Exclusive Networks SAS

PAR:EXN

Earnings Call Transcript 2022-Q2

[Operator]

Hello, and welcome to the Exclusive Networks' Second Quarter 2022 update. My name is Jess, and I'll be your coordinator for today's event. [Operator Instructions] I will now hand over to your host, Hacène Boumendjel, Head of Investor Relations, to begin today's call. Thank you.

[Hacène Boumendjel;Head of Investor Relations, executive]

Thank you. Good morning, everyone. And welcome to Exclusive Networks' Second Quarter 2022 Conference Call, 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.

First, I would like to draw your attention on the disclaimer on Slide 2 of this deck regarding the information contained within this document, 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, Jesper Trolle, CEO of Exclusive Networks; and Pierre Boccon-Liaudet, 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 for you after the call.

I will now pass it over to Jesper for his opening remarks and his overview of Q2 performance. Jesper, the floor is yours.

[Jesper Trolle, executive]

Thank you, Hacène. And good morning, everyone, and welcome to our Q2 2022 gross sales release. We appreciate that you take the time today to join us as we review our gross sales and our IFRS revenue results. Before detailing our performance of the past quarter, I would like to briefly introduce Stephanie Bia who joined Exclusive Networks 1 month ago as SVP of Marketing, Communications and Investor Relations. In her role, Stephanie will primarily focus on structuring a corporate communication strategy to reinforce Exclusive Networks' profiles to investors and all stakeholders. And also on driving a consistent vendor and partner marketing strategy globally. Stephanie brings with her a wealth of experience in strategic communications, investor relations, with a strong financial background. She has extensive knowledge in global capital markets and working with publicly listed companies.

Moving on to our Q2 results. I am delighted to announce that we delivered in our second quarter gross sales about EUR 1 billion for the second time in the company's history. The first time was in fourth quarter of 2021. Our record performance this quarter reflects our unique positioning in the cybersecurity ecosystem, which results from the relevance of our strategy implemented over the last several years. It is also driven by structural growth drivers in the market and some favorable external factors such as the strengthening us dollar and better-than-anticipated delivery rate from some of our core suppliers.

The superior execution of our teams around the world is instrumental to our performance. And as always, I want to warmly thank all our teams for that relentless focus on execution and value creation within our ecosystem. They are truly the ones that we can thank for this outstanding performance. As in the previous quarters, we continue to outperform the overall growth within the cybersecurity market. Growth has been fueled this quarter by all of the main cybersecurity segments, as well as by our newest segments such as cloud security and DevSecOps, both delivering sharp growth and validating our strategy to accelerate opportunities in these segments through the acquisition of Nuaware in 2020. These segments have experienced triple digit growth rates and have an outstanding long-term growth potential.

There has been no major shift in market trends since we discussed our first quarter performance. Spend on cybersecurity continues to be an increasing priority for companies and public institutions of all sizes. This is driven by greater awareness of cyber threats, sophistication of attacks and ongoing geo political tensions. In terms of the evolution of the market, although not all market reports for Q2 2022 is out, we have seen second quarter with very similar dynamics to Q1 of this year.

Protecting digitized businesses, consumers and devices from malicious threat actors continues to propel cybersecurity spending as the economy continues to face an increase in quantity, frequency and sophistication of cyber-attacks. With such digital transformation comes also an increase in cloud threats due to misconfigurations that could leave organizations wide open. On this, demand related to cloud security threats to API connections and container environments are now prevalent.

In addition to securing cloud infrastructure, we continue to see a significant uptake in SaaS to protect not only the apps, but also the remote workers. And last but not least, OT or IOT security, enterprises of all sizes are demanding different approaches to industrial security as threats increase and the security of key infrastructure is continuously tested in today's environment. Exclusive Networks has a prominent position in the cyber ecosystem, thanks to our global but decentralized specialist positioning and to our deep and longstanding relationships with our vendors. We continue to build new relationships with promising new vendors and expand our geographical coverage with existing vendors, further cementing our competitive advantage and growth potential.

With that, let's now get into the details of our performance for the second quarter of this year. I'm pleased to announce record quarterly gross sales in the second quarter of 2022, the second quarter where we have exceeded the EUR 1 billion bar, doing EUR 1.027 billion and delivering a reported growth of 42.5%. Further surpassing the growth we saw in Q1 of 2022. Pierre will explain later an adjustment in the definition of our gross sales that we are introducing in this quarter's reporting to better anticipate and reflect the evolution of our business model.

The strategy we have in place and the value added services we provide to our vendors and more globally our best-in-class execution are the key success factors and the pillars to our consistent over-performance within what is already a fast growing market. I'm very satisfied with the consistency of growth we have achieved within our 3 operating regions, all growing between 36% and 46%. There was a strong rebound in APAC this quarter after a muted first quarter of the year. Globally, we have seen a strong increase in the contribution from large deals to our gross sales. Deals in the excess of $1 million accounted for 14% of our gross sales in Q2 of 2022. This is a strong increase versus the 7% contribution from the same deals in Q2 of 2021.

