:56
  SPEAKER_00: What are your thoughts on uh growing?
• 16:58
  SPEAKER_01: I think it's a global issue.
• 17:01
  SPEAKER_01: So I don't really have that much of a case regarding a single single uh region.
• 17:07
  SPEAKER_01: I think that's just a general issue.
• 17:09
  SPEAKER_01: With within the US, there is good potential and outside as well, in my opinion.
• 17:13
  SPEAKER_01: Well, I think that's better.
• 17:14
  SPEAKER_00: I think it's it's good not just to focus on the United States, and I think you know, crime is a global thing.
• 17:21
  SPEAKER_00: It's uh it's it's it's big in the United States, of course, but uh it's it's just as big in Europe and in Asia.
• 17:28
  SPEAKER_00: So uh I think there's still lots of room to grow.
• 17:32
  SPEAKER_00: It would be interesting to talk a bit about the industry and competition.
• 17:36
  SPEAKER_00: To set the scene, maybe tell us a bit about the market, the market size, some of its competitors.
• 17:42
  SPEAKER_00: I'm interested to hear your thoughts there.
• 17:45
  SPEAKER_01: Yeah, so the overall digital forensic market is pretty large, expected to reach around 50 billion by 2024, which represents around a 15% keger from uh around 13 billion in 2025.
• 18:01
  SPEAKER_01: We have to see though that um the largest part of that is hardware products with around 43% according to uh precedent's research.
• 18:12
  SPEAKER_01: Software and services are 30 and 27% each, and Cellbrite is mostly focused on the software and services aspect.
• 18:21
  SPEAKER_01: So the market is pretty huge, but also very fragmented.
• 18:24
  SPEAKER_01: And the real competitors I would say is Magnet Forensic, which is the closest competitor.
• 18:30
  SPEAKER_01: But then there are also some smaller uh competitions like MSAB and OpenText Corporation, and also some larger players like Cisco or IBM, which have some some point solutions which could compete in in some ways, but but really the the big competitor is Magnet, which is basically a duopoly in the core business.
• 18:53
  SPEAKER_00: Yeah, and to add to that, I've growth in the industry is driven by three main trends.
• 18:59
  SPEAKER_00: First, there's a massive increase in digital evidence.
• 19:03
  SPEAKER_00: You already mentioned the backlog.
• 19:06
  SPEAKER_00: Every phone, app, or connected device can now hold valuable data for investigations.
• 19:13
  SPEAKER_00: Second, the encryption battle keeps intensifying as companies like Apple and apps such as Telegram make data much harder to access, pushing Celebrite to keep investing in advanced RD, and it's very it's a very specialized job.
• 19:31
  SPEAKER_00: And third, the backlog is growing fast.
• 19:34
  SPEAKER_00: With limited staff and rising workloads, agencies need AI tools like Pathfinder to handle cases more efficiently.
• 19:42
  SPEAKER_00: And the biggest challenge here is government funding.
• 19:45
  SPEAKER_00: Celebrite depends on these public budgets, but uh I think there's uh a lot of tailwinds for Celebrite in the industry.
• 19:53
  SPEAKER_01: Yeah, so you you mentioned the budget situation.
• 19:56
  SPEAKER_01: Celebrite currently accounts for 0.02% of the budgets for its top 20 US city um public departments.
• 20:05
  SPEAKER_01: So it's a mission critical piece of uh software and and hardware, which accounts for basically nothing of the overall budget.
• 20:15
  SPEAKER_01: So I think um using Celebrite or Magnet is the last um part where they want to slash budget.
• 20:23
  SPEAKER_01: So maybe they are trying to remove a few investigators if they need to crack down on budget, but but even then they have the backlog to to service, so they can't really do that.
• 20:35
  SPEAKER_01: So that's a good point.
• 20:37
  SPEAKER_00: I did I didn't think of it.
• 20:39
  SPEAKER_00: It's it's mission critical, it's probably better to cut out on uh other things.
• 20:45
  SPEAKER_00: Yeah, definitely.
• 20:46
  SPEAKER_01: I mean, there is still, as right now, the situation.
• 20:48
  SPEAKER_01: I think it was called Doge, the uh the efficiency program in the US, where basically, as I said, they did not know how much budget they can allocate, and they basically also just fired a lot of people which made decisions.
• 21:02
  SPEAKER_01: So once the US is not as paralyzed and they can actually make decisions again on a local level, I think that investing back into um these solutions will be the natural choice.
• 21:13
  SPEAKER_00: Yeah.
• 21:15
  SPEAKER_00: So since it's such a difficult company to really grasp, uh it's very secretive, it operates sort of behind the scenes for us.
• 21:26
  SPEAKER_00: Is there a way we can see whether Celebrite is better than let's say Magnet or some of the competitors, or what do you think makes Celebrite better if it is than competitors?
• 21:39
  SPEAKER_01: I think one way to do it is to look at, for example, what I did podcasts um around uh the general industry, around police work, and they basically talk about both companies in a similar way, at least in the core business.
• 21:53
  SPEAKER_01: It's also tough to compare them because there are a lot of different devices, and Celebrite would work better on one device on one.
• 22:01
  SPEAKER_01: Version of the iOS system, and then Magnet will be better for one of the Android systems.
• 22:07
  SPEAKER_01: And what we also need to remember is that generally these criminals don't have the newest iPhone.
• 22:14
  SPEAKER_01: I don't know what what is it, 15 or something?
• 22:17
  SPEAKER_01: I don't know.
• 22:19
  SPEAKER_00: 29, I don't even know.
• 22:20
  SPEAKER_01: Yeah, they they probably won't have the newest one.
• 22:23
  SPEAKER_01: They they might have might have a cheap phone, and uh yeah, so there is a lot of crown to cover, and each of them does some things better than the other, but they are generally accepted as the leaders, and what's also very interesting is that it's basically a dual vendor industry.
• 22:42
  SPEAKER_01: So, what that means is that an agency typically, or at least often, uses both of them because well, they have different devices they need to crack, and some is better than the other for one of them, and also they just want to cross-reference the results sometimes to have like two opinions on the truth.
• 23:04
  SPEAKER_01: So it makes sense to to have both solutions in many cases.
• 23:09
  SPEAKER_00: And that's a great point.
• 23:10
  SPEAKER_00: Very recently, just recently, Celebrite opened it opened its solutions to uh to work with Magnet Forensics and Grayshift uh who are now merged.
• 23:21
  SPEAKER_00: So the uh dual vendor is actually uh a real thing now, and they actually work together now.
• 23:26
  SPEAKER_00: And uh, there was a problem a couple years ago where Celebrite didn't want to uh have this multiple vendor dynamic.
• 23:37
  SPEAKER_00: But just for our listeners, it's you know it's very difficult to really verify what we're saying and finding online and hearing about.
• 23:48
  SPEAKER_00: But from what I found is that A Celebrite currently supports over 31,000 different sorts of devices and systems.
• 23:59
  SPEAKER_00: And for a comparison, Magnet Forensics, which recently merged with Grayshift, is estimated to support about 10,000 to 15,000 devices and apps.
• 24:13
  SPEAKER_00: Well, a smaller competitor, such as MSAB, Microsystemation, supports under 5,000 devices, so you can clearly see that Celebrite has three times as much as uh the second largest competitor.
• 24:29
  SPEAKER_00: And the dual vendor thing, I quite like it.
• 24:32
  SPEAKER_00: I think it um it makes competition less cutthroat, and you see the same thing happening in clouds where you don't want to be dependent on just AWS, so you use Google Cloud and AWS, and it makes you more flexible.
• 24:46
  SPEAKER_00: You can um so yeah, I think it it's a natural and good thing overall.
• 24:51
  SPEAKER_01: Yeah, definitely.
• 24:52
  SPEAKER_00: How about uh the the mode for Celebrite?
• 24:55
  SPEAKER_00: Usually SaaS businesses, especially for government agencies, I think of Palantir, for example, have very high switching costs and barriers to entry.
• 25:05
  SPEAKER_00: So, what sort of uh competitive advantages do you think Celebrite possesses?
• 25:10
  SPEAKER_01: I think Celebrite has one of the best modes I've I've seen yet, because um, yeah, there are definitely very high switching costs, and especially within the dual vendor um setup.
• 25:20
  SPEAKER_01: Um I mean you can switch to Magnet, but you might as well just use both.
• 25:25
  SPEAKER_01: I think Magnet is a little bit more expensive, at least for the core um business they have.
• 25:31
  SPEAKER_01: But well, if you have 0.02% of budget for Celebrite and another 0.03% for Magnet, for example, it's still basically nothing.
• 25:41
  SPEAKER_01: Switching costs for the amount of value they and especially um people hours saved, which they uh save is just so immense that it doesn't really make sense to to quit or to switch.
• 25:55
  SPEAKER_01: And the complexity also is very large in the whole um business, so it's very tough to replicate it.
• 26:02
  SPEAKER_01: And also, if you would want to replicate it, you need all the compliance and you need to convince a lot of established and slow-moving agencies um to switch, which is very hard.
• 26:13
  SPEAKER_01: They are already trying to catch up in efficiency, they don't want to learn another software tool, and you would have to have a competitive um solution.
• 26:23
  SPEAKER_01: And as you said, Cellabrite has around 30,000 um different um devices and apps and whatever they can crack.
• 26:32
  SPEAKER_01: And getting to that point needs a lot of investment and a lot of time, and frankly, just know-how that is not widely available.
• 26:39
  SPEAKER_01: Cellbrite did some acquisitions, some people suspect, just to get the talent, because it's a very niche industry.
• 26:48
  SPEAKER_01: You need experts to to crack these systems.
• 26:50
  SPEAKER_01: Yeah, it's it's it's really hard to get them and to retain them, and if a lot of them are working already for Cellabrite or Magnet, then very tough to on an RD basis get to the same point.
• 27:02
  SPEAKER_01: It's not, for example, comparable to some enterprise software like like a CRM system where you just need to handle data and view it nicely.
• 27:12
  SPEAKER_01: It's it's a lot more complex, in my opinion.
• 27:15
  SPEAKER_00: I think the niche leadership is very it's good that you mentioned that.
• 27:19
  SPEAKER_00: It's one of the things I saw as well.
• 27:20
  SPEAKER_00: You know, it's it's a highly specialized market, it's relatively small, and it doesn't really make sense for competitors to really invest a lot if you can not make a lot of money from it.
• 27:32
  SPEAKER_00: So the barriers to entry are very high, and the rewards are too small to justify the effort.
• 27:39
  SPEAKER_00: And uh you know, you talked about regulation and compliance.
• 27:44
  SPEAKER_00: A lot of investors think that's a bad thing, but it sort of adds a layer of protection for celebrite.
• 27:52
  SPEAKER_00: They they have the know-how, like you mentioned, and the fact that it's so regulated, it's all about ethical policy, it's you it's about human rights, and you need to be trustworthy, and they have that that stamp of trustworthiness, and uh it adds a very high barrier to entry for uh for celebrite, in my opinion.
• 28:17
  SPEAKER_01: Yeah, the ethical part is also very interesting.
• 28:20
  SPEAKER_01: Uh, that was one of the reasons why I initially skipped on the business, because if you go to Wikipedia, for example, there are situations where um corrupt governments or police forces use their software to to crack phones they shouldn't um shouldn't have and to spy on people.
• 28:37
  SPEAKER_01: And it's an immensely powerful solution they have.
• 28:40
  SPEAKER_01: And in the wrong hands, it can do a lot of harm.
• 28:44
  SPEAKER_01: So actually, if and a very interesting dynamic is that part of the churn that a bright has right now is from basically them cancelling their solutions for some governments and agencies that were misusing it.
• 28:57
  SPEAKER_01: And yeah, when they came public, they um enabled an ethicals and ethics um board basically to um to look at these things and increase their their standards in in that way.
• 29:11
  SPEAKER_01: So that is a a critical part for me as well, because I don't want the software that's abused for that kind of stuff.
• 29:18
  SPEAKER_00: I know you as someone who only invests in things that feel good to you ethically and morally.
• 29:25
  SPEAKER_00: For many investors, the fact that Chern is dropping is a bad thing.
• 29:28
  SPEAKER_00: But if you really understand what they're doing, it's very similar to Palantir.
• 29:33
  SPEAKER_00: Palantir wants to make the Western society more powerful.
• 29:38
  SPEAKER_00: Anyone abusing Celebrites or Palantir's software needs to get removed from the software.
• 29:44
  SPEAKER_00: It's a headwind in the short term, they'll lose customers, they'll lose lose revenue.
• 29:50
  SPEAKER_00: But you don't want Russia or Iran using your solutions and hurting your brand, hurting your trustworthiness, and you know, hurting investor trust.
• 30:01
  SPEAKER_00: So I actually don't mind it at all, and I think it's a short-term thing.
• 30:05
  SPEAKER_01: Yes, it improves the the overall quality of the revenue in the long term.
• 30:10
  SPEAKER_00: Yeah, it's all about trust in the long term for Celebrite, and I think it's uh it's a good step.
• 30:16
  SPEAKER_00: Um so while we're up talking on this topic of uh losing customers, let's talk about the risks and opportunities for Celebrite.
• 30:27
  SPEAKER_00: What are some of the main risks for Celebrite to be a bad investment?
• 30:32
  SPEAKER_00: Things they might do wrong.
• 30:34
  SPEAKER_00: Maybe give me some of your uh of the risks you're seeing, and I'll see if I can uh add anywhere.
• 30:39
  SPEAKER_01: Yeah, so the big risk, of course, is if they can't innovate.
• 30:43
  SPEAKER_01: Because technology keeps on improving and changing, especially also with AI, a lot of things will change.
• 30:51
  SPEAKER_01: They need to reinvest and they need to stay on top.
• 30:54
  SPEAKER_01: They need to have a competitive solution.
• 30:56
  SPEAKER_01: And even though there is a lag, in my opinion, between the newest um solutions and what actual criminals are using, you still need to have it ready.
• 31:06
  SPEAKER_01: So, one of the bare cases right now, at least negative arguments, is that the new iOS is very hard to crack and that Celibride has not done it yet, but nobody else has either.
• 31:19
  SPEAKER_01: So if they for a long time can't get there, then that will impair the uh value of their solution.
• 31:27
  SPEAKER_01: But then again, there is no better solution, so it just uh would be a white spot to eventually cover.
• 31:35
  SPEAKER_01: What would be horrific, of course, is if there was a large um data leak, if the securities were breached in a business with that amount of critical data and uh sensible data, that can't happen, and that could maybe even on a nationwide level in the US um lead to customers having to drop it.
• 31:55
  SPEAKER_01: So that would be like the catastrophic bear case, in my opinion.
• 32:00
  SPEAKER_01: Besides that, I think um there is not that much risk of new competition.
• 32:05
  SPEAKER_01: Um, yeah, I I guess if they can't um reach a good profitability, a stable profitability, if they can't convert cash flows or growing fast enough, it could make it a bad investment.
• 32:15
  SPEAKER_01: But fundamentally, I think it's a very solid business.
• 32:18
  SPEAKER_00: Yeah, the only thing I I would add is maybe talent acquisition since it's still a relatively small company, it's it's based in Israel, although listed in the United States.
• 32:30
  SPEAKER_00: There are companies with a lot deeper pockets, so I think stock-based compensation is sort of a must for keep and attract talent.
• 32:41
  SPEAKER_00: You need you need a lot of smart engineers to to you know help with RD and crack these phones.
• 32:49
  SPEAKER_00: And Apple has some of the smartest people together with Microsoft and Google, and they're always working on encryption, and you need people that can beat that encryption.
• 32:59
  SPEAKER_00: So it's a very you know highly specialized, difficult field, and uh not attracting the right talent is always a risk for a company like Celebrite.
• 33:11
  SPEAKER_01: Yeah, so I I guess one reason, but like one bear case also could be if you can't um grow your stock over the long term, uh that people who who get those uh share-based compensations would maybe feel like they should switch to another company, maybe like one of the big ones, like a Google or whatever.
• 33:28
  SPEAKER_01: But yeah, I guess that's also a risk um on the other part of stock-based compensation, if it keeps to stay elevated.
• 33:35
  SPEAKER_01: I mean, the last years were pretty um pretty distorted because of the IPO and warrants and all of the issues with modeling IPO shares.
• 33:47
  SPEAKER_01: But going forward, they expect to dilute around 2% a year.
• 33:52
  SPEAKER_01: But if, for example, it turns out to be like four or five percent, that would of course change the model.
• 33:59
  SPEAKER_00: Yeah, definitely.
• 34:01
  SPEAKER_00: If AI significantly improves cybersecurity, do you think celebrite value increases due to more complexity to decode, or do you think it decreases because there are fewer vulnerabilities to exploit?
• 34:16
  SPEAKER_01: Tough question.
• 34:17
  SPEAKER_01: I think like it could go in in both directions.
• 34:20
  SPEAKER_01: We also have to view the angle that crime will always find a way, and with the tools of AI, they already are finding ways to speed up processes and to automate crime or like attempt attempted crime.
• 34:37
  SPEAKER_01: So I think you could have that direction where there's just a lot more volume, even if it's not online, there there still is like um physical crime which won't go away.
• 34:48
  SPEAKER_01: So it's tough to model, but of course, um improving cybersecurity could be a headwind.
• 34:53
  SPEAKER_00: Or a tailwind, right?
• 34:54
  SPEAKER_00: Yeah, just like Google.
• 34:56
  SPEAKER_00: It could be like a headwind or a tailwind for Google.
• 34:58
  SPEAKER_00: It's still uh up for debate.
• 35:01
  SPEAKER_00: Yeah.
• 35:01
  SPEAKER_01: So that's a question that uh we will see in hindsight.
• 35:05
  SPEAKER_00: Yeah, definitely, yeah.
• 35:07
  SPEAKER_00: So take us through the opportunities.
• 35:09
  SPEAKER_00: What uh what are you seeing?
• 35:12
  SPEAKER_01: Yes, I'm definitely seeing the the tailwinds of at the large public safety gap.
• 35:17
  SPEAKER_01: We have more devices used in crime, we have just more volume in crime, and a lot of departments that are not equipped to to deal with the uh digital component to it.
• 35:28
  SPEAKER_01: And also the backlog, so there's just a lot of volume that needs to be serviced.
• 35:33
  SPEAKER_01: It's also still from what I heard, um, Cellbrite is not that profitable compared to Magnet, which is owned by private equity nowadays.
• 35:42
  SPEAKER_01: And what I heard, they have like 40 or 35-40%-ish EBTA margins, while Cellbrite is around 20%.
• 35:51
  SPEAKER_01: Satellite is currently still in a reinvestment cycle with the whole development of the ecosystem, of Guardian, of Pathfinder.
• 36:01
  SPEAKER_01: And once they don't have to do um all that um development and just improve the product, but not the initial development, and they have the the wider adoption and revenue from that, they should have good um operating leverage.
• 36:18
  SPEAKER_01: So those are some of the opportunities I definitely see.
• 36:21
  SPEAKER_00: And to add to your opportunities, the recent acquisition from Cor-I'm not sure how I pronounce it, but I think it's Corleum.
• 36:30
  SPEAKER_01: Yeah, I think so.
• 36:31
  SPEAKER_00: Yeah, I think it looks very good at first glance, although it's still a bit speculative on uh how the integration will be, and but I think they have the expertise and know how to implement it correctly.
• 36:45
  SPEAKER_00: So imagine you have an iPhone or an Android phone, but instead of holding the phone in your hand, you have like a perfect fake version of it running on your computer.
• 36:55
  SPEAKER_00: So you can open apps, press buttons, change settings, everything, but nothing can break.
• 37:00
  SPEAKER_00: There's no real data at risk.
• 37:02
  SPEAKER_00: So that is basically what Coralion does.
• 37:05
  SPEAKER_00: It creates like this virtual phone or device on a computer so experts can test how the phone works and what happens when new security features are added and look for bugs and weaknesses.
• 37:16
  SPEAKER_00: And that seems like a real good add-on.
• 37:19
  SPEAKER_00: And the other one is the uh the federal, the US federal market that is such a big opportunity for the uh FedRamp authorization, and that just opened so many more doors in the United States.
• 37:33
  SPEAKER_01: Yeah.
• 37:33
  SPEAKER_01: Um the acquisition actually, I had a pretty hard time grasping it at first because it's it's a very complex topic, and just reading the description they first gave was pretty tough.
• 37:46
  SPEAKER_01: But then I dug deeper and also came to the same uh conclusion you did that it's basically mirroring uh the device without breaking it, basically making a digital digital clone, digital twin, whatever you want to call it.
• 38:00
  SPEAKER_01: And what also makes me reassured that they will nail the uh integration is that they have been working together with them for years, and now they're just increasing the level of collaboration, obviously, as a combined company.
• 38:15
  SPEAKER_00: Yeah.
• 38:17
  SPEAKER_00: So we haven't really talked and touched on the financials, which is very difficult to grasp in audio form, but maybe, you know, this sounds like a company.
• 38:26
  SPEAKER_00: Is it making a million in revenue, hundreds of millions, billions?
• 38:30
  SPEAKER_00: Can you just give us a snapshot, a quick overview of Celebrite's financials?
• 38:36
  SPEAKER_00: Are they profitable?
• 38:37
  SPEAKER_00: What are some of the margins?
• 38:40
  SPEAKER_01: Yes, so Celebrite right now is around a$500 million company and is aspiring to get around uh$1 billion by 2028, I think it was, in uh annual recurring revenue ARR.
• 38:56
  SPEAKER_01: So the company is still not that big, but in context of its industry, it has a pretty good size.
• 39:05
  SPEAKER_01: As I said, it's uh still very much in reinvestment mode, and um, I think you also need to um account for a lot of RD spending in the future.
• 39:23
  SPEAKER_01: So there is a lot of maintenance, I would say, um RD as well, not just growth.
• 39:29
  SPEAKER_01: But at current level of around 20% EBTA margins is uh I think understated, they should get higher.
• 39:37
  SPEAKER_01: Uh I have not been that aggressive in my assumptions, in my model.
• 39:42
  SPEAKER_01: Um I went for around uh 5% improvement in EBTA in the bull case.
• 39:48
  SPEAKER_01: I could say it being uh a lot better too, in uh more time.
• 39:52
  SPEAKER_01: What's also very interesting is that it's a very capital-light business.
• 39:57
  SPEAKER_01: They have very favorable working capital dynamics, and recash flow is around the same level as EBDA or even higher.
• 40:05
  SPEAKER_01: So it's it's very cash generative and as a very clean balance sheet with a lot of net cash.
• 40:10
  SPEAKER_01: If the acquisition closes, I think I actually closed already, I'm not sure there.
• 40:15
  SPEAKER_01: Um the balance sheets will get sheet will get weaker, but they still have a net cash position.
• 40:22
  SPEAKER_01: So overall, a um pretty well-led company, also from a financial perspective.
