Exclusive Networks SA (EXN) Earnings Call Transcript & Summary

Hello, and welcome to the Exclusive Networks Third Quarter 2021 Update. My name is Courtney, and I'll be your coordinator for today's event. Please note that this call is being recorded. [Operator Instructions] And I will now hand you over to your host, Hacène Boumendjel, Head of Investor Relations, to begin today's conference. Thank you.

Good morning, everyone, and welcome to Exclusive Networks third quarter 2021 publication, which is broadcasted live and will be available on demand on our website. The presentation slides and press release for this call are also available on our website in the Investor Relations section. Can you go on Slide 2, please? First, I would like to draw your attention to the disclaimer on Slide 2 of this deck regarding the information contained within this document and in particular, the forward-looking statements. I invite all participants to read this. Today's call is scheduled to last about 60 minutes, and I'd like to introduce our key speakers this morning: Exclusive Networks CEO, Jesper Trolle; and Pierre Boccon-Liaudet, our CFO. The presentation will last about 30 minutes and will be followed by the Q&A session. If we don't have the time to take anyone's question in this session, I am available and happy to take any of your questions following up the call. I'll now pass it over to Jesper for a few opening remarks and his overview of the Q3 performance. Jesper, the floor is yours.

Thank you, Hacène, and good morning, everyone, and thank you for attending this session, which marks our first earnings call following our successful IPO back in September. Before I comment on our strong performance in Q3 2021, I would like to spend a brief moment on the Exclusive story and put the role that we play as a specialist in this growing cybersecurity ecosystem into context for all of you. Our vision is that of a totally trusted digital world for all people and organizations. Our mission is to become the leading category specialist for cybersecurity services and solutions, facilitating that journey towards a totally trusted digital world. As a company, we believe in the power of ecosystems and have built strong enduring partnerships over the past 17 years with some of the world's most notable cybersecurity innovators and developers whom we represent today in a growing number of geographies across the world. We are a global specialist in this space. We have dedicated expertise, skills and services within cybersecurity and adjacent segments like cloud, networking, SaaS and DevOps. We have solutions today for every cyber threat as evidenced by our comprehensive range of services and broad solutions portfolio. We have a strong and a growing partner ecosystem of more than 18,000 partners who are spending more with us as we help them defend. There are over 120,000 end customers against the elevated threat landscape that we are currently witnessing in the market to date. To put it simply, for those who are less familiar with the pivotal role we play within the cyber ecosystem, we are the connecting link between these technology developers and their end customers, help bridging the gap through our partner community by providing enabling and ultimately accelerating their routes to market. Finally, before I move on to the real purpose of today, let me just recap the 5 pillars of our growth strategy because I believe it would help you to put our announced results into perspective. First off, we continue to leverage the underlying growth of existing vendors in current geographies, vendors who, in many cases, are category leaders themselves. As a second growth pillar, we are focused on expanding geographically with our current vendors into new territories as we see mutual opportunities arise. Additionally and as a key part of Exclusive Networks history and DNA, we continue to attract new cybersecurity innovators to our growth platform, giving these often early-stage vendors access to our vast array of services and solutions through which we help them accelerate their growth. As our fourth pillar of our strategy, we remain laser-focused on increasing our range of services and offerings, helping to serve the current and evolving future needs of our ecosystem of vendors and partners. This part is particularly important within today's market that are characterized by significant skills shortages. And finally, we continue to accelerate the implementation of our strategy by pursuing value-accretive M&A with a focus on both geographic expansion and expansion of our offerings and services. But most importantly, we continue investing in our own talented and dedicated cyber teams who are our key differentiator and critical to our success in the marketplace. And at this point, I'd like to personally thank our remarkable teams across the world for their commitment and relentless dedication to our business. It is then who made this achievement today possible. And for that, I applaud them all. With that, let's move on to the real purpose of today and take a look at the highlights of our Q3 financials. Next slide, please. First of all, I'm very satisfied with our strong growth in Q3 2021. This growth is a testament to the execution of our teams and the value we are creating within the ecosystem. Gross sales have reached EUR 2.3 billion year-to-date with a record growth of 21.9% for the third quarter when comparing to Q3 of 2020. This is a clear outperformance of the strong cybersecurity market, and it is a result of our strategy of having the best cybersecurity portfolio backing the most innovative cybersecurity vendors, coupled with a strong network of cybersecurity partners across the world. Demand remained consistent across all theaters, and we saw particularly strong contribution from the enterprise segment with an increase in large strategic projects. Our performance was mainly attributable to our ability of driving expansion from a very solid and returning base of vendors and customers. Our gross sales visibility improved throughout the quarter, and our vendor and customer renewal rates reached pre-pandemic levels at 119% and 115%, respectively. Given this context, I'm happy to confirm our full year guidance. Next slide, please. This quarter also saw us continuing to invest in the business while delivering on our growth strategy. We drove significant growth with our existing vendors we sold more to our existing partner ecosystem, while at the same time also attracting new partners to our growing customer base that currently stands at circa 17,000 partners year-to-date. We further capitalized on our strong position with our existing vendors by adding 20 new geographies to our existing vendor agreements in Q3. We onboarded 4 new vendors to our growth acceleration platform and are in the process of evaluating several potential emerging vendors for the future. In other areas of our strategy, we have made progress with our on-demand consumption platform, X-OD or Exclusive On Demand, which now has 128 partners trading on the platform as of end of September of 2021. In addition, we also extended X-OD into North America and have now added 6 of our key vendors to the platform. This is in line with our road map to make X-OD the consumption model of choice for the emerging subscription economy. In short, the partner base is expanding and sales are progressing. On the M&A front, we acquired ignition in early July, which has now fully contributed to the third quarter performance. And with that, let me now hand it over to Pierre, who will comment on the gross sales and revenue performance as realized within the quarter. Pierre?

Thank you, Jesper, and let's go to Slide 5, please. Good morning, everyone. I will now detail you the strong sales performance we achieved in the quarter. But before we start, let me remind you that on a reported basis, we have our numbers on a reported basis, which means as published in our financial statements without reclassification for M&A activities. And we also report our numbers on a pro forma basis, which means integrating large acquisition impacts more than 5% of our total revenue. The acquisition of Veracomp back in December 2020 is part of that category. That's why we present growth as if Veracomp has been acquired in January 2020 for better comparison purposes. And we also comment on our sales numbers as revenue and gross sales. Gross sales represent revenue recognized by the group on a gross basis before IFRS 15 adjustment. It represents our overall volume of activity. This is the value of transaction net of discounts generated by our local teams. And revenue is a similar metric to gross sales, but it includes the invital of IFRS 15 adjustment. IFRS 15 considers we are a principal for the sales of software and adjacent products but agent for the sales of support and maintenance, which represents around 30% of the activity. So for support and maintenance, the net margin alone is considered as a revenue. For further details, you'll find a slide in the appendices. So let's first review the peak trends of the third quarter and start with gross sales. We generated solid gross sales growth in Q3, reaching EUR 105 million, up 21.9% year-on-year pro forma to our Veracomp acquisition, thanks to the strong contribution of all our 3 theaters. This was the consequence of a healthy momentum in the enterprise segment and the signature of more large deals. On a reported basis, gross sales grew by 37.7% with only minor variation at constant currency. This growth was consistent across our 3 theaters. In the EMEA region, gross sales at EUR 608 million grew plus 22.3%, realized on the back of a strong enterprise momentum. In the APAC region, gross sales reached EUR 103 million, supported by us winning large contracts and the expansion of our service offering. And in the Americas region, gross sales were up 20.1% where we transacted with 12% more partners in Q3 '21 versus Q3 2020, in line with our ambition to expand in the regions and more vendors with the first sales with Juniper. During the quarter, additional investments were made to ensure the delivery of the growth strategy driven by new vendors rollout. We also launched Exclusive On Demand in the Americas in August to give customers more purchasing options to consume technology. Let's turn now to Slide 6. The performance in terms of revenue is in line with gross sales evolution. Revenue for the group was EUR 578.4 million in the third quarter of 2021, growing at plus 34% on a reported basis. EMEA enjoyed the strongest growth at plus 38.5% reported, including the impact of the acquisition of Veracomp acquired in December 2020, followed by APAC and Americas, respectively, at plus 22.8% and 19.3%. Let's now move to Slide 7. And let's now look at the key drivers of our Q3 pro forma growth. As you can see, in Q3, 70% of our growth came from our existing base of vendors in their historical geographies, which illustrate our first and stable growth driver, the organic growth from selling the solution of our existing vendors in their existing geographies. But 70% is a low ratio compared to previous quarters. This is mainly because of the success in expanding our relationship with some of our existing vendors to other geographies, which explain 14% of our growth, for example, with our launch of distributing Juniper solutions in the Americas region. Another 14% of the growth came from the contribution of newly acquired companies outside of the one of Veracomp not capturing this pro forma growth. Ignition acquired in early July 2021 and also JJNET in Hong Kong in September '20 and Nuaware acquired in November 2020. And the impact of new vendors on the growth is less significant in Q3 '21 at plus 2% -- at 2% of the total growth as the additions were early-stage companies. The visibility from vendors and customers' renewal rates reached levels similar to pre-COVID, I just explained and clearly above 2020 at, respectively, 119% and 115%, respectively. Overall, this is a confirmation of the key drivers of our growth and our ability to drive expansion from a very solid and returning base of vendors and customers. I now pass on to Jesper, who will go through some key strategic developments over the quarter.

Thank you, Pierre. And can we go to next slide, please? So as earlier mentioned, we continue to make significant progress with our new and existing vendors. In Q3, we added 4 new vendors to our growth platform, including Alkira, Diamanti, Wasabi and InfiniPoint. These vendors are in our view, some of the most promising emerging companies within their respective market segments. In addition to welcoming these new vendors, we also successfully expanded our strategic partnerships with Netskope across EMEA as well as with Juniper network across EMEA with the first launch in Belgium, Spain and the U.K. Finally, building on our strong track record in EMEA, we extended our partnership with Proofpoint into the North American market. In summary, we continue to prove our capacity to identify, partner and expand with industry cybersecurity leaders, and we look forward to continuing to drive growth for our entire vendor ecosystem. Next slide, please. Slide 9. We are pursuing our M&A strategy with the acquisition of Ignition in the U.K. that was announced at the onset of July of this year. This strategic acquisition reinforces our heritage and reputation around emerging disruptive and innovative technologies and allows us to build a dedicated value proposition and global launch path for these early-stage emerging vendors. Finally, on the M&A front, we remain in exclusivity with Networks Unlimited, an acquisition which would expand our footprint into Sub-Sahara Africa. We hope to close by the end of the year, as previously announced. This remains obviously subject to the finalization of agreements and usual conditions. In short, our M&A pipeline remains very active with exclusive networks as a natural consolidator within the current cybersecurity market. I'll now let Pierre comment on the guidance.

Thank you, Jesper. And let's move to Slide 10, please. We are confirming our guidance for 2021 and medium term. At group level, we expect gross sales to grow by low teens in 2021 and then mid-teens in 2022 as our vendors and geographical expansion strategy picks up. In the medium term, we see the business growing broadly at low double-digit growth. Overall, we remain above market growth. Note that this guidance at group level includes M&A, which contributes mostly from '22 onwards. We see M&A contribution about 1.2 percentage points of the gross sales growth rate. Growth pattern will be similar at revenue level as we expect a stable contribution from support and maintenance. And by segment, we expect the dynamic across our key geographies to defer slightly, EMEA in line with group, APAC slightly below group and Americas above group from 2022, reflecting the significant opportunity we see in the region but coming from a much smaller base. At net margin level, we expect net margin in value to increase by high single digits in 2021, then the net margin to contract slightly following the drivers that I outlined previously. Note that the margin compression should remain below 1% point in total over the midterm period. And finally, at adjusted EBITDA level, we anticipate stable margins as a percentage of net margin after an increase of low double digit in 2021 as we onboard our new IPO team and ramp up our growth initiatives. We expect to achieve more than 40% margin in the midterm as we deliver on our operating leverage potential. As a reminder, the guidance on below EBITDA items can be found on the next slide, on Slide 11, but it didn't change. So we confirm our previous guidance. With this, I now hand over back to Hacène to open the Q&A discussion.

Thank you, Pierre. Thank you all for your attention. This now opens the Q&A session. So I think we have already 1 question. Operator, please open the Q&A session.

[Operator Instructions] And our first question comes in from the line of Stacy Pollard, calling from JPMorgan.

A few questions from me, and you partly answered it towards the end. So let me pose it and then just double check, but how much correlation between gross sales and net margins? So I guess you said adjusted EBIT would be flat. You confirmed that for 2021. So I guess that means no particular pressure on take rates from the vendors seen in the quarter or expected for the second half. Second question would be, how do you see growth progressing for X-OD? And do you think it's additive to your overall growth targets? And then final question, how does the M&A pipeline look? We saw Networks Unlimited, of course, but what other geographies are you looking at? And are the valuations what you'd expected and hoped to see.

Thank you, Stacy. So let me start maybe by answering question 2 and 3, and then I'll let Pierre talk about your question one. So on X-OD, we -- as I mentioned in our prepared remarks, we are progressing well along the strategy. We are expanding the number of partners transacting on the platform, and we're also expanding the number of vendors we have on the platform. That said, today, it is still with 240 vendors in our portfolio. And so far, 6 on the platform, it is still a fairly small part of our vendor portfolio. And also from a partner perspective, because we haven't launched X-OD yet in all of our operating markets, we are not able to bring on all of our partners to the platform. So I would say, as of today, it is part of our strategy, and it will certainly be a bigger part of our future growth. But it is not delivering a lot of incremental growth in the most recent quarter. To your question on M&A, we have a pipeline that is outside of the 2 targets that we have, one, we have closed and the other one that we had an exclusivity with Networks Unlimited. We have a pipeline of targets that we are in discussion with at various stages across the different geographies and within certain sectors of our business where we believe there is room for adding additional capabilities and services. And then I'll let Pierre talk about the margin.

Yes. Thank you for your question, Stacy. So as you know, we do not comment on net margin at quarter end, and we do not provide quarterly breakdown on net margin. So we are confident in delivering our net margin target of high single-digit net margin growth in full year '21. As explained in previous session, you remember that we do not expect a percentage of the euro to our gross sales growth to always translate in the same percentage of gross margin growth. So as a company, we are really focusing on growing our gross margin euros. And our margins and EBITDA are influenced by the mix effect with our business -- within our business, as explained a couple of months ago, the mix effect comes from geographic mix, vendor mix, customer mix, big/small deals and product service mix. So here, the main point again is really we confirm our guidance.

I think that answers the question. So I think we have another question.

The next question comes in from the line of Alastair Nolan, calling from Morgan Stanley.

Maybe just one, first of all, on the supply chain impacts. I think you mentioned in the release that they've been pretty minimal in terms of impacting the products you're distributing. Or maybe you could provide a little bit more of an overview as to what you're seeing, I guess, the concern being that there is a hardware component in many of the solutions that you're delivering? So could that be a potential impact or headwinds for the rise? And then maybe just secondly, you mentioned some higher levels of investment in the U.S. Just wanted to check what exactly that is around. And if that's broadly in line with the existing plans or if there's any kind of impact we should be aware of when it comes to margin. So those would be the 2.

Thank you for the question. So on your first question on supply chain, I would say it is -- there is chip shortage and more generally some tension on the hardware components as we see within the industry, and you will also have noticed this from some of our vendors who had reported earlier this month. I think what's important to note for us is -- hardware is always part of the solution, and it is not the majority of our revenue, and therefore, it doesn't really affect our license renewals, the call-based activities we are having and neither our support and maintenance with service offerings. We have a couple of vendors that do have a bit of impact while we see some supply chain extension, and we are working closely with these vendors and also the channel partners to mitigate any negative impact where possible. So that would be sort of what we are seeing in terms of supply chain. In terms of the U.S., most of the investments we have done is in the front end of our business. So we mentioned to you end of Q2 that we have expanded our relationship with Juniper. This quarter, we expanded our relationship with Proofpoint, and we have several ongoing discussions with other vendors to expand into -- to the North American market for us. So we are anticipating this and are investing to be able to take full advantage of these new vendor contracts and hit the market running. So it is -- to answer your question shortly, it is well in line with the plan that we have presented before.

Thank you, Alastair. We can now go to the next question.

The next question comes in from the line of Ross Jobber, calling from Citi.

A couple of questions, if I may. Just following on from the supply chain point. I wonder whether or not for Q3, now we've got Veracomp embedded in for the whole quarter, can you give us any indication as to what the current split is between hardware, software and services at any level that you think is appropriate, whether it be revenue gross sales or whatever? I think it would be quite useful to just check in on what that looks like. And then my second question is just on Slide 8 and the new vendors in existing -- sorry, existing vendors in new geographies. And I'm just interested to know to understand how much of that is driven by you approaching vendors and saying we would like to operate in new geographies. And to what extent is it the likes of, say, SentinelOne approaching you and saying, we'd really like you to represent us in Israel. I'd just like to get a bit of handle on how those talks are initiated?

Yes. Thank you, Ross. Good question. So let me start maybe with the last question and then I'll let Pierre do a brief comment on the splits you're asking for. So there's really not 1 way getting expansion with vendors. Obviously, we are enjoying very strong and enduring relationships with some of the top cybersecurity leaders in today's market. And we have been very open with them that we want where possible to leverage these relationships and expand globally where possible, allowing these vendors to take full advantage of our growing geographic footprint. And so these conversations happens every day at different levels. It happens in the field. It happens between our country leaders and the leaders of the vendors. It happens at regional level. And it happens at my level as well with some of the leaders inside of these vendors. So there is not one recipe here, it's a mix between vendors asking us if we would be interested and it's a mix of us going to vendors asking for potential to evaluate opportunities. I think what's important is that both the vendor and exclusive networks see this as a mutual benefit for our partnership and not just the one sided where it benefits Exclusive but not the vendor or vice versa. So that's typically the way it happens. For new vendors that we don't trade with today, I would say, given our DNA and heritage in launching new disruptive emerging vendors, we do see a bigger influx of new vendors coming to us, asking us to evaluate their solutions with fit with our portfolio, with the market and to explore whether if we could onboard them on to our platform and help them grow a scale internationally. So that would be my answer to that question. Pierre, do you want to...