Forward indicators remain very strong as business expansion in the second quarter through new vendor acquisitions and adding new geographies for existing vendors enables us to address an estimated additional serviceable addressable market in excess of EUR 2 billion. Our order book keeps outpacing our gross sales, which provides confidence in the continuing strong performance of the business. As I'm used to say by now, we are in the right market at the right time and have a solid strategy in place that gives us a unique position within the ecosystem to continue capitalizing on the positive growth and market trends.

Moving on to our underlying business performance and a slide that you are now all familiar with. I am again very pleased to report that we have achieved positive developments across all of our core strategic growth pillars. These includes the acquisition of over 800 net new resellers. As a reminder, we also acquired over 400 net new resellers in the first quarter. And the increase in our cloud-based business continues with a 4-fold increase in the number of new reselling partners and a 2.5-fold increase in the number of transactions within our own X-OD platform. We signed geographic expansion agreements with 4 existing vendors and added 2 new net new vendors to our portfolio. I will get into more details on these in the next slide.

Moving to the extension of our service offerings. We managed to sign an accredited training center agreement with Fortinet for North America. This gives us a massive advantage versus our competitors, as we are now the only distributor in North America that has been granted this authorized training center status by Fortinet, and therefore the only one who can offer Fortinet trainings alongside the Fortinet solutions. This new contract comes on the back of having won 2 awards from Fortinet for training, delivery across Asia and EMEA, a true testament to the high value that we provide to both our vendors and our customers.

We have also secured additional support services agreements for 3 existing vendors in EMEA, Netskope, Tanium and SentinelOne. Acting as an aggregator of cybersecurity solution and professional services, we have extended our capabilities to become an authorized service provider, providing level 1 and level 2 support professional services within these 3 strategic vendors in order to propose our partners with an end-to-end solution approach from procurement all the way through to installation, deployment and production.

On the M&A front, we are currently focused on the successful integration and business expansion of our latest acquisitions. Networks Unlimited, who we acquired at the end of 2021, officially begun its operations as Exclusive Networks Africa earlier this year. In parallel, we keep monitoring the market very closely and having ongoing discussions on several potential opportunities. We remain as focused as ever on M&A to address new geographies and to reinforce our services portfolio and offerings. We are in a very fortunate position, both from a financial and a business point of view when we think about acquisitions, and we are fully focused on capitalizing on this to select the opportunities that create values for our business and also for our shareholders.

Finally, as we have mentioned before, we continue to increase our influence within the cybersecurity ecosystem. We have recently signed a partnership agreement with the International Chamber of Commerce to provide cybersecurity expertise and knowledge to the leadership teams of some of the world's fastest growing companies. Through this partnership, we will help guide and educate business leaders on what they need to know, what they need to do and who can provide the products and services to help them safeguard their business against the growing cyber threats.

We are also very committed to help close the ongoing skills gap that currently exist in the cybersecurity market. To that extent, we announced in July our participation as a founding partner to the cyber talent hub that has been initiated by ThriveDX and NightDragon. The objective of this hub is to bring together educators and corporate institutions to create qualified candidates for roles such as security operations center analysts, sales representatives, or incident responders, rich of practical experience on top of that theoretical training.

Moving on to Slide 6, which details the additional serviceable addressable market that we have captured over this past quarter. You recall, 2 of our growth pillars are highlighted on this slide. On one hand we continue with the expansion of our portfolio with new vendors, NetWitness in the Evolved SIEM and Open XDR platform in the Middle East and with Mimecast technologies on messaging security in a number of EMEA geographies.

Simultaneously, we kept expanding our existing vendor agreements to new geographies in EMEA and APAC. I would like to highlight the success story we have had recently with Tenable, the world's first cyber exposure platform, with whom we started with a distribution agreement in France and then expanded through acquisitions into Eastern Europe and South Africa. And managed this quarter to further expand our contract into a full pan EMEA regional contract. These expansions together provide us with access to an additional serviceable addressable market in the excess of EUR 2 billion which bodes well for the future of our business and further supports our accelerated growth above the market.

Moving on to the next slide, this is a slide that I'm particularly proud of, and that shows very clearly that our model resonates with customers. As you can see, we have outperformed the market on every single of the main cybersecurity segments, in most of them more than doubling the growth rates within the market. As we mentioned in our previous publications, we can do this thanks to our ability to spot market trends and identify new winners early on. Secondarily, by having the best and the fastest growing vendors in our portfolio. And thirdly, by complementing their technologies with high value added services, which gives us a unique position within the marketplace. This allows us to continue increasing our prominent position in the market and continues to feeding the flywheel that makes us keep winning and keep outperforming.

I would like to emphasize our performance on 2 new fast growing segments. Firstly on cloud native where we have experienced more than 500% growth this quarter. By the end of 2020 we anticipated early on an exponential demand for cloud native software, particularly around DevSecOps. In response to this demand, we made a key strategic move to acquire Nuaware, a specialist cloud native DevOps-focused business. On the back of this acquisition and thanks to our position in the cybersecurity industry, we've been able to sign partnerships with a significant number of key cloud security vendors. We are now rolling out our unique go-to-market strategy built on Cloud DevOps, DevSecOps expertise with leaders such as Docker, HashiCorp, Mirantis, Prisma Cloud from Palo Alto Networks, Salt Security, Sonatype, [ Systech ].

The second fast growing segment I would like to highlight is OT or IoT with a year-on-year growth of more than 45% this quarter. This segment was already part of our value proposition specifically through Fortinet. We have since then increased our strategic partnerships in the OT security space with ForeScout, Nozomi and more recently, as earlier mentioned, with Tenable. These 2 segments show how we anticipate trends and are able to position ourselves ahead of the market to benefit from the fast growing trends and solutions.

Moving on to our cloud business, we are really pleased with the expansion of the pace of our cloud-based business which continues to grow at more than 50% year-on-year, continuing the growth trends that we presented in the first quarter. The driver for the adoption is still the same, an increasing numbers of partners transitioning from traditional hardware-based and perpetual license-based sales models to more software and cloud-oriented models. We continue to see an increase in demand for our on-demand consumption platform X-OD with an increase of close to 4x in terms of numbers of partners, and more than 154 year-on-year increase in numbers of transactions on this platform. With that short business update, I would like to hand it over to Pierre to provide you more details on our gross sales and our revenue for the quarter. Pierre?

[Pierre Boccon-Liaudet, executive]

Thank you, Jesper, and good morning, everyone, and welcome again to our gross sales and revenue publication for the second quarter of 2022. I will start with reminding you 2 definitions around sales and 1 clarification on the change of reporting method. As a reminder, gross sales represents sales recognized by the group on the gross profit before IFRS 15 revenue recognition adjustments. They represent our overall volume of activity. This is the value of transaction generated by the activity net of discounts. Revenue also called IFRS revenue is a similar metric to gross sales, but it includes the impact of IFRS 15 adjustments, which for our activity considers we are principle for the sales of software and adjacent products like hardware, but agent for the sales of support and maintenance, which represents around 30% of the activity. So for support and maintenance, our activities recognized on a net basis, the net margin generated on support and maintenance fees revenue.

So the second important remark relates to the change in Q1 '22. So overall on intercompany elimination, exclusively to Q1 2022 we excluded net worth reported gross sales without eliminating intercompany transactions. However, in full year '22 with a growth pattern of the activity of the company and with some increasing centralization of inventory in one country serving the whole region, the group decided to exclude the intercompany transaction from its gross-sales KPI. And by doing that, improve the relevance and reliability of its gross sales indicators to the market. So effective Q2 2022, gross sales represent sales from third parties only without any intercompany transaction.

And for comparability purposes, historical figures have been restated according to the new definition and a reconciliation of gross sales before and after intercompany elimination is presented in the appendix. The impact is minor, less than 3% of gross sales in any given quarter since Q1 '21 and no major variations year-over-year. This change does not have any impact on net margin nor on adjusted EBITDA, and it does not impact revenue where intercompany eliminations were already applied.

Now let's review our second quarter gross sales key trends. Gross sales in the second quarter of '22 were EUR 1.027 billion, up 42.5% year-over-year. Our highest quarterly growth over the last 3 years, even higher than our first quarter 2022, which was already a record of up 25% up. In constant currency, gross sales grew by 39.5%.

As Jesper mentioned, the momentum in the cybersecurity industry is strong. Our superior growth in each segment is clear. And the delivery against our strategy in each driver of growth works. Our gross sales benefited this quarter from a stronger U.S. dollar and from higher production costs from vendors reflected in our sales price. We also benefited from a very dynamic demand for large solutions defined as greater than EUR 500,000. In all the 3 regions, we continue to see some supply chain constraints around both chipset shortage and logistic challenges, and we worked relentless with our vendors and partners to accommodate their expectations at best with some positive signs of easening (sic) [ easing ] at the end of the second quarter by -- with some vendors.

At the same time, in all the 3 regions, order intakes remained above billings level, which confirms the positive trend of the demand for our products and services. As you can see on the right-hand side, in EMEA, gross sales were EUR 798 million, an increase of 43% year-over-year. This represents a strong acceleration compared to the previous 3 quarters, 22% in -- plus 22% in Q3 '21, plus 9.5% in Q4 '21 and plus 27% in Q1 '22. This growth represents EUR 240 million of additional sales just in 1 quarter, more than the Q2 gross sales in APAC and Americas altogether. And our order intake stayed above our billing, which is a good sign for future months. All vendors contributed to this success with more and more large contracts greater than EUR 500,000. And all the strategic recent acquisitions did well, really well, including Nuaware, Eastern Europe, Ignition and sub-Sahara Africa. Impressive performance in Europe with this 43% growth.

In APAC, gross sales were EUR 123 million, up 36.3% from prior year, up 25.3% at constant currency with some local currencies such as the Singapore and the Australian U.S. dollar strengthening significantly to the euro. But even this growth at 25.3%, excluding currency impact, is a very positive sign, considering APAC has not grown by more than 20% in any given quarter since the start of the pandemic, and we are now seeing some signs of good dynamics in the region.

In Americas, the spectacular gross sales growth continued and reached EUR 107 million in the second quarter of 2022, plus 46% year-over-year, after a growth of 62% in the first quarter. Same as in Q1, this growth is partly explained by the U.S. dollar strengthening to the euro. And the growth was still plus 30% when excluding the currency effect. This growth was mostly driven by historical vendors and also by the addition to the portfolio of Juniper in Q3 '21 and Docker in Q4 '21. Even though already very impressive, this growth was delivered despite the continuation of some supply chain constraints with product shortage.

IFRS revenue and IFRS revenue growth for the second quarter are presented in Slide 19 in the appendix. Revenue growth was plus 39%, slightly lower than gross sales growth of 43%, with a slightly higher growth of support and maintenance in the mix. Let's now look at which driver of growth contributed to the 42.5% year-over-year growth this quarter. First of all, 12% of the growth came from M&A with the acquisition of Ignition Technology early July '21 and Networks Unlimited early December '21, respectively, adding EUR 16 million and EUR 20 million of gross sales this quarter, which is the last one where ignition will be an M&A add compared to the prior year.

11% of the growth in the second quarter came from vendor expansion, first by onboarding new vendors such as Sysdig and Zimperium Q1 '22 and NetWitness and Mimecast in Q2 '22, as Jesper explained. And second, by expanding our relationship of some -- with some existing vendors to a wider geographical footprint, such as Juniper and F5 to the Americas, and Fortinet, Palo Alto, F5, Juniper, Netskope, and more recently Tanium, Extreme Networks, [indiscernible] to some EMEA and APAC countries. And finally, 77% of the growth came from existing vendors in territories we were already working with them in.

The demand clearly accelerated, brought to us by more and more resellers trusting our capacity to accompany them in presales and post-sales efforts, as well as delivering reliably. For the second quarter 2022, vendors renewal rates came in at 135% and customer renewal rate came up 133%, which specify the engagement of our partners on both sides. These metrics have always been above 100% for the last 3 years since we have tracked them, but they clearly accelerated this quarter. Our vendors and partners are growing with us.

Looking at the trends this quarter, we did not see any change in the contribution of our 3 key actors. Indeed, the underlying growth was very strong everywhere, slightly higher in EMEA with the contribution of M&A. But at the same time, APAC and Americas benefited from the strengthening of their local currencies when reported in euro. As already mentioned by Jesper, in terms of deal size, the share of deals greater than EUR 1 million doubled from 7% to 14% of total gross sales in the second quarter of 2022. And these trends appeared in all theaters. Public sectors and financial services are the 2 sectors which traditionally drive this category of high-value deals. This proves the relevance of our model from very small to very large deals and our ability to capture all aspects of the demand. As a reminder, the average size of the deal of Exclusive Networks is around EUR 10,000 to EUR 11,000. This gives you an idea of the large spectrum of deal size we are able to tackle for our customers and for our vendors.

So overall, in the second quarter of 2022, we delivered on all pieces of our sales road map and captured exceptionally well the best part of the very dynamic cybersecurity market despite product shortage at the industry-wide issues, preventing from an even stronger performance as shown with backlog still historically high. Price increase and U.S. dollar strengthening also helped the increase of gross sales.

Turning to our year-to-date performance H1. Gross sales growth accelerated to reach EUR 1.947 billion in the first 6 months of 2022, up 33.8% compared to the same period in 2021. On a reported basis, this is a EUR 492 million additional gross sales compared to the same period last year. EMEA, the largest region, representing 79% of the group's sales is up 35.1% in line with the global growth. APAC growth is up 13.4% due to a slow first quarter but strongly accelerating in the second, and the Americas showed stronger growth at 52.9%, representing in the first half of the year 10% of gross sales. Both APAC and Americas benefited from stronger ForEx effects as you can see with their lower growth when looked at constant currency.

