Darktrace shares surge following earnings release

Darktrace shares were trading sharply higher in early London price action today after the company reported its fiscal year 2021 earnings and raised the guidance.

Darktrace reported revenues of $281.3 million in the fiscal year 2021 as compared to $199 million in the previous fiscal year. The company’s gross margins meanwhile narrowed from 91.2% to 89.9% during the period. Nonetheless, these are pretty good margins to have which somewhat explains the high valuation multiples for Darktrace shares.

Darktrace reports wider loss

Darktrace reported an operating loss of $38.5 million in the year which was higher than the $24.9 million in the previous fiscal year. The company’s net loss also widened to $149.5 million in the fiscal year as compared to $24.9 million in the previous fiscal year. The massive increase in net loss was due to the $107.2 million in non-cash finance costs that the company booked in the year. These are related to convertible loan notes that were issued in July 2020. These notes were extinguished and converted to equity during the IPO.

On the brighter side, Darktrace reported an adjusted EBITDA of $29.7 million in the year as compared to $8.9 million in the previous year. The company also posted positive free cash flows before financing activities of $34.6 million. It said that the cash flows were “driven by both scale effects and a significant reduction in travel and entertainment costs from COVID-related global travel restrictions.”

Commenting on the results, Darktrace CEO Poppy Gustafsson said “At our first full-year earnings, we are very pleased to report robust financial and operational performance, and strong growth, during the period. In this new era of cyber-threat, Darktrace is helping organizations from every industry sector, including providers of critical national infrastructure, to protect their digital assets, and avoid the serious disruption that cyber-attacks can cause.  “

Other key takeaways

During the year, Darktrace reported share-based compensation and related expenses of $38.6 million as compared to $10.3 million in the previous year. It also booked IPO-related costs of $15.3 million during the year. These costs are non-recurring in nature and companies going public often book them post the IPO.

Meanwhile, Darktrace has been among the most successful London IPOs of recent times. The company priced the shares at 250p which happens to be its 52-week low also. The shares have since surged and went on to hit a high of 787p. While the shares have come off their 52-week highs, they still trade at over twice the IPO price. The price action is in contrast to Deliveroo, which was another hyped IPO of the year. Despite lowering the IPO price, the shares have traded on a weak note. The negative publicity that the delivery company got over its contractor policies have not done any good either and several institutions had shunned the IPO.

Darktrace raises guidance

After posting spectacular earnings for the fiscal year 2021, Darktrace also raised the guidance for the fiscal year 2022. The company expects revenue growth between 35-37% in the year which is higher than its previous guidance of 29-32%. It also raised the adjusted EBITDA margin guidance to between 2-5%, up from the previous range of 1-4%.

“The Group has now confirmed strong sales trends exiting the second half of FY 2021, including a particularly strong June performance, and has seen early FY 2022 sales performance towards the upper end of its expectations,” Darktrace said in its release.

Darktrace share price forecast

According to the data compiled by TipRanks, all three analysts covering Darktrace rate it as a buy or some equivalent. Its average target price of 702.67p is a premium of only 2% over current prices. The highest target price is 778p. Meanwhile, after the earnings beat and guidance raise, analysts might also upwardly revise their target prices for the shares.

As the digital transformation is increasing, cybersecurity threats are also increasing. The recent cyberattacks including that on Colonial Pipeline in the US, have highlighted the importance of cybersecurity for companies. Darktrace looks like a good way to play the cybersecurity theme.

Darktrace shares trade at an NTM (next-12 months) EV (enterprise value)-to-sales multiple of 17.5x. The multiples might seem high in absolute terms but looking at the high revenue growth and gross margins that the company brings to the tables, the valuations seem reasonable.

Darktrace shares opened at 655p today and went on to high a high of 720p. At 10:05 AM London time, the shares were trading 7.5% higher at 686.50p.