18th Jul 2023 11:59
(Alliance News) - After being targeted by a shortseller, it would appear Darktrace PLC has escaped largely unscathed, with investors also cheered by its strong trading and guidance.
The cybersecurity firm brought in accountants from Ernst & Young to conduct a third-party probe into its financial processes in February, after falling under scrutiny from short-seller Quintessