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Hello and welcome to the Exclusive Networks First Quarter 2023 Earnings Call. My name is Caroline and I'll be your coordinator for today's event. Please note this call is being recorded. [Operator Instructions]I will now hand over the call to your host Hacene Boumendjel, the Head of Investor Relations, to begin today's conference. Thank you.
Thank you and good morning, everyone. Welcome to Exclusive Networks Q1 2023 earnings conference call, which is broadcasted live and will be available on demand on our website. The presentation slide and press release for this call are also available on our website in the Investor Relations section. 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. So I'd like to introduce our key speakers this morning: Jesper Trolle, CEO of Exclusive Networks; and Nathalie Buhnemann, our CFO. The presentation will last about 30 minutes and will be followed by a Q&A session. If we don't have the time to take everyone's question in this session, I am available and happy to take any of your questions following up the call.I will now pass it over to Jesper for a few opening remarks and his overview of Q1 2023. Jesper, the floor is yours.
Thank you, Hacene. Good morning, everyone, and warm welcome to our Q1 '23 trading update. Our strong momentum coming into FY 2023 has paved the way for a solid performance in Q1. I would like to thank our teams around the world for their efforts in achieving these impressive results. Cybersecurity continues to remain both relevant and resilient compared to the overall IT sector with double-digit growth forecast for the years to come. We are seeing trends around the consolidation of cybersecurity tools within end customers who on average are using more than 40 different solutions today. Many are taking a platform approach in order to decrease vendors [ for all], reduce complexity and drive economies of scale. Others are taking a more disruptive best-of-breed approach, choosing established category leaders in their respective segments. Exclusive Networks' industry-leading cybersecurity portfolio caters for either of these approaches.So whether it's consolidation or disruption, we remain highly relevant to the market needs. So in summary, Q1 was a solid start to our FY '23. Despite the challenging macro environment that we find ourselves in, we continue to do well and we are keeping our focus on our strategic priorities and above all executing against our growth plan. Let's take a look at some of the key highlights for the first quarter. We entered FY 2023 with a strong momentum on the back of our record-breaking FY 2022 results, which drove a record performance in Q1 where we continued to outperform the cybersecurity market across most major segments. Q1 saw us achieve a fourth consecutive quarter of gross sales above EUR1 billion. This is a significant achievement and a milestone for our company as we are now firmly established as a EUR1 billion run rate business. Gross sales were EUR1.180 billion, up 28% over Q1 of 2022 with strong sales momentum across all of our global regions.We continue to attract new market leading vendors to our portfolio adding an additional $820 million to our serviceable addressable market opportunity. We continue to achieve high levels of vendor and customer satisfaction as evidenced by our strong vendor retention rate of 126% and a strong customer retention rate at 123%. Our highly differentiated model drives stickiness within our ecosystem allowing us to continue to drive greater operating leverage within our business model. While Exclusive Networks is certainly not immune to the overall slowing and uncertain macro environment, we continue to outperform the market through our ability to extend our coverage with existing vendors as well as attracting new ones to our portfolio; evolve and grow our cloud-based business, continue to increase our offerings around innovative value creating services and above all as a result of this, continue to outgrow all major cybersecurity market sectors.Based on these results, the current market conditions and the outlook for the remainder of 2023; we remain confident in achieving our FY '23 guidance as published in February. Vendor acquisition and expansion are a key component of our flywheel for growth as it enables us to continuously grow our addressable market opportunity. In Q1 we added 2 new vendors to our portfolio. We signed an EMEA contract with a leading cybersecurity ratings and analytics company BitSight and as well a feature management platform company LaunchDarkly within the segment of DevSecOps. We also signed contract extensions with 4 of our key cybersecurity vendors. We signed a major expansion contract with SentinelOne in North America building on our 7 years of long strategic partnership across EMEA and APAC. The move by SentinelOne from a 1-tier to a 2-tier distribution model is of significant importance as it demonstrates our value and relevance even in a mature market like North America.It also highlights the critical role that the 2-tier model plays in an increasingly complex and fragmented cybersecurity ecosystem. This is an ideal example of our expansion strategy with existing vendors and further validate our growing presence within the U.S. or North America marketplace. With Fortinet, we continue to extend our authorized training center contracts to now covering Canada as well, which brings the total number of countries where we operate Fortinet training centers in local language to 35. We signed an agreement with Thales to expand our existing partnership in the U.K. across the rest of EMEA. And with Imperva, we signed an expansion contract to add France to the growing list of countries where we are partnering together. In aggregate, these contract extensions and expansions have increased our serviceable addressable market by close to $1 billion to a global annual service addressable market of $41 billion.Moving on to cloud services and cloud delivery models. We continue to see how these evolve and challenge traditional routes to market as more and more vendors are shifting towards SaaS and ARR models. Our cloud-based business continues to post double-digit growth rates. In Q1 it grew by 23% over the same quarter last year and continues to make up around 1/4 of our overall gross sales. As end customers continue to move more workloads to the cloud and shift their consumption habits away from large onetime CapEx purchases towards more recurring OpEx based subscription models, we're enabling our partners to take advantage of this growing trend to transform their products and services into subscription-based offerings. As a result, we are seeing our cloud delivery and subscription platform X-OD continue to gain market traction.The number of partners now trading on the platform is up 86% on the same period of last year and the number of transactions has increased by 160% as compared to Q1 of 2022. Moving forward, our cloud business will continue to play a key part in our growth plans as we evolve to meet the growing go-to-market needs of our vendors and our partners in a cloud-enabled, as-a-service, on-demand and consumption driven economy. Another part of our growth flywheel is our services and we are continually evolving new innovative offerings to create value for our vendors and our partners. An example of this is our new penetration testing service that we recently launched in France. Pen testing or ethical hacking, as some would call it, forms part of an organization's cybersecurity best practice simulating attacks on IT infrastructure to identify any weakness in company security defenses.According to several market studies, the global market for Pentest services is worth $1.7 billion and is expected to grow as high as $2.7 billion by 2027. We are offering this service to our partners and for them to perform the Pentest to end users directly. Furthermore, this service will allow us and our partners to leverage the insights and the findings we are gathering from the pen testing report to drive further revenue opportunities around remediation solutions and services. This is a great example of how we continue to develop and deliver value creating services within our ecosystem. Moving on to our performance by segment. I would like here to draw your attention to the fact that we have changed the format from a quarterly view to a 12-month rolling evolution as this allows to better perceive the underlying trends and better reflect the market dynamics within the overall cybersecurity market.Exclusive Networks is active across all of the top-tier market segments through our highly specialized and curated portfolio of cybersecurity leaders and innovators. Our proven ability to attract market leaders and fast growth challengers, helping them scale and expand into new markets has enabled us to grow market shares in core segments. We've seen tremendous growth in endpoint security, network security and data security as well as other sectors like identity and access management and DevSecOps and not the least cloud security. Over the last 12 months, we have consistently outperformed the market across most of the major segments. So all in all, a strong start to Q1.And I would now like to hand it over to our CFO, Nathalie Buhnemann. Nathalie, over to you.
Thank you, Jesper, and good morning, everyone. So let's start with the financial presentation. Let's look first at the drivers for gross sales on Slide 10. On the left of the slide, you can see that we have been experiencing double-digit growth rates in Q1 over the last 3 years mainly driven by our positioning on the cybersecurity market. Sales have grown from EUR920 million in Q1 2022 to EUR1.180 billion in Q1 2023 increasing at 28% reported and 29% constant rate. We have clearly outperformed the cybersecurity market. However, it should be considered that out of the 28% of growth: 6% are resulting from the release of our Q4 2022 backlog, during our full year 2022 financial presentation we informed you that we had a significant backlog and pipeline to secure a strong start for 2023; and 4% are driven by increase in prices; 2% from price inflation; and 2% from dollar fluctuation. As a result, the growth rate without these nonrecurring effects that I have just described can be estimated at 18% in Q1 2023 compared to Q1 2022.Turning now to the drivers of our growth on the right of the slide. Most of our growth in Q1 2023 meaning 24% out of 28% came from existing vendor relationships where we already operate. The 4% balance came from vendor expansion either from new geographies or new vendor relationships. As Jesper said earlier, our positioning linked to our vendors portfolio enables us to outperform the cybersecurity market. Let's move now to Slide 11. The slide shows our regional performance. We enjoyed double-digit growth in Q1 2023 in all of our regions and again this underlines our consistency and scale. Starting with EMEA, we had a strong momentum in our largest region. Gross sales grew at 28% reported, 29% constant rate. This was driven by activity from strategic vendors who are doing large deals. Ongoing demand is reflected by a healthy backlog and our capability to innovate and develop our services offer as explained by Jesper with the example of the Pentest Center.Moving to Americas, gross sales continued to post a record sales at 50% reported, 45% constant rate. This reflects the success of our strategy to align with strategic vendors while also developing new vendor relationships on new territories like SentinelOne in the U.S. Finally, gross sales in APAC region grew 19% reported and 17% at constant rate. Remember that in Q1 2022 the Asian business was still suffering from shortage and COVID lockdown issues, which resulted in a weaker prior year comparator. Turning now to the breakdown of our revenue by geography and deal size on Slide 12. Our geographic split is consistent with the split we presented at year-end 2022 because our regions all grew well with double-digit growth in each of them. In terms of deal size, the share of deals above EUR1 million increased from 11% to 13% and this trend was consistent in all the regions.In 2022 number of large deals have progressively and proportionally increased over the quarters reaching a high point in Q4 2022 representing 17% of our sales. In Q1 2023 we grew in number of deals compared to Q1 2022. However, the mega deals, the one above EUR10 million, have decreased in number. This results from the uncertainty we feel in the market. Our customers take more time to make a decision on significant projects with much more approvals needed. These projects are most often not canceled, but decision can result in delayed orders. To conclude, this proves once again the relevance of our model allowing us to capture from very small to very large deals. Now the last slide are key takeaways before we open the floor to questions. I would like to conclude this presentation by stating that we are very pleased with the strong start to the year in Q1. It demonstrates the validity of our strategy and the uniqueness of our business model, which enables us to consistently outperform the market.Despite global IT spending has been under pressure, cybersecurity still remains the #1 spending priority for the future according to every CIO survey recently published. Looking ahead and aligned with current market analysis, we continue to expect double-digit growth within the cybersecurity market in the years to come. Let's now spend a few minutes on the guidance for full year 2023. I would like to remember you that our full year guidance was set up in February 2023 in a similar macro environment than the one we experience today. Our guidance takes into account a strong start to the year in Q1 2023 as well as the uncertainty and headwinds in the macro environment for the rest of the year. Q1 has started according to our expectations and we are confident we will meet our 2023 guidance in the context we are today.So thank you for listening. And I will now hand it over to Hacene to open up the Q&A session.
Thank you, Nathalie. Thank you, everyone, for your attention. Now this starts the Q&A session. Please, operator, can you remind how to proceed.
[Operator Instructions] We will take the first question from line Joe George from JPMorgan.
Firstly, could I just ask about the bookings growth through the quarter and how bookings growth compared to sales growth and then how does that leave the backlog now looking? And then secondly, just on the services side. That was useful information on the pricing. So can I ask what are you seeing with regards to pricing specifically within the services or are there any signs of deflation here and how confident are you in the services pricing power?
Thank you for the question. So as you know on the first question on bookings, we don't break out our bookings growth. What I would say is that in Q1 we saw a continuation of what we saw in Q4, which were a slowdown in bookings growth and of course that meant, as Natalie was pointing out, that we took some of the backlog into sales in Q1. We still run at elevated backlog and we still continue to build some backlog. So we feel good about the current trends in our business. On the services side, I'm not sure entirely how to interpret your question. But if I answer it from the angle of our own services, I would say we have obviously where possible increased our services to account for inflation and we still see demand for the services we are delivering, whether that's professional services or training services of that nature.
We will take the next question from line David Vignon from Stifel.
I have 2. The first is on the SentinelOne contract extension in North America. Could you give us a bit of details on the potential impact in terms of cost saves in the region considering you are not the only distributor for them in the Americas and also some details on the ramp for that contract would be great? And the second question is on the Pentest services. Similarly, could you give us bit more details? Is this a wide label offering? Are you providing the security consultants that run the Pentest? Just give us a bit more details on the offering.
So on SentinelOne, I mean we don't break out our sales by vendor as you know. As I mentioned in my prepared remarks, this is a key contract for us because it validates the strategy that we have defined, which is to expand with our key vendors across most of the world where possible. And it's also an important contract, as I mentioned, due to North America being predominantly a more mature market and therefore is less reliant on the 2-tier channel. This is a case which we see many times where a vendor have sort of decided to go away from a Tier 1 model to a 2-tier model to reach more customers, drive more scale within their partner ecosystem. And therefore, SentinelOne have embarked on this change from a 1-tier to a 2-tier model similar to what they have around the world. We are not -- I heard your comment on we are not the only one. That's true.By the way, we are not the only distributor for SentinelOne in EMEA or APAC either. So we are used to compete and our differentiation in our model and our cybersecurity focus allows us to compete well with other players. But we expect to continue to build on the momentum we have in North America and the momentum we have with SentinelOne globally and so we expect to become one of their very important partners in North America. On the pen testing, this is a service that our partners can deliver or sell I should say and where we are leveraging our existing resources in the business, our technical consultants to deliver this Pentest service remotely. And so you can think about it as a way for us to yield more efficiencies in our model where we are leveraging resources we already have on hand to deliver a service to end customers, but on behalf of our partners so that they stay engaged in the deal and the process.
We will take the next question from line Alastair Nolan from Morgan Stanley.
Nathalie, would you just remind us of the numbers you provided around kind of the impact of working through the backlog and then price increases again? I just missed some of those numbers. And then secondly, can you maybe comment on the pace of the growth expected throughout the rest of the year? Obviously the comps get a little bit tougher and kind of what we should expect around that. That would be really helpful.
Okay. Thanks for your questions. So regarding what we call the nonrecurring impact, we have 6% that is coming from the release of the backlog in Q4 2022 to Q1 2023 and 4% coming from price impact. So 2% on inflation and 2% on dollar fluctuation. So it means that at the end if you take out this effect, you are at 18% recurring growth in Q1. Coming back to the second part of your question. As we said, we expected a strong Q1 and this is what happened. The macro environment when we made the guidance for full year is still the same today. There has not been a lot of change. And we have also anticipated some uncertainty and headwinds for the rest of the year. So we confirm our guidance and this is it for the moment. It's only the first quarter so let's wait for the 3 other quarters to say anything more.
That makes sense. And maybe just one follow-up. You mentioned some slight decrease in the size of larger deals. I know you don't provide typically commentary on net margin at this point, but is it fair to assume that could have a slightly positive impact on net margin just given a slightly smaller percentage of margin [indiscernible]?
I will not comment this and it's not something we can comment. It's regional sales. You can assume whatever you want to assume, but this is something I cannot comment.
[Operator Instructions] It appears there's no further question at this time. I would like to hand it over back to your host. Thank you.
Thank you, operator. And thank you, everyone, for listening to today's call. Thank you for the questions. I just want to end where I started, which is we are extremely pleased with our start to FY '23. Strong start in Q1 which, as Natalie highlighted, we did anticipate since we set our guidance end of February. Obviously we find ourselves in a macro environment where there is limited visibility. But with the visibility we have in our business, with the performance we have, with the vendor portfolio we have; we feel confident about the rest of the year. So we'll keep focusing on what we control, which is to implement our strategy and execute properly across all the markets in which we are present. So thank you and looking forward to talk with each of you at a later stage.
Thank you for joining today's call. You may now disconnect.