I'll now hand it over to Jesper to conclude with some key takeaways.

[Jesper Trolle, executive]

Thank you, Pierre. So before we open the floor to questions, I would like to conclude this presentation stating that we are very pleased with our record gross sales reported in the second quarter of the year. Q2 is when you think about it, really a continuation of our Q1 growth with the addition of a strengthening U.S. dollar and better-than-expected delivery rates from our suppliers. It demonstrates the validity of our business strategy and the uniqueness of our business model, which enable us to consistently outperform the market.

We have seen consistent growth, as I mentioned, across regions, as the number of large deals expands and growth has been driven by all of the core cybersecurity segments. No doubt that our portfolio of solutions, our superior execution and our strong close customer and vendor relationships makes the difference when it comes to expanding our business. The prospects of the markets are strong, the awareness on cyber threats and the increasing sophistication of the threats require continuous investments from governments and corporates, and we have a best-in-class portfolio to help address these challenges.

Finally, the forward indicators in our business are strong. As I was saying at the beginning of this call, we are confident and very excited about the future prospects of the business, and we do today confirm our guidance for the full year of 2022. Again, I would like to end with where I started, which is to thank all of our teams around the world for their hard work and their dedication, thanks to which we have been able to have such a strong performance through the first half. We will release our half year full financial statements mid-September and will detail our H1 profit performance and expectations for the full year.

With that in mind, we are ready to open for the Q&A session focusing on gross sales and revenues for Q2 and the first half. Thank you for your time so far.

[Operator]

[Operator Instructions] The first question comes from the line of Kathinka de Kuyper from JPMorgan.

[Kathinka de Kuyper, analyst]

A few for me, please. First of all, congrats on the very strong Q2. You've kept your full year guidance unchanged despite the very good results. So it kind of implies a slowdown in the second half. I think you mentioned bookings growth was ahead of gross sales. So what is holding you back of raising the outlook? And then secondly, I think you mentioned that the demand environment remains very strong. Have you seen any changes, for example, in customer behavior, like sales cycles getting longer? And then finally, on the supply chain issues, can you just quantify how much of an impact that still had on Q2 and what you expect for the remainder of the year now that the issues are easing?

[Jesper Trolle, executive]

Thank you for the nice words, Kathinka. So let me start talking about the guidance, and then I'll let Pierre maybe talk about the supply chain, and I can talk a bit about the demand environment. So first of all, needless to say, we are very pleased with our H1 performance, which demonstrates, as I said, the strength of our business model and also the strong drivers that we see within the market. And as H1 has been strong, I understand your willingness to talk about the full year. But it's also important to think about all the elements of the growth that we have seen in the first half when we think about Q2. So that's the market positioning, the growth in the market, the contribution from large deals, the impact of the strengthening U.S. dollar and also some of the shortening of the delivery times that we've seen from our vendors.

So as you can see, there are several factors that some are within and some are beyond our control. And then last but not least, not mentioning the uncertainties that is currently in the macro environment that we are all finding ourselves in. So today, our financial statements for the first half are not fully ready yet. They will be for the disclosure in mid-September. And on the basis of the information that we currently have available, we maintain our guidance for the full year. So we are pleased to confirm that we will deliver sales in the excess of EUR 3.8 billion for the full year, as we have guided to watch.

We are happy to confirm this guidance with the numbers that we have available today. Pierre, do you want to talk about the supply chain?

[Pierre Boccon-Liaudet, executive]

Yes. And then I'll let you finish on the change of customer behavior. So on the supply chain, we don't disclose any impact because it's quite difficult to estimate what we -- it's a loss of opportunity because we -- on some vendors where we -- there are some shortages, we cannot buy the inventory, so we cannot sell. So this is true from certain vendors, but we don't disclose the impact it has.

[Jesper Trolle, executive]

Yes, maybe I will just add, Kathinka, to what Pierre said on supply chain, that it's not broad-based. We've seen some vendors that have managed to deal with this better in the last quarter, and that was part of the growth of our sales. But it's not that I would say there is a broad-based easening of the supply chain across all vendors. We still see predominantly the impact being in our business on access points, routers, switches and then specific products that have certain chipsets in them. So it's not a broad-based easening yet, hence why our backlog continues to build as we talked about. To your last question on the demand environment, I would say, overall, the demand environment is quite similar to what we experienced in Q1. We did see a little bit of a deal extension towards the end of June, but nothing really alarming and out of the ordinary. So I would say so far in -- by the end of Q2, the demand environment were similar to what we saw in Q1 and also in Q4 of 2021. Thank you.

[Operator]

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

[Rosslyn Jobber, analyst]

Couple of questions, if I may. The first one is, could you talk a little bit about the product pricing environment of H1 and how that has affected your results? My second question is, given how strong the contribution is from the large deals, are we storing up some tough comps in a year's time in terms of Q2 '23 and H1 '23? And then my third question is actually just a bit more of a request. I wonder whether or not you could circulate the FX rates you've used.

[Jesper Trolle, executive]

Thank you, Ross. Let me -- I'll talk about the product pricing. And Pierre, I don't know if you want to come with a comment on the comps. So to your point, Ross, and as I think several of you have written about for several of the vendors we are working with. It's true that many of them have implemented price list increases to, frankly, help offset rising component costs and also a bit on the inflationary environment on wages that we find ourselves in. And of course, when price lists are being raised or prices are being raised, it does have a positive impact on our gross sales line. Now the price list increases are not necessarily fully reflected into the end customer price because, as you know, in these environments, there is quite heavily discounting going on.

So if a vendor is raising a price by 10%, it's not necessarily sure that the 10% is going to be fully reflected in the end-user market. But there is some element of contribution to growth from the increase of prices from vendors. The last point I would make on price list is that it's not a broad-based price increase. So it's not across all products. It's really dependent on the type of product, depending on the -- it's a physical hardware product, the components that goes into it, whether they are easy to get or harder to get -- so it's difficult to talk about a fully broad-based price increase. I don't know, Pierre, if you want to try and give an idea about the impact.

[Pierre Boccon-Liaudet, executive]

So on the large deals questions, we don't have to fear any shortage of large deals in Q2 next year here. What we try to describe is a trend, a trend of more and more large deals are coming to in the market and to us. This is an acceleration, but this is nothing exceptional 1 or 2 super-large deals, that could be a one-off. And then on the FX point, that's fully disclosed in our press release that we are showing. So I'm not going to describe all the -- to list all the rates now, but that's in the appendix to all our tables in the press release that you have received.

[Operator]

Next question comes from the line of Alastair Nolan from Morgan Stanley.

[Alastair Nolan, analyst]

Maybe one just firstly on kind of the full year guidance and specifically on net margin. It does feel as though gross sales are clearly running well ahead of expectations, and I acknowledge you haven't actually updated the full year guide. But is it fair to assume that there may be, especially with some of these larger deals, there may be a slightly higher level of pressure on the net margin versus gross sales. Just given the strong trends there and the fact that you've confirmed the absolute range as such for net margin. And then secondly, just to go back to the supply chain impacts. I know at the first quarter you kind of updated the expectation for improvements not to be seen until the second half. I'm just wondering if you're kind of running slightly ahead or behind that expectation at this moment in time from what you're seeing?

[Jesper Trolle, executive]

Thanks, Alastair. So on guidance, it's kind of similar to what I mentioned to Kathinka. So again, we feel good about where we are at the half year point. This is a gross sales release. So when we think about guidance, we are committed to deliver on the full year plus EUR 3.8 billion that we mentioned and that we have guided for at the beginning of the year. Again, as we said, there are many factors that plays into growth, and we need to take all those into consideration.

And then finally, we are still closing our full financial statements. And so we don't have the full details available. In terms of margin, again, this is a sales release, so we don't talk about margin today, but I would just reiterate what we said on several other calls, which is obviously larger deals do tend to come with less margin as a percent of gross sales. But there you've got to take into consideration our operating leverage in our model. Hence, why we always keep talking about the adjusted EBITDA on net margins, which is a true profit metric in our business because margins are impacted by deal size, by regions, by vendor mix, it's customer mix, et cetera.

So -- but we believe it's reflected in the adjusted EBITDA or net margin line, which we'll present on the 14th of September. On the supply chain, to your final question, I don't -- I want to be honest and say we saw a bit of an improvement with a couple of vendors that drove part of our performance in Q2. And also why we are saying that actually Q2 was very similar to Q1 with the addition of some of these supply chain releases. But broad-based, I would say, I don't see a lot of improvements. I don't see a worsening either, which, frankly, for today is a good sign. But it's really in pockets. And we had a couple of vendors that did well there, which is why we saw the further contribution to our growth in Q2.

[Operator]

The next question comes from the line of David Vignon from Stifel.

[David Vignon, analyst]

Two questions from my side. The first would be, could you please comment on the concentration of your revenue during Q2, especially on the top 5 vendors? And the second question is a follow-up to a previous one. Some of the vendors in the U.S. have indicated that they were seeing sales cycle lengthening in the EMEA specifically. Is this something that you have seen as well, specifically for the EMEA market? Or is that something that is pretty similar across the board?

[Jesper Trolle, executive]

Thank you, David, and welcome to the call. So let me talk about the sales cycle, and I'll let Pierre give you the contribution of our large -- our top 5 vendors. So on the sales cycle, as I mentioned early on in the Q&A, we saw a little bit of an extension for a couple of vendors towards the end of June. But again, nothing that I would say is out of the ordinary and frankly quite normal. So we haven't really seen sort of a slowdown or an extension of deals in our spectrum. It's also important to note that the deals we are working on have a sales cycle that is between 3 and 6 months. So these are typically projects that corporations have been budgeting for and working on for quite a substantial time period before it becomes a light deal, I would say. Pierre, do you want to talk about the concentration?

[Pierre Boccon-Liaudet, executive]

Yes. So to share the figures, the concentration of our top 5 vendors in Q2 was 64.9%. And it was in Q1 to 61.2%. So a slight increase, but which is in the general norm of what we have seen over the last years. So no major change here. I would say we had some Tier 2 vendors, which are for tech refresh, end of period had a lower revenue, but we have very strong performance from many Tier 2, Tier 3 vendors. And also on the strategic vendors, we are approaching recently, that's where we see triple-digit growth, which is very promising.

[Operator]

Next question comes from the line of Louis Lu from BNP Paribas Exane.

[Louis Lu, analyst]

Just a question on the EUR 1 million deals doubling in Q2. I was wondering if you could talk about what's driving that increase? And just to be clear, does that mean in terms of margins they've got lower carry rates, lower carry take rates and higher EBITDA margins? And should we expect that to continue in the second half?

[Jesper Trolle, executive]

Thank you for the question. So what drives the larger deals is frankly customers' need for buying more and larger cybersecurity solutions. Indirectly, some of the factors we have talked about on this call, the strengthening of the U.S. dollar, some of the price increases that have been is obviously also sort of indirectly playing into the size of the deals, right? So because when products increase, whether it's due to a strengthening dollar or price list, it has an impact on the deal. So that is an indirect driver. But I think we have reported over the last 3, 4 quarters, a continuation and an increase in these deals. We also have some vendors that are working a lot on penetrating the enterprise. The enterprise are larger institutions, and they tend to buy larger projects and larger solutions. So that's on that.

On your question on the take rate, I think -- I mean, again, this call is for gross sales. But as I mentioned to -- on one of the other analysts, yes, larger deals tend, not always, but tend to come with a lower margin percent. But again, we evaluate these deal out from the net contribution to our EBITDA and take the costs that are associated with these deals into consideration. And we have demonstrated through the last several quarters the operating leverage that we have in our model. And so this is part of the decision metrics we use when we decide whether we want to take a deal at certain terms or not. So again, I would say the true profitability metric in our business is not the net margin percent of gross sales. It is truly the EBITDA over net margin ratio.

[Pierre Boccon-Liaudet, executive]

And all this will be disclosed and detailed on the 14th of September.

[Operator]

The next question comes from the line of Antoine Lensel from Kepler Cheuvreux.

[Antoine Lensel, analyst]

I'm sorry, but all my questions have already been asked.

[Jesper Trolle, executive]

No problem. Thank you. Maybe just to come back on the last comments on the impact on net margin on big deals. It's important to note that this is the last time that we are going to comment net sales -- sales on one -- at one moment and a couple of weeks later the profitability. Starting Q4, we'll have one call for all the information altogether.

[Operator]

And the next question comes from the line of Ross Jobber from Citi.

[Rosslyn Jobber, analyst]

I'm just wondering whether or not the -- if you could comment on the amount of growth that's going through the reseller channel as opposed to the amount of growth going through, say, the larger system integrator channel. Are there any changes happening there in terms of the way that the end users are buying and implementing their cyber solutions?

[Jesper Trolle, executive]

Thanks, Ross. We don't have the detail in percentages ready today. I would say we haven't seen a big change in the way that customers are procuring. One change we have seen is the rise of what's called the sort of the managed service providers. It's clear that in a market where there is a lack of talent and skill sets, there are customers, particularly smaller customers that don't have the same capacity to attract talent and have adequate resource around cybersecurity. There is a tendency for them to look at outsourcing this and buying it in as a service where they don't need to take responsibility in a way for keeping the talent in-house and make sure they are adequately trained and certified on the solutions they have.

So this is clearly something we see and is also part of the underlying growth driver for growth in the X-OD platform where a lot of the partners there are what we classify as the managed service providers. Then I would say, of course, some of the larger projects and some of the larger deals we are seeing tend to go down with larger system integrators, which is natural because they have more skill sets and more expertise around a broader set of cybersecurity categories than maybe some of the smaller reselling partners.

[Operator]

The next question comes from the line of David Vignon from Stifel.

[David Vignon, analyst]

We have seen 2 large value-added distributors merge a few weeks ago in Europe. And other distributors have publicly commented on their willingness to make more acquisitions in Europe in cybersecurity distribution. Could you comment overall on the competitive environment in EMEA in the VAD market?

[Jesper Trolle, executive]

Yes, sure. Good question. I was waiting for this. So it's true that 2 of what I have, what some of you or most of you recently have heard me talk about as -- or previously have heard me talk about as regional players, have come together in an acquisition or merger. We do not see this as changing a lot for Exclusive Networks. First of all, we are focused on our own strategy and our own sort of execution on that. Secondly, I would say the combination of these 2 entities does create a little bit of a larger footprint in Europe, but still mainly Europe where Exclusive is truly global. And from a vendor perspective, there is very little overlap with the portfolio of Exclusive Networks.

So it's not something I spend a lot of time thinking about. I prefer to spend time thinking about how we're going to continue to grow and scale our own business. Last but not least, I would say it does show that the market is alive and there is activity, which is always a good thing. So yes, we'll see how this is going to play out. Obviously, with any M&A there comes integration and other things that can distract the businesses a little bit. But again, we don't have significant vendor overlap with them. So we don't meet that record date.

[David Vignon, analyst]

And are you seeing any -- and re you seeing more competition for M&A deals in EMEA?

[Jesper Trolle, executive]

No, it's kind of similar to -- we have a very proven methodology around M&A, and we use that and we are using this currently. And we don't participate to bidding contest. We work very closely with the targets that we identify and create industrial projects because it's all about growth of the combined businesses rather than just taking over our business in a market. So we have not really seen an increase or a rise in competition for M&A deals in the marketplace today, no.

[Operator]

Next question comes from the line of Louis Lu from BNP Paribas Exane.

[Louis Lu, analyst]

Just one on the EUR 2 billion incremental addressable market opportunity. I was wondering if you could talk about the growth profile of that market versus the present addressable market.

[Jesper Trolle, executive]

Yes, it's not really the -- it's difficult to talk about the growth profile of that particular market. I mean, if you think about it, there is -- the way we think about the overall cyber security market, there is a total addressable market. And within that, you have what we call the serviceable addressable market. And within that, you have the sweet spot. And the sweet spot is really defined as the vendors we are working with in the different cybersecurity solution areas. The services of addressable market is what we can grow into if we expand with our vendors and some of the vendors in sort of adjacent segments like cloud security, DevSecOps, et cetera. And then the total addressable market always obviously takes all of the different routes to market into place.

So when we talk about the ability to address a further EUR 2 billion of our serviceable addressable market, it means that with the expansion of these agreements with Mimecast, with NetWitness and also with the expansion of some of our -- also the onboarding and the expansion of some of our existing vendors, it allows us to grow into more of our serviceable addressable market, which is the EUR 2 billion that we have quantified this to. So that's the way we think about that. It's not a specific cybersecurity segment, right, it goes across all these different vendors. Hope that makes sense.

[Operator]

The next question comes from the line of Derric Marcon from Societe Generale.

[Derric Marcon, analyst]

One, if I may. Since the end of 2021 your backlog has increased significantly due to the shortage of components, as you said and mentioned several times during your previous call. Can you help us to understand in the Q2 very strong performance you had? What was linked or derived from the decrease of this backlog? Is it today half of what it was at the peak? Or it's 30% reduced compared to the peak? Any granularity about that would help us to understand what remains to materialize in revenue in the coming quarters.

[Jesper Trolle, executive]

Thank you, Derric. I was wondering if you are on the call. So actually the backlog at the end of Q2 was beyond what it was at the end of Q1. So the backlog continues to build. But as I've said before, the -- when we think about the supply chain, we did see, for a couple of our vendors we did see some improvements that helped us drive the growth we saw in -- or part of the growth we saw in Q2. But actually, at the end of our Q2, so at the end of June, the full backlog for the business was above what it was in Q1. And if you recall in Q1, we mentioned that the backlog in Q1, at the end of Q1 was higher than at the end of Q4. So actually the backlog continues to build. There's been a couple of vendors where we've seen some delivery and supply improvements -- and then there is others where we haven't really seen an improvement, and it continues to build as we book orders.

[Operator]

There are no further questions. So I will hand the call back to your host for some closing remarks.

[Jesper Trolle, executive]

Yes. So again, thank you, everyone, for the time today. I appreciate most of you are probably on your way or already on summer holidays. So we appreciate you taking the time to listen to this gross sales announcement today. I just want to end with where I started, which is to say that we are very excited about our first half performance. And again, for me, it truly shows the execution of our teams on the ground and also demonstrates the strength of our business model and the strong drivers that are within the cybersecurity market despite the, I would say, the macro environment that we are in. So we feel very strongly about our business and the performance, and we look forward to update you in mid-September on our full set of half year 1 financial statements. So thank you for that. And wishing everyone a good summer.

[Operator]

Thank you for joining today's call. You may now disconnect your line.