• 40:28
  SPEAKER_00: Yeah, it's it's very capital-light, profitable.
• 40:31
  SPEAKER_00: Uh it's a real software business.
• 40:35
  SPEAKER_00: Hey, in your uh deep dive on uh heavy mode investments, you talked about the potential buyout.
• 40:42
  SPEAKER_00: Can you tell us a bit about why you think that might be uh might be happening?
• 40:48
  SPEAKER_00: Are there certain signs or hints that point to this?
• 40:51
  SPEAKER_00: I I am interested.
• 40:54
  SPEAKER_01: Yes, there are actually a lot of people, at least in the Celebrite bubble I looked at, who talk about the financial acquisition.
• 41:02
  SPEAKER_01: There are also many signs I would say.
• 41:04
  SPEAKER_01: We already said that Magnet was acquired by private equity.
• 41:08
  SPEAKER_01: They got bought out by Thomas Bravo in 2022, I think it was, at a multiple significantly higher than Celebrite is trading at right now.
• 41:19
  SPEAKER_01: And at the time it they were trading, they were generating 90 million in ARR.
• 41:24
  SPEAKER_01: So Celebrite also is a lot bigger now.
• 41:27
  SPEAKER_01: Yeah, so they had an issue actually the last year or so when the founder stepped down and they did not have a suitable replacement as CEO.
• 41:39
  SPEAKER_01: So for around a year, they just had an interim CEO, which of course is not a good look, and also a little bit questionable with a company that needs a good leadership and direction with all the product development.
• 41:52
  SPEAKER_01: So, what what turned out is that the interim CEO was always planned as a CO, or like relatively quickly after being appointed, they also planned on getting him as the full CEO role.
• 42:05
  SPEAKER_01: But then he got cancer and had to go through that, so that delayed all of it.
• 42:10
  SPEAKER_01: But now he is the CEO and they also have a new CFO.
• 42:14
  SPEAKER_01: And while, of course, a new management team is a significant risk, a lot of it points towards an eventual buyout and probably a sale to private equity.
• 42:25
  SPEAKER_01: Because both of the CEO and CFO have um experience selling their previous business to private equity.
• 42:34
  SPEAKER_01: Then you also have the shareholder structure with Suncorp, which initially acquired the business um a decade ago, and then also brought it public via spec.
• 42:46
  SPEAKER_01: They still hold 44%.
• 42:49
  SPEAKER_01: It's a Japanese company which currently trades um on a big discount to their stake in Celebrite.
• 42:56
  SPEAKER_01: So there are several activist investors who are getting them to uh to use the discount and sell off their uh Celebrite shares to do something with them.
• 43:07
  SPEAKER_01: So uh then you also have some other um funds and activists who hold um around 5% of the shares, and then you also have still one last remaining tranche of um warrants from um the IPO from the um the spec, which states that uh if the share price goes to 30 by August 2026, they will get 1.5 million shares vested.
• 43:36
  SPEAKER_01: So that also could push people to try to get the company sold at uh 30 million, uh$30 per share by that time.
• 43:46
  SPEAKER_01: So there are just a lot of different factors who point towards maybe trying to get the company ready for a sale and then uh get a buyout.
• 43:55
  SPEAKER_01: And you also have some potential acquirers.
• 43:57
  SPEAKER_01: Exxon, for example, already has a 4% stake.
• 44:00
  SPEAKER_01: Can celebrate from the IPO where they already were invested and trades or operates in a similar industry, so it would be a nice adjacent purchase.
• 44:10
  SPEAKER_01: Then you also have Motorola, which competes with Exxon and the body cam segment and is aiming to drive higher top line growth.
• 44:19
  SPEAKER_01: So an acquisition could make sense too.
• 44:21
  SPEAKER_01: Thomas Bravo probably is interested after they already bought Magnet, but regulators probably would shut that down.
• 44:28
  SPEAKER_01: But I could see a world where different private equity firm also sees the success they are having with Magnet and wants to replicate it with an acquisition of Celebrite.
• 44:38
  SPEAKER_01: So I think it is a perfect setup for an exit eventually.
• 44:47
  SPEAKER_00: Oh, you see what I did there?
• 44:48
  SPEAKER_01: Yeah, very good.
• 44:52
  SPEAKER_00: I know it's so bad.
• 44:54
  SPEAKER_00: As long as it's not a daylight robbery with a low share price.
• 44:57
  SPEAKER_00: Yeah, that makes sense.
• 44:58
  SPEAKER_00: But you know, for a company like Celebrite, you know, I I I got in uh I got it as a library card position.
• 45:06
  SPEAKER_00: It feels like a company I wouldn't mind owning for many, many years.
• 45:12
  SPEAKER_00: In a sense, I would mind like a buyout because it can be like a 30, 40, 50% premium, maybe.
• 45:22
  SPEAKER_00: But uh yeah, I don't know.
• 45:24
  SPEAKER_00: As a long-term investor, sometimes getting acquired is not what you want, right?
• 45:29
  SPEAKER_01: Yeah, it's tough.
• 45:30
  SPEAKER_01: So far, I had only one case where one of my companies got acquired.
• 45:34
  SPEAKER_01: In that case, I was at first not so happy, but afterwards I was happy that I got out and had capital to focus on other things.
• 45:41
  SPEAKER_01: And with Celebrite, I think it's it's a fantastic business, but in general, um like I wouldn't mind if sofer is good.
• 45:50
  SPEAKER_01: It's it I also see it's sort of of a downside protection because if there is uh a good probability of them getting acquired and the share price would continue to uh to perform badly, yeah, then they probably would get a buyout with a good premium.
• 46:06
  SPEAKER_00: Yeah, the likelihood increases.
• 46:08
  SPEAKER_01: Yeah.
• 46:09
  SPEAKER_01: In the bolt case, of course, they continue to grow and potentially even get acquired at a higher multiple down the road, but but yeah.
• 46:18
  SPEAKER_01: I ideally it continues to have good organic growth and uh generate returns that way.
• 46:25
  SPEAKER_01: But yeah, it's it's a it's an option.
• 46:27
  SPEAKER_00: That's a good point.
• 46:28
  SPEAKER_00: I didn't think about that one, but uh it sort of protects your downside because if it becomes cheap enough, the buyout only, the likelihood only increases.
• 46:36
  SPEAKER_00: The thing I struggled with most with the deep dive, besides really understanding the company itself, was management.
• 46:43
  SPEAKER_00: Uh, you already talked about management, uh, some of you know their the previous experience selling to uh private equity.
• 46:52
  SPEAKER_00: What is your opinion on management?
• 46:53
  SPEAKER_00: Are they you know they're pretty new?
• 46:56
  SPEAKER_00: How should we as investors think about the current management team?
• 47:00
  SPEAKER_00: Is it are they capable enough?
• 47:02
  SPEAKER_00: Maybe you can give us your thoughts on uh management quality.
• 47:07
  SPEAKER_01: Um, yeah, on management, I have not um found the same conviction in them compared to other companies.
• 47:14
  SPEAKER_01: So I think the business is strong enough as it is that uh management can't um do too much wrong.
• 47:21
  SPEAKER_01: And they seem to have a good reputation uh in the past, they seem to be not some some randoms, um, but obviously it would have been preferable to have the prior CEO continue to stay.
• 47:33
  SPEAKER_01: But from what I heard in one of the interviews was that he had a great time scaling it from nothing to 500 million, but that he did not see himself as the right person to scale it further.
• 47:45
  SPEAKER_01: Because obviously, as you scale a company, it becomes different once you reach a certain level of size.
• 47:52
  SPEAKER_01: So I can see the point of uh switching it up and um getting an operator that can do it better.
• 47:59
  SPEAKER_01: And the new CEO has um experience of operating large companies.
• 48:05
  SPEAKER_01: I say that's a good fit, probably.
• 48:09
  SPEAKER_01: But um, yeah.
• 48:11
  SPEAKER_01: I did not see major red flags or something like that, but it's also like not one of those um situations where management is the key reason why I bought a company.
• 48:22
  SPEAKER_00: I think we're pretty uh similar here.
• 48:24
  SPEAKER_00: I don't really have much to share on management, even in my deep dive.
• 48:28
  SPEAKER_00: There's not much to say, there's not much known about them.
• 48:31
  SPEAKER_00: They have experience with a couple other technology and AI companies.
• 48:34
  SPEAKER_00: Some have been in the business for over 40 years in uh in technology, so I mean they probably know a lot more about technology than I do.
• 48:43
  SPEAKER_00: So uh what the hell do I know?
• 48:44
  SPEAKER_00: All right, there's no real red flags currently, so that's a good thing.
• 48:50
  SPEAKER_00: And I think we should mostly focus on the quality of the company, and it needs to be run by someone that is trustworthy, and I think that is the case.
• 48:58
  SPEAKER_00: Before we we we end this this deep dive into Celebrite, would you like to share some of your thoughts on the current valuation?
• 49:06
  SPEAKER_00: Maybe it seems pretty expensive if you just look at it from like an overview.
• 49:11
  SPEAKER_00: If you look at some of the PE and the price-to-free cash flow ratios, or how do you value a company like Celebrite?
• 49:18
  SPEAKER_01: Yeah, so it definitely is not of one of my highest IRR opportunities in my portfolio.
