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Edited Transcript of EXN.PA earnings conference call or presentation 14-Sep-22 7:00am GMT

Half Year 2022 Exclusive Networks SAS Earnings Call Sep 14, 2022 (Thomson StreetEvents) -- Edited Transcript of Exclusive Networks SAS earnings conference call or presentation Wednesday, September 14, 2022 at 7:00:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Hacène Boumendjel * Jesper Trolle Exclusive Networks SA - CEO & Executive Director * Pierre Boccon-Liaudet Exclusive Networks SA - Chief Financial and Operations Officer ================================================================================ Conference Call Participants ================================================================================ * Alastair P. Nolan Morgan Stanley, Research Division - Equity Analyst * David Vignon Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Hello, and welcome to Exclusive Networks' Half Year Results 2022. Please note this call is being recorded. (Operator Instructions) I will now hand over to your host, Mr. Hacène Boumendjel, Head of Investor Relations, to begin today's conference. Thank you. -------------------------------------------------------------------------------- Hacène Boumendjel, [2] -------------------------------------------------------------------------------- Thank you. Good morning, everyone, and welcome to Exclusive Networks' First half of 2022 Conference Call, which is broadcasted live and will be available on demand on our website. The presentation slides and the 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, 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, 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'll now pass it over to Jesper for a few opening remarks and his overview of H1 results. Jesper, the floor is yours. -------------------------------------------------------------------------------- Jesper Trolle, Exclusive Networks SA - CEO & Executive Director [3] -------------------------------------------------------------------------------- Thank you, Hacène, and good morning, and welcome, everyone, to our half year results presentation today. We appreciate that you take the time to join us as we review our results for the first half of 2022. We are really pleased to announce a fantastic set of results, where we have delivered record half year gross sales, improved our profitability with higher adjusted EBITA margins and delivered record cash generation. As the CEO of Exclusive Networks, I am immensely proud of the outstanding performance of our teams worldwide, which have contributed to the record results that we are presenting today with gross sales increasing at 33.8% and adjusted EBITA growing even faster at over 35%. These results prove once again our unique proposition, which comes as a result of the strategy that we have implemented over the last several decades. This has enabled us to outperform the market on all of its core segments. You have heard me say this before, and I always like to say that we are in the right market at the right time. Our specialization allows us to also keep profiting from the strong momentum in the cybersecurity market, where cybersecurity continues to grow as a key strategic priority for businesses and public entities across all sizes and all geographies. Just a couple of weeks ago, we saw the CEO of Norges Bank, the world's largest sovereign wealth fund, quoting in the press that cybersecurity was their biggest concern at the moment, and that he was "more worried" about cybersecurity than he is about the markets. This is just an example of a trend that we see more and more, where companies are facing more frequent and more sophisticated cyber attacks. We are well aware of the challenging macro environment around us and the potential recession indicators. But when we look at how the cybersecurity market will be evolving in the coming months, we see no slowdown. The drivers for growth remains as present as ever, including increasing digitalization of businesses, more and more frequent and sophisticated cyber attacks and increasing regulatory scrutiny for companies and institutions to have adequate cybersecurity defenses in place. This, in turn, has lifted the entire cybersecurity industry and created a favorable market momentum. We would like to spend some time today to going in detail through our financial results, especially in regards to profitability and cash generation, which we did not cover during our gross sales update back in early August. Also, as you may have seen in the press release that went out this morning, we are raising our outlook for 2022. Pierre will be covering this in more detail later in his section. This new outlook reflects our strong start to the year, the evolution of the business and the macro environment as we approach the end of Q3 as well as the positive indicators we are seeing going forward, both in terms of the cybersecurity market and our ability to keep growing. We are, therefore, very confident in our ability to deliver the outlook that we are presenting today. With that, I would like to provide some color on our business performance for the first half of 2022. This is a slide that we have presented several times before, so I'll try and make it short. When we are looking at our underlying business performance, we have made excellent progress across all of our strategic pillars, enhancing our already prominent position within the cybersecurity ecosystem, which ultimately helps feed the flywheel effect that contributes to our success. Firstly, we have grown in our current geographies, where we have added over 1,200 net new transacting partners in the first half of 2022. And we now work with more than 25,500 partners on an annualized basis, helping our vendors to reach all parts of the market they serve. Our cloud-based business continues to accelerate, and through our X-OD platform, we have seen a strong acceleration, including a 