SNCPF - Greenhaven Road Capital - Cellebrite DI: Enjoys Forced Buyers Severely Compressed Multiple

Summary

• Newer holding Cellebrite DI, which is now in our Top 5, enjoys forced buyers and also has a severely compressed multiple.
• 90% of CLBT's revenues come from government sources.
• Cellebrite has 7,000 customers and very low churn.
• It is highly unlikely that Cellebrite’s revenue will fall off a cliff even if inflation continues at 9%.
• Given the embedded growth rates and high net revenue retention, if the multiple just stops contracting, we would expect to see returns in line with recurring revenue growth in excess of 30% per year.

The following segment was excerpted from this fund letter .

Cellebrite DI ( CLBT )

Newer holding Cellebrite DI, which is now in our Top 5, enjoys forced buyers and also has a severely compressed multiple. The company is based in Israel and was owned by Japanese company Sun Corporation ( OTCPK:SNCPF ) until, in an effort to highlight Cellebrite’s value, Sun helped take the company public by merging it with a SPAC. (Notably, the SPAC was backed by Adam Clammer, who worked at [[KKR]] for more than a decade, founding and leading the Global Technology Group.)

Sun did not sell any shares in the process, rolling over all of their equity, a sign of their confidence in the business. The logic for going the SPAC route was to get a U.S. listing and try to get a U.S. multiple for their tech business. The strategy has not worked to date as investor skepticism of Israeli companies and cash-guzzling SPACs is quite healthy. However, in its 20+ years of existence, Cellebrite has never raised capital for growth – it has always been able to self-fund – so this is not a profitless tech company that will be burning cash for the foreseeable future.

Cellebrite’s primary products enable law enforcement to extract and analyze data from cell phones and other electronic devices. As our digital lives and our actual lives converge, accessing digital information becomes critical when solving crimes and building criminal cases. A cell phone holds a range of information, often including data trails for where a person has been (pings to cell towers, geolocation tags on photos, etc.) as well as texts, emails, photos, contacts, social media accounts, search histories, etc. that can help build a very robust profile.

Accessing this information can be challenging (rightly so) given the security that is on phones. Cellebrite’s access solutions naturally vary by model and operating system version, and at this point the company is equipped to extract data from more than 30,000 variations of phones.

Once a phone is “cracked,” the terms of a search warrant typically restrict what data can be accessed legally, and an audit trail must be maintained to show what information has been accessed, by whom, and if and how it has been shared. Then there is the challenge of making sense of the accessed data, making connections between people, and building a timeline of events. All of this has to be digital, and Cellebrite is the leader in selling these tools.

Individual agencies are not equipped to build these tools in-house. According to the company, 90% of revenues come from government sources – Cellebrite sells to all of the large U.S. federal agencies as well as to a range of law enforcement agencies, including all 20 of the largest U.S. cities and all 27 of 27 EU national police departments. The remaining 10% of revenue comes from large corporations, so Cellebrite has effectively zero exposure to small businesses or direct consumers.

In aggregate, Cellebrite has 7,000 customers and very low churn because not accessing the data is not an option. Unless there ceases to be law enforcement, digital devices, and a legal system that demands controls over data access and transparency into the evidence chain, solutions like Cellebrite will continue to be purchased in this modern age. Agencies are forced buyers; they cannot develop the expertise themselves.

Given the diversity of the customer base and the fact that they are primarily government funded, I believe it is highly unlikely that Cellebrite’s revenue will fall off a cliff even if inflation continues at 9%. In fact, existing customers have a history of buying more products and upgrades each year as measured by the Net Revenue Retention, which has been running above 125% for the last 3 years. Given the company’s market penetration so far, this is a case of selling more into the existing customer base, not spending heavily to acquire new customers with an unknown lifetime value.

Cellebrite has been transitioning customers from licenses to SAAS, which has the effect of lowering the overall growth rate but should result in higher lifetime values and higher valuation over time. This year, company guidance is for overall revenue to grow between 16-20% while the recurring SAAS revenue is projected to grow in excess of 30%.

The company has a strong balance sheet with over $170M in cash, ending the ended the quarter with a ~$920M market cap and ~$745M enterprise value. They are slated to generate approximately $250M in recurring revenue (sub-3X EV/Recurring Revenue) this year with gross margins of 80%+ and continue generating cash while investing heavily in the business to drive future growth.

Despite a share price down almost 40% as of the end of the quarter, this is a very healthy, market-leading company with mission critical products, trading at a very compressed multiple. Given the embedded growth rates and high net revenue retention, if the multiple just stops contracting, we would expect to see returns in line with recurring revenue growth in excess of 30% per year.

As in the other cases mentioned above, returns can be far higher should relatively modest multiple expansion resume. There was a time not so long ago when investors were paying >10X recurring revenue for growth rates of 35%. We don’t need to approach those multiples to make multiples on our investment.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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