OVERVIEW

TWC Tech Holdings II, a SPAC formed by True Wind Capital (PE firm established by founding partners of KKR’s technology group), is acquiring a very high-quality company called Cellebrite (the “Company”). Cellebrite has established what I consider to be an unassailable market position, with a very hard to penetrate customer base. It is the dominant provider of Digital Intelligence (“DI”) with a win rate of 99% and an extensive customer base of 6,700 public agencies and corporations, and includes almost every US cabinet executive department, European Union member state national police, US state or large city alongside top-tier enterprises.  The Company’s solutions are used in cases of child exploitation, anti-terror, border control, rape, human trafficking and others, and have helped millions of investigations around the globe. Company’s solutions are so well entrenched within its customer base, that they are the industry standard and used as a verb – “to Cellebrite a device”. There is no other company that provides an end-to-end solution in this domain. The Company already sells to 90% of the relevant agencies, but is only 20% penetrated within this customer base. Its over 140% ARR net retention rate speaks to its ability to upsell within its customer base and its gross retention rate of 98% evidences the loyalty and stickiness of its customers. The valuation at 6.4X 2022 revenues is a 40% plus discount to the median of the comps set and I believe the competitive position and visibility into the growth trajectory of the business is higher than most of the comps. I expect this investment to be a long-term compounder.

Cellebrite is not a start-up. Its CEO has been with the Company for 17 years. The Company is profitable, generating $195MM of revenues in 2020, gross margins of 80% and EBITDA of $35MM.  The Company has no debt and expects to have $580MM of cash on the balance sheet post-closing. The Company has a sales platform in 140 countries and offices in 14 countries.

MARKET NEED

Investigations today are slow, manual and backlogged. The evidence collection process is manual and error prone. Analysis of evidence relies on a few people who are usually overwhelmed resulting in 100’s of cases of backlog and months to get results. Management of this data is siloed in various task forces, making coordination, sharing of insights and chain of custody slow, manual and inefficient.  These deficiencies directly affect the ability to solve criminal cases leading to many unsolved cases. Plus, the explosion of digital data is changing the world of investigations. Not only is the number of devices and applications growing, but also the data on each device, resulting in more exhibits per case. Almost 60% of cases contain some sort of Digital Evidence.

SOLUTION

The Company’s DI platform makes the investigative process smarter, faster and more productive. There are 3 main components of the platform. The first part is “Collection & Review”. It includes software licenses for the collection and review of data from a variety of digital sources, including the mobile phone computer, cloud data and call data allowing access to social media, emails, texts, health and location, etc. The data collection is a one-time action, performed on specific device/s as part of a specific investigation and pursuant to a warrant issued by a judge. It does not intercept data or perform any type of ongoing monitoring or surveillance. This collected data is then decoded and made readable for investigators in the lab or in the field. The Company estimates, based on customer feedback, that operational efficiency is improved by 40% utilizing its solutions. The second part of the platform is Investigative Analytics, which are AI-based solutions that help investigative teams fuse and enrich data, and automate the analysis process. The Company’s proprietary systems allow large amounts of data to be digested and correlated, and deliver faster insights. This solution accelerates the time to evidence by 30X and automatically provides leads and insights. The third part is the management solutions that facilitate the deployment and utilization of the solutions, define and enforce permissions and access, and allow for the sharing of investigative data in a secure manner.

GROWTH DRIVERS

The Company estimates a total addressable market of over $12 billion by 2023, of which the current actual market size represents only a fraction. It’s the only company that offers solutions to each and every segment that make up this TAM, creating a blue-sky growth runway. The customer base is going through a strategic process of digital transformation that is gradually expanding across large agencies to additional functional areas or departments, as well as filtering down from larger to mid-sized agencies. This digital transformation is driven by immense growth in the number of digital data sources, the increasing complexity across the investigative lifecycle, and the need for higher efficiency in every step of investigations.

Organic Growth

The Company has guided to 20% organic revenue growth. There are two primary organic growth drivers. First upsell and cross-sell of additional modules in Collection & Review to more buying centers within existing customers, and accelerated Investigative Analytics adoption. The Company believes there is significant headroom to sell more into these customers as the lines of communication are already open and operating. The Investigative Analytics opportunity is in its early stages. The Company estimates that for every $1 spent in its collection and review solutions, there is a $4 opportunity to sell holistic DI solutions to more departments and more users, across a wider solution portfolio, addressing larger budgets.

Second growth driver is expanding the customer base in the private sector. The Company entered the private sector, primarily through its acquisition of BlackBag Technologies in early 2020, an industry leader in Computer Forensic acquisition and analysis solutions and established a business unit dedicated to capturing growth opportunities in the private sector. 67 of the Fortune 100 are already Cellebrite’s customers.  The Company expects this segment to grow from 10% of revenues to 20% of revenues from 2020 to 2023.

Acquisitions

The Company has raised the funds mainly for acquisitions, as its cash flow fully finances its organic growth initiatives. M&A will be focused on expanding the TAM, enhancing solution set and/or augmenting the customer base. The Company sees a broad set of opportunities in targets that provide point solutions on one hand, and broad but generic solutions that are not tailored to the investigations' world on the other. I believe the Company’s most valuable asset is the relationships and penetration it has achieved into a customer base that is very hard to access. These acquisitions will allow it to leverage these relationships to access larger budgets.

FINANCIAL PROJECTIONS

For 2021 and 2022 projections, most of the logos required to hit projections are already customers and no acquisitions are incorporated in the forecast. The Company expects EBITDA margins can expand from 19% in 2021 to 35% long term due to the operating leverage in the business. The Company expects to exceed the “Rule of 40” financial metrics in the coming years.

VALUATION

The deal values the Company at $1.8 billion enterprise value, representing 6.4X 2022 revenue or 30X 2022 EBITDA, which is a 40% discount to Cellebrite’s peer set. The stock price can almost double to trade in line with the comps and compound from there. Management will be rolling more than 85% of their existing stakes into the transaction and existing shareholders will retain 65% ownership in the company. The comp set and how Cellebrite stacks up on various metrics is on slides 39-42 of the management presentation.

https://cf-media.cellebrite.com/wp-content/uploads/2021/04/Cellebrite_Investor-Presentation_Apr-2021_Final.pdf

RISKS

- SPACageddon – broad scale redemptions of SPAC’s similar to 2008. I’m playing it through the stock instead of warrants to limit downside

-   Execution

-  Most of the workforce is from Israeli intelligence services, potential for a backlash to only use national resources for law enforcement