• 49:24
  SPEAKER_01: I have it at around a um actually let me check the numbers real quick.
• 49:30
  SPEAKER_01: I have it at around a 17% IRR, which does not include the potential buyout, so that would be a potential better case if it is a buyout relatively soon.
• 49:42
  SPEAKER_01: But overall, I see a very strong revenue growth trajectory and um improving margins.
• 49:48
  SPEAKER_01: So the company should be like in a base case growing at high teens, and if the Fed ramp opportunity, for example, goes well, they they should be able to grow in the 20s and high 20s, maybe even.
• 50:02
  SPEAKER_01: Cause the backlog and the tailwinds are um supporting that, in my opinion.
• 50:06
  SPEAKER_01: Organic growth is strong and cross-selling uh is a huge opportunity.
• 50:11
  SPEAKER_01: Um, I think Pathfinder and uh Guardian are growing at 60 and over 100% each.
• 50:17
  SPEAKER_01: So there is a lot of runway there to cross-sell.
• 50:20
  SPEAKER_01: I mean it's just around 10% of revenue right now.
• 50:23
  SPEAKER_01: The big question, of course, dilution, will they actually stick to what they um try to do and um dilute at around 2% a year, which is manageable.
• 50:36
  SPEAKER_01: If it gets to around 4, 5, 6% a year, that would be pretty bad in my opinion.
• 50:42
  SPEAKER_01: Uh will they try to offset it with buybacks?
• 50:46
  SPEAKER_01: So far they haven't.
• 50:48
  SPEAKER_01: And they're just building cash, um, which they for example used in the latest acquisition.
• 50:53
  SPEAKER_01: And then of course the exit multiple, I try to look at EV EBTA for that because it's pretty close to free cash flow in their case.
• 51:03
  SPEAKER_01: Around uh, I think it's around like 26 times or so, yeah, 25 times-ish forward EBTA.
• 51:09
  SPEAKER_01: So I think that's not too bad.
• 51:11
  SPEAKER_01: Should be around a 4%-ish free cash flow yield.
• 51:15
  SPEAKER_01: And if you combine that with high teens or higher growth on a revenue basis and higher on a profitability, then I think that's a a pretty good case for the kind of quality that Celebrite has.
• 51:28
  SPEAKER_00: So before we uh we leave, what would make you change your mind and sell Celebrite altogether?
• 51:35
  SPEAKER_01: Yeah, so outside of just better opportunities or valuation running way too high, because I mean, even the best business uh is not worth owning if the math doesn't work.
• 51:46
  SPEAKER_01: One part obviously would come from large breaches of safety, if they have a large data breach or something like that, um, which which would um impair their uh credibility.
• 52:00
  SPEAKER_01: Then some acquisitions which are questionable, if they would go into unrelated businesses just to diversify, basically if there are signs of clear mismanagement and bad capital allocation.
• 52:12
  SPEAKER_01: But um, besides that, um I think there is not much risk of new competitors, so most of the issues would be basically them uh inflicting inflicting the wounds on themselves, in my opinion.
• 52:25
  SPEAKER_00: Yeah, yeah, and my final thoughts on the capital allocation.
• 52:29
  SPEAKER_00: I mean, I I don't mind them building a little bit of a war chest.
• 52:32
  SPEAKER_00: The current valuation is pretty expensive, so I wouldn't want them buying back stock right now.
• 52:36
  SPEAKER_00: I think that would be value destroying.
• 52:39
  SPEAKER_00: I don't want dividends for this company.
• 52:41
  SPEAKER_00: And the fact that they're buying some, you know, the the fact that they're stacking cash gives them optionality, it makes them more, you know, open to opportunities.
• 52:50
  SPEAKER_00: For example, the current acquisition they just did, and uh yeah, I don't mind it currently.
• 52:55
  SPEAKER_00: It's a lovely company, and uh I would love to to know more about it and I'm going to in the in the coming months, and who knows?
• 53:02
  SPEAKER_00: Well, there you go.
• 53:04
  SPEAKER_00: Thank you so much, Nicholas, for coming on the show again, sharing your thoughts and insights on this unique SaaS company.
• 53:12
  SPEAKER_00: I highly recommend you all to check out Nicholas Substack.
• 53:16
  SPEAKER_00: It's uh one of our most appreciated writers.
• 53:20
  SPEAKER_00: We look uh we read whole his articles, they're always very, very good, very in-depth for uh those that like that sort of deep dives.
• 53:29
  SPEAKER_00: So uh thank you so much, Nicholas, and uh I'm excited to do this again on a new company sometime.
• 53:34
  SPEAKER_01: Yeah, sure.
• 53:35
  SPEAKER_01: Looking forward to it as well.
• 53:37
  SPEAKER_00: Have a good one.