4.5x growth in the number of resellers on the platform and more than a 7x growth in the number of transactions versus same time a year ago. We have signed geographic expansion agreements with 8 of our existing vendors and added 4 net new vendors to our portfolio. I will go into more details on this in the next slide. Moving to the extension of our service offerings, a key part of our value add, we increased Level 1 and Level 2 support for Tanium and managed to sign an authorized training center agreement with Fortinet for North America. This grants us exclusivity to sell Fortinet training in the region and helps us to drive more cybersecurity skills into the market alongside the Fortinet solutions. Also, we secured additional support services agreements for 3 existing vendors in EMEA, namely Netskope, Tanium and SentinelOne. On the M&A front, the integration and the performance of our latest acquisitions, which includes Ignition, Networks Unlimited, Veracomp and Nuaware are going extremely well. In parallel, our M&A team together with our technology experts are constantly scouting and monitoring the market very closely and are in ongoing discussions on several potential new opportunities. There is no doubt here. We remain as focused as ever on using M&A to address new geographies and reinforce our services offerings and capabilities. We move on to the next slide. The overall cybersecurity market showed strong secular growth due to an exponential growth in data, an advancing threat landscape and an increasing awareness of the need to have adequate cybersecurity infrastructure in place. In fact, several industry analysts have raised their outlook for cybersecurity spending such as Gartner, who raised their forecast to 13.4% CAGR growth through 2029 versus the previous forecast for the same period of around 10%. With this context in mind, I would like to spend a moment to explain how we think about growth and why we believe we can keep growing faster than the overall cybersecurity market despite its strong embedded secular growth. On the previous slide, I presented our 5 execution pillars that individually all are supporting our ambition to continuously capture a larger and larger share of our addressable market. You will have seen this slide before, and we use this to illustrate how we think about our addressable market. Within this, our service addressable market, which is the gray bubble, is defined as all cybersecurity products that flow through the 2-tier distribution value chain, including vendors and segments that we do not address today. Our sweet spot on the other hand, represents the main cybersecurity segment, which we do address currently with our existing portfolio of vendors and our services that we offer alongside it. When we think about how we grow within this market, first, we look at our current vendor portfolio, represented by the green bubble. As you can see, our net retention rate for vendors was 128% in the first half of 2022 and equally 127% for partners. In other words, when we look at the vendors we had in the first half of '21, we have increased the business we did with them by 28% year-on-year across the same geographies and similarly by 27% with our partners. These high net revenue retention numbers clearly demonstrates the high demand for our vendor solutions, the value we create and the stickiness of our business model and relationships with vendors and partners alike. The next way we can grow within our market is through expansion with our existing vendors, including both geographical expansion and also services expansion. On the geographical expansion, we have opened new markets for 8 of our vendors with some of the most recent including Palo Alto in the Middle East, Tanium in Eastern Europe, Extreme Networks in Malaysia and Hong Kong and also Tenable in EMEA. We will discuss Tenable in a little bit more detail later on in the presentation. On the services expansion, as we mentioned earlier, we have extended the partnership with Fortinet by having exclusivity on Fortinet certifications. And earlier this year, we launched support center services for Netskope, Tanium and SentinelOne. And lastly, through the ongoing work we are doing to assess new emerging vendor opportunities, we have the upside and the possibility to further increase our addressable market. During first half of 2022, we estimate that we have increased our total serviceable addressable market by more than EUR 2.5 billion due to the previous mentioned territory expansion with existing vendors as well as the new vendor additions to our portfolio. And this leads me to the next slide, which shows this very clearly and where we can see how we have outperformed all of the core cybersecurity segments. We don't really get tired of mentioning this, and this slide proves how our strategy resonates with our vendors and our partners and how we managed to consistently outperform the market on every one of its core segments. We have included one new segment into this slide, DevSecOps. This is a segment where we have recently increased our presence and where the performance has been outstanding. We anticipated an exponential demand back in 2020, and we entered this segment through the acquisition of Nuaware. Thanks to our Nuaware platform, we have been able to sign partnerships with a significant number of key vendors in this particular segment and helped accelerate their rapid growth. We are now expanding our unique go-to-market strategy that's built on cloud-native software, DevSecOps and cloud security expertise with leaders such as Hashicorp, Palo Alto Prisma Cloud, Salt Security, Sysdig and Docker within containers. As I've mentioned on several occasions in previous results presentations, the reason why we can continuously outperform an already fast-growing market is really a result of 3 main pillars. First off, it's our ability to continue to spot market trends, identify the disruptive and new winners early on and establishing long-term relationships with them. Secondly, it's about having the best and the fastest-growing vendors in our portfolio, and most of those are usually Gartner Magic Quadrant Leaders. And finally, it's all about complementing our vendors' technologies with high value-added services and an abundance of technical skills, which is a key differentiator and a critical part of our value proposition. Let me go through a couple of examples of this to give you a true sense of what we mean. On this next slide, we show our partnership with Fortinet from the very beginning. We identified Fortinet early on in 2003, just 3 years after the company were founded and long before their IPO. As we often do, we started partnering and working together in a couple of markets, in this case, France and North Africa. Since then and almost 20 years of strategic partnership later, we have expanded together into more than 60 countries with almost 600 exclusive network-certified resources, who are supporting more than 9,000 partners with Fortinet technologies every day. Despite this already impressive partnership, we continue to expand our relationship. In 2020, Fortinet was one of the first vendors we onboarded on our X-OD platform. And as I mentioned earlier this year, we were granted the exclusive status as a Fortinet authorized training center in North America. Fortinet is one of the leading and one of the largest cybersecurity companies in the world, and identifying the opportunity with Fortinet early on, coupled with our ability to continuously evolve the value and the services we bring to Fortinet and our mutual channel, is a perfect example of how we work with our vendors and the trust they place in us and in our execution capabilities. I mentioned earlier that I would get into a little bit more details on Tenable, which is a more recent example of our land and expand strategy when we onboard a new vendor. Tenable is one of the newer vendors in our portfolio. Our relationship with them started in France during the first half of 2021 after Tenable acquired Alsid earlier in 2021, who was already a vendor that was working with Exclusive Networks, specialized within the area of active directory security. Through our Veracomp acquisition, we expanded the coverage into Eastern Europe, followed by South Africa and Sub-Sahara Africa through our acquisition of Networks Unlimited. Subsequently, in 2022, we have built on this momentum and expanded further with them into the European market by entering the U.K., Ireland, Benelux, Italy, Spain, Portugal and Germany. This significant contract expansion has increased our serviceable addressable market with Tenable, which is directly associated with our strong sales growth doubling year-on-year in first half of 2022. The last slide I would like to present before I hand it over to Pierre is the one on our cloud business. We continue to grow at rates above 50% year-on-year, driven by an increasing adoption of cloud by more of our partners who are transitioning from traditional hardware-based sales models to more software and cloud-oriented models. The cloud-based business now represents 27% of our gross sales in first half of 2022. As we presented in August, we continue to see an increasing demand for cloud security as well as a demand for our X-OD platform, both in number of partners that grew by more than 4x versus same time last year and number of transactions, growing more than 7x since first half of 2021. And with this, I would like to hand it over to Pierre, who will present our financial performance for the first half of the year. Pierre, over to you. -------------------------------------------------------------------------------- Pierre Boccon-Liaudet, Exclusive Networks SA - Chief Financial and Operations Officer [4] -------------------------------------------------------------------------------- Thanks, Jesper, and good morning, everyone. I'd like to start with some familiar remarks. The difference between gross sales and the IFRS notion of revenue was presented during the gross sales publication in early August. So I assume this is understood. Second, and also disclosed early August in the first half of 2022, the group decided to exclude the intercompany transaction from its gross sales KPI, and by doing that, improving the relevance and reliability of its gross sales indicated to the market. Gross sales represents sales from third-party only without any intercompany transaction. And for comparable purposes, historic figures have been restated according to the new definition and the 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 variation year-over-year. And also important to note that this change does not have any impact on net margin nor on adjusted EBITA. Another preliminary remark is that our first half condensed financial statements have been reviewed by the auditors and so they are audited. The auditors have updated the Board and the Board approved the release of these financial results for the half year ending June 30, 2022. Finally, important to state that the outlook does not take into account any unforeseen event that may happen during the second half of 2022. So let's go into the key highlights of our first half 2022 results. As you already heard from us on August 2, gross sales reached a record semester of EUR 1.9 billion in the first half of 2022, up 33.8% from the first half year of '21, plus 31.2% at constant currency. And as already explained, all market fundamentals was very strong, growth in all geographies, in all cybersecurity segments, with an acceleration in Q2 compared to the first quarter. In the first half of '22, adjusted EBITA was EUR 66.5 million, up 39.3%, growing faster than gross sales and representing a new record of 35.4% of adjusted EBITA as a percentage of net margin in a first half. Thanks to a strong management of net working capital, the operating free cash flow before tax on adjusted EBITA was a record high 227.7% or EUR 166 million, with a mid-term normal unchanged around 80%. This one-off improvement has a consequence on ROCE, which stands at 107%, an average ratio closer to 71% if averaging over the last 3 years. All this strong profitability and high cash conversion led to a record net debt leverage of 1.8x at the end of June 2022, a sharp reduction from 3.1x at the end of December '21, and we see us staying around that level. Let me drive you now through each of these strong performances. We'll go quickly through the Slide 13, as we already disclosed it during our gross sales and revenue publication in August. Gross sales grew 33.8% in the first half to EUR 1.9 billion, up 31.2% at constant currency. Three reasons, as explained by Jesper: the market is growing faster than anticipated; significant price inflation due to supply costs going into price increases, coupled with USD strengthening compared to the local currencies; and also our strategy and operating model, which is resonating. Out of the 33.8% growth, 72% came from the same vendor in geographies we were already working with them in the year before, 14% from vendor expansion to new geographies or new vendors and 14% from M&A, namely Ignition and Sub-Sahara Africa acquisitions. The key components of growth are disclosed in Slide 14, as it provides the source, information to understand our profitability profile. In the first half, we saw a superior growth rate in the Americas at 52.9% compared to a lesser growth rate in the APAC region at 13.4%, with EMEA growing at 35%. This is how now Americas represents 10% of the gross sales of the group in the first half compared to 9% a year before, and this is how APAC declined from representing 13% to 11%. Regarding the size of deals, we saw strong activity with large sized deals above EUR 500,000, growing at around 80% and now representing 21% of gross sales in the first half of 2022 compared to 17% in the first half of '21. Both trends are going into a profitability profile of slightly less OpEx-intensive contracts and slightly less margin as a percentage of gross sales. In the Americas, the level of support required for every euro of sales is much less proportionately than in APAC, for example. The business in the U.S. is more transactional and requires less support, so lesser margin percentage, and similarly, lower cost to support it. And large deals require less support proportionally as well. So let's go deeper on the consequences on net margin and adjusted EBITA on the next slide. In the first half of 2022, net margin landed at EUR 187.6 million, an increase of 29%, almost at the same speed as gross sales growth and a spectacular 58% increase if you will take it over the last 2 years. The spectacular growth comes from the obvious strong dynamic of the demand for cybersecurity solutions. It also comes from the value add that Exclusive Networks brings in its capacity to expand vendor presence and capacity also to fuel reseller with activities. Net margin as a percentage of gross sales was at 9.6% in the first half of 2022, 40 basis points lower than from the first half of 2021, with 3 points of explanation: 25% basis points deriving from the larger portion of large deals in the mix -- that's why I insisted on the previous slide; 10 basis points explained by the geographic higher growth in the Americas region taking slightly more share; and 500 basis points came from a blend of freight costs, which inflated during 2021, and strategic negotiations. This confirms that geographical mix and deal size are the 2 key drivers of net margin as a percentage of gross sales. Simultaneously, large deals and some geographies like the Americas do not require the same level of cost to deliver EUR 1 margin. When looking at the adjusted EBITA contribution on the right side, you can see that in parallel to the net margin percentage, the adjusted EBITA margin -- adjusted EBITA as a percentage of net margin is increasing very significantly to 35.4%, 2.6 basis points higher than during the first half last year. This is a confirmation of the fundamentals of our business model, which, with the deal size and the geographical mix, influencing the net margin percentage, but compensated by less intense resources needed and not deteriorating the profitability ratio overall. This is confirmed, again, this semester as the adjusted EBITA has grown to EUR 66.5 million, plus 39.3%, much faster than the 20 -- the plus 29% net margin growth and even faster than the 33.8% of gross sales growth. This is a 78% growth of profitability over the last 2 years, a true testament to our strategy. If we go to the next slide, let's have a quick focus on our OpEx and operating expense. As a reminder, we include depreciation and amortization in our OpEx as they are structurally low and not strategic in our asset-light model. Overall, with a EUR 24 million increase year-over-year, OpEx grew slower than gross sales and net margin, supported by the favorable mix of activity and some operating leverage. Looking at the details. And despite some recruitments to support growth and salary increases to recognize performance, personnel costs were well contained and other operating costs benefited from some fixed cost leverage despite the return of high levels of travel, entertainment and physical marketing events, but still at a lower pace than pre-COVID. Let's now look at the financial performance by region. On this slide, we show gross sales, revenue and adjusted EBITA metrics. Let me have a short comment to remind the definition of revenue as reported on this slide and in the consolidated financial statement. We are not the primary obligor for the sales of support and maintenance, thus following IFRS for support and maintenance, which represents around 25% of gross sales. We record the net margin generated as our revenue, revenue without any cost attached. As you can see on this slide, all the 3 theaters enjoyed some solid sales and profitability growth. They are -- they all performed above guidance. EMEA, first. Gross sales grew by 35.1% and adjusted EBITA grew even faster at 42.4%, reaching EUR 70 million in the first half of 2022. All EMEA countries posted outstanding performance. The enterprise market dominating that growth, in particular in the U.K. and in Germany, which led to a superior growth of large sized deals. EMEA is the region where the 2 acquisitions had an acceleration effect on growth with Ignition and Sub-Sahara Africa. The strong growth was also supported by the vendors' product price increase passed on to the channel, which are reflected in both our purchase and our selling prices; and also by the strong USD, making selling price in local currency even higher. During the second half of the year, we continued to see a business environment of product shortage and supply chain tensions, and as a consequence, backlog is still at all-time high. With a 42.4% growth, adjusted EBITA was higher than gross sales growth, thanks also to a strong operating leverage. In APAC, gross sales grew by 13.4%, plus 6.2% at constant currency, which shows a good acceleration in the second quarter of 2022 compared to the first one. And over the same period, adjusted EBITA grew a spectacular 39.8% derived from higher margin in all activities, growth in services and operating leverage on the cost base. The Americas had a spectacular growth at 52.9% in the first half, which was really 39% at constant currency. Profitability grew 36%, perfectly in line with the constant currency gross sales growth. Exclusive Network is investing in resources in the platform and in working capital to develop this region where we see some good potential. This performance shows in the U.S. and Canada that the investments are paying off. Still a very strong organic growth from historic vendors and a successful onboarding of new vendors. And thanks to the leverage effect, profitability increased also. This confirms our strategy in the Americas, as already described. So putting it all together, to wrap it up, we are presenting the half year group simplified adjusted P&L here. Gross sales grew 33.8%. Revenue growth is in line with gross sales growth as the contribution of support and maintenance remains flat. Net margin grew 29%. Adjusted EBITA was EUR 66.5 million, up 39.5% versus last year, improving 2.6 basis points as a percentage of net margin at 35.4%. Note that the guidance at 37% is for the whole year. And traditionally, the first half year ratio is lower than the second half, which is the direct consequence of higher sales volume in the fourth quarter, leading to higher profitability. Adjusted net income increased even faster by 49% to reach EUR 47.4 million, with less financial expense following the refinancing of the IPO and the cash generation and limited tax calculation at half year-end. And the outstanding performance on gross sales and profitability was even accelerated in its cash conversion. So let's start with net working capital. We made a tremendous progress at the end of June 2022 compared to both December '22 and June last year despite the significant growth of activity. About the tight control on the fundamentals of working capital, 3 elements generated an improvement this quarter. Some factoring facilities without recourse were implemented in The Netherlands, in Belgium and in France, accelerating the conversion by EUR 33 million of receivable into cash, which limited the growth of receivables generated by the growth of activity. Second, in the U.K., the cadence of the quarterly payment of VAT to the tax authorities changed and was postponed from before the quarter end to after the quarter end. This element alone had a permanent positive effect of EUR 20 million on the net debt of the company. And to manage at best the product shortage issues and the supply chain tension, some increase of inventories due to product partly delivered and unable to be delivered to clients, we agreed not to pay to vendors. This was not the case at the end of December, and the negative impact of net working capital and cash generation reversed in the first half of '22. We expect to continue such policies with our vendors in the near future until product shortages cease. This helps net working capital by EUR 70 million. All these initiatives and the current good positioning of receivables, inventory and payables led to a net working capital of EUR 53 million at the end of June 2022, only 1% of gross sales and significantly better than the 4% to 4.5%, which remains our normal average level. These improvements are one-offs, but they will not reverse. Going further into the cash generation analysis. As a consequence of the reduction in net working capital described above, the change in net working capital was significantly favorable at EUR 103 million. The operating free cash flow reached a record level of EUR 166 million, EUR 81 million above prior year, thanks to higher profitability, a significant change in net working capital and less interest expense with the new capital structure. This represents an exceptional conversion of adjusted EBITA of 227.7% into cash. We expect the normal conversion rate to come back to around 80% with the next year -- within the next year. But these improvements are not expecting to reverse and they are permanent. The operating free cash flow details are presented in the appendix Slide 33. Free cash flow has the same variation as the operating free cash flow before tax as the current tax paid and the change in scope of consolidation are at similar movements. Exclusive Networks remains, unlike some other distributors, an asset-light model, resulting in high capital efficiency. This led to a significant improvement of Exclusive Networks' net debt leverage. Net debt leverage landed at 1.8x last 12 months EBITA after lease at the end of June 2022 as a result of the cash generation. Overall, our financial structure is very secure. Long-term debt is not due before September '26, and we estimate we have sufficient liquidity with the EUR 120 million of revolving credit facility not used at the end of June and EUR 257 million of cash as at June '22. This improvement of leverage is permanent, no reversal effect to expect. The 2021 dividend of EUR 18.3 million was paid to shareholders early July '22. Instead of 1.8x leverage, the leverage ratio would have been 2 if the -- 2.0 if the dividend payment had been made in the second quarter of 2022. Based on these positive results at half year, we are now targeting to have a net debt leverage ratio below 2x by the -- by year-end compared to a target of 2.5x previously. Midterm, and considering the asset-light model of the group and historical cash generation profile, we intend to continue to fuel the organic growth to do M&A, to serve shareholders' return and continue to reduce leverage at the same time. With that, let's move to the revised outlook for 2022. Starting with gross sales. Given what we are seeing in the market now such as the strong market demand for cybersecurity, the favorable price and U.S. dollar increases, our current backlog and despite the economic tensions that we are well aware of, we expect consolidated gross sales to grow above EUR 4.2 billion in 2022, up 10.5% from our previous 2022 outlook. Towards the end of 2022, we expect to see a continuation of the faster growth in EMEA and in the Americas, with a softer growth in APAC, with overall a continuous growing contribution of large deals. Our baseline outlook assumes that supply does not materially deteriorate beyond what we have been experiencing in the first half of 2022. Moving down the P&L. We currently expect net margin to grow and reach a range between EUR 392 million to EUR 400 million in constant currency, the positioning in the range depending on the volume of gross sales and the mix of deal size and geographies. This equates to approximately an 8.5% growth from the initial guidance. Moving further down the P&L. We expect adjusted EBITA to grow faster and reach a range between EUR 146 million to EUR 152 million in constant currency, up around 10% compared to previous outlook. And for the year 2022 and considering the performance in H1 2022, we now target an operating free cash flow before tax greater than 160% of adjusted EBITA and a net debt leverage below 2x at the end of the year. We feel confident to convert adjusted EBITA into cash at that level or higher. Please remember, we hold ourselves accountable for delivering our combined financial outlook on an annual constant currency basis. Turning to 2022 capital allocation priorities. Our objectives remain consistent with what we shared during the IPO process last year. The group is providing an attractive shareholder return in line with its expectation in terms of value creation resulting from the implementation of this growth strategy. The group's attractive shareholder return policy includes, but not limited to a dividend payment in the range of 25% of its annual adjusted net income. And the structure of the distribution policy might be adjusted should growth opportunities to complement organic growth arise or should a other mechanism to return value to shareholders be assessed as being more compelling. Some more details on gross sales before and after interpolation. IFRS to adjusted reconciliation tables, consolidated financial statements details and cash flow generation can be found in the appendix slide. That concludes the financial summary. As we always do, we will provide updated views on the macroeconomic environment and our business on future earnings calls. And with that, I give the floor to Jesper so that he can summarize the key takeaways. -------------------------------------------------------------------------------- Jesper Trolle, Exclusive Networks SA - CEO & Executive Director [5] -------------------------------------------------------------------------------- Thank you very much, Pierre. And hopefully, everyone appreciated the additional color on our financial results. So before we open the floor to questions, I would like to conclude this presentation stating that we are extremely pleased with our business performance and our financial results for the first half of the year. When we did the IPO 1 year ago, we guided towards growing slightly faster than the market, which we clearly have delivered on. We continue to see a strong market and high demand for cybersecurity products despite the uncertainties in the macro environment. Cybersecurity remains a top agenda item for bots and CEOs alike across corporations and public entities across the world and across all types of companies. And this trend is showing no signs of slowing down. This, together with the price inflation tailwinds, is accelerating the growth of the cybersecurity market as a whole. And as I explained at the beginning of the presentation, the combination of the structural growth in the market, our portfolio of premium vendors and our unique execution capability gives us strong confidence that we'll continue to outperform the market. We are very excited about the future prospects of the business, and we are confident that we will meet the raised outlook that we have presented here today. Again, I would like to finish off where I started, which is to thank all of our people and teams around the world for their hard work and dedication. It is truly them that we can thank for our strong performance year-to-date. I will now hand it over to Hacène, and we are ready to open for the Q&A session for any questions that you might have. Thank you for your time. -------------------------------------------------------------------------------- Hacène Boumendjel, [6] -------------------------------------------------------------------------------- Thank you, Jesper. So this now opens the Q&A session. Operator, the line is yours. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) The first question comes from the line of David Vignon calling from Stifel. -------------------------------------------------------------------------------- David Vignon, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [2] -------------------------------------------------------------------------------- So I have 3 questions on my side. The first one is, could you please give us a bit more color on the improvement in commercial conditions with vendors that is mentioned in the press release? And the second one is, on your adjusted EBITA margin in the Americas region, it has slightly decreased as you had continued to invest for growth in that region. Could you please give us a bit of insight into when improvements should be expected there? And the last one is on the net working capital. Just a clarification. I think you mentioned that the 4% of gross sales target was still valid for the net working capital. So just to be clear, should we expect a negative impact on cash during the course of 2023? -------------------------------------------------------------------------------- Jesper Trolle, Exclusive Networks SA - CEO & Executive Director [3] -------------------------------------------------------------------------------- I'll take the part on the U.S., and then I'll let Pierre answer your 2 other questions. So first of all, we are very happy with the progress that we are seeing in the U.S. This region grew 52.9% in the first half and 39% at constant currency because, obviously, they are helped by the U.S. dollar. But in line with a 30% -- 36% adjusted EBITA growth. We've always been clear about the U.S. that this is a market that we entered much later than our other comparative markets. In fact, we only entered the U.S. 6 years ago with the acquisition of Fine Tec. And so we are still investing and still building out our platform in this geography. And that's why they are still not at the same level of adjusted EBITA as some of the other regions. But we feel confident in our abilities to get there. As we have highlighted many times before, the operating model is different. There are bigger deals, lower margin percent, but lower cost to sell. And all of that translates into a meaningful EBITA over net margin in similar sort of size as we see in our other businesses. Pierre, you want to take the 2 others? -------------------------------------------------------------------------------- Pierre Boccon-Liaudet, Exclusive Networks SA - Chief Financial and Operations Officer [4] -------------------------------------------------------------------------------- Yes. So on net working capital, we made an improvement. We'll have this improvement towards the end of the year, and we expect to continue to have this improvement on an ongoing basis. Without this special improvement, the rest of the trend, that's what I meant, will continue to be as before. So we are guiding towards the end of the year to be below 2 of leverage and to be at 160% of generation of operating free cash flow. Then in terms of improvement of condition, it's not an improvement of conditions. We didn't have any change on the improvement on conditions -- commercial conditions with our vendors. It's just that due to this period of supply shortages or partial deliveries, we clarified with them what was the right modus operandi and we clarified that if we cannot recharge and invoice our customers, we cannot pay them and carry the inventory. So that's what we do in some -- to some extent at the end of last year. That was disclosed and explained. We were expecting to have the reversal of this. We had the reversal. And so now we just are doing our back-to-back activity as normal, which made a portion of the improvement this year. But no change of conditions with our vendors in terms of payment terms or delivery cycles, et cetera. -------------------------------------------------------------------------------- Operator [5] -------------------------------------------------------------------------------- The next question comes from the line of Alastair Nolan calling from Morgan Stanley. -------------------------------------------------------------------------------- Alastair P. Nolan, Morgan Stanley, Research Division - Equity Analyst [6] -------------------------------------------------------------------------------- Maybe Jesper, can you just give a little bit of an update on what you're seeing in the broader supply chain impacts? Is there something that maybe has improved? I think you had said previously you didn't expect an improvement until the second half, but just looking for an update there. Secondly, is there any particular vendors you might call out that has been exceptionally strong in the first half? Just trying to get kind of a read on who's performing best. And then thirdly, you've obviously delevered pretty significantly. I guess considering where the shares are trading, have you considered something like a buyback given kind of the performance of the business and maybe the disconnect between valuation? -------------------------------------------------------------------------------- Jesper Trolle, Exclusive Networks SA - CEO & Executive Director [7] -------------------------------------------------------------------------------- So I'll take the first 2, and I'll let Pierre talk about the shares and -- so on the supply chain, we haven't seen a lot of improvement. I mean there is -- it sort of ebbs and flows in a way. There is -- we have some months where we see a bit of improvement. Then we see a bit of worsening. So I would say on a blended average, it hasn't really changed significantly during the last 5 quarters we have been reporting on. What's also blurring the picture a little bit is when we look at our backlog -- because we still, quite frankly, have a stronger bookings growth than billings growth, we continue to build backlog. So what I see in the backlog is that it's becoming more and more current. So when I look at the proportion that relates to -- of the backlog that relates to deals that are from more past quarters, that portion is growing inside of the total backlog. And that tells me that the backlog and the supply chain is very much alive and that it's sort of flushing out at a set pace. But we haven't seen like a massive easening of supply chain that suddenly allows us to bill out a very significant part of our backlog. So in a way, I would probably summarize it by saying it's kind of more of the same, and we expect this to probably continue through the remainder of the year. It's true though that if -- and there's been some writing on this I've seen in the press, that, if other segments are starting to slow a bit, there will be more chips available in this part of the sector. And that could lead to more production capacity that could be positive for the supply chain in the overall cybersecurity industry. Then in terms of your question on vendors. I mean, as you know, Alastair, we don't really talk too much about individual vendors. I would say, as I said in my prepared remarks, we see a lot of emphasis on cloud security as a segment. XDR continues to be really strong as companies are sort of understanding that endpoint is not just one thing. And then we see very strong momentum as the companies have also reported themselves with the likes of Fortinet and Palo Alto that clearly are pursuing more of a platform approach to customers to try and sell more of their different cybersecurity segments to the same customers. And so that's probably how I would talk about vendors. -------------------------------------------------------------------------------- Pierre Boccon-Liaudet, Exclusive Networks SA - Chief Financial and Operations Officer [8] -------------------------------------------------------------------------------- As regards to the potential share buyback following this very strong net debt leverage, no, no, there is no such a plan on the table at the moment. Management is satisfied with the current level of leverage. -------------------------------------------------------------------------------- Jesper Trolle, Exclusive Networks SA - CEO & Executive Director [9] -------------------------------------------------------------------------------- On the share buyback, Alastair, I would say that, as you know and everyone knows, we would like more liquidity. So that doesn't necessarily support that at this moment in time. We do have an employee lockup that expires on the 23rd of September, which will help to increase the liquidity and then we will discuss with the Board if we feel we need to take different actions. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- (Operator Instructions) The next question comes from David Vignon again calling from Stifel. -------------------------------------------------------------------------------- David Vignon, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [11] -------------------------------------------------------------------------------- Just one more on my side on Tenable, the important stat in your current portfolio. Could you give us a bit of an idea on actually where it is compared to a company, for example, like SentinelOne as a share of your growth base, I would say. -------------------------------------------------------------------------------- Jesper Trolle, Exclusive Networks SA - CEO & Executive Director [12] -------------------------------------------------------------------------------- With Tenable? -------------------------------------------------------------------------------- David Vignon, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [13] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Jesper Trolle, Exclusive Networks SA - CEO & Executive Director [14] -------------------------------------------------------------------------------- Yes. So we don't break out individual vendors in our performance. SentinelOne is a company that -- very similar to the story I went through with Fortinet, that we have partnered with since 2016 and have helped to grow and scale and expand with. And Tenable is, as I said, a very recent addition to our portfolio. So it's difficult to compare the 2. They are also in different segments, by the way. And again, we don't break out individual vendor performance in our results. -------------------------------------------------------------------------------- Operator [15] -------------------------------------------------------------------------------- We currently have no questions anymore. There are no further questions. So I will hand you back to your host to conclude today's conference. -------------------------------------------------------------------------------- Jesper Trolle, Exclusive Networks SA - CEO & Executive Director [16] -------------------------------------------------------------------------------- Okay. Thank you. So I'll just finish off with what I said at the beginning of the call, which is I'm immensely proud of our teams around the world. It's truly through their hard work and dedication that we're able to present the results that we are presenting on this first half. It's clearly -- very clear to us and to the market that our business model, the value we generate and the strategy is resonating with the market, both our vendors and our customers. And this, coupled with the positive momentum in cybersecurity industry -- within the cybersecurity industry despite the macro sort of environment uncertainties is why we are raising our 2022 outlook as we have presented to you today. So as both Pierre and I said, we feel very good about the new outlook that we are presenting, and we look forward to report back on progress against that in the quarters to come. Thank you, everyone, for attending the call today. -------------------------------------------------------------------------------- Operator [17] -------------------------------------------------------------------------------- Thank you for joining today's call. You may now disconnect.