1st Feb 2023 12:04
(Alliance News) - Darktrace PLC on Wednesday announced a GBP75 million buyback plan in what the cybersecurity company believes to be the "best use" of its excess cash.
The stock was up 6.8% at 224.40 pence each in London on Wednesday morning. It still remains down some 13% so far in 2023, falling 13% and 4.5% on Monday and Tuesday, as the stock was hit by a short-seller attack.
Darktrace said up to 35 million shares will be repurchased under its GBP75 million plan. It said its cash position has increased by USD100 million to USD368 million since its May 2021 initial public offering. While that part of its balance sheet has risen, shares have not. The stock is down about 10% from its 250p IPO price.
However, at 251.80p, it had ended last week above its float price. That all changed after Quintessential Capital Management announced it has taken a short position on the stock.
In its 69-page report, titled 'The dark side of Darktrace' Quintessential criticised the company's management and said it is "sceptical" about the company's growth figures.
"[We] fear that sales, margins, and growth rates may be overstated and close to a sharp correction," Quintessential said.
Quintessential said it found "numerous transactions" in the run-up to Darktrace's IPO which involved simulated or anticipated sales to phantom end-users, meanings ones that do not actually exist.
"DT seems to have repeatedly used marketing activities to channel funds back into its partners as payment for apparently fictitious purchases," Quintessential alleged.
"These alleged channel stuffing and round-tripping activities may have involved shell companies in offshore jurisdictions manned by individuals with ties to organized crime, money-laundering, and fraud. We have detected a pattern of transactions suggesting that a portion of Darktrace's past recurring software sales may instead be one-off sales of hardware appliances."
Quintessential said Darktrace shows shades of Autonomy.
It added: "Far from coincidental, we believe that this situation may exist because Darktrace has been led or strongly influenced by many of the very same individuals that participated in the Autonomy debacle, especially during the years leading to its IPO and to an even greater extent than is currently acknowledged by the public.
"Given its close ties to Autonomy, it would be reasonable to wonder whether certain individuals within DT's management team may have been tempted to replicate its problematic sales practices, perhaps with additional sophistication."
Autonomy Co-Founder Mike Lynch has been accused of deliberately overstating the value of his business before it was acquired by computer hardware and software services provider Hewlett-Packard Co back in 2011.
AJ Bell analyst Russ Mould commented: "Has this business got more skeletons in its closet than Tim Burton has featured on screen in his film and TV repertoire? Yet another hedge fund would think so, judging by the latest bear raid on the cybersecurity group.
"The fact we've had two damning reports means a lot of investors will have lost faith in the business. A buyback might provide short-term relief to the share price but ultimately Darktrace needs to come up with some detailed responses to Quintessential's accusations or investors are simply going to walk away."
By Eric Cunha, Alliance News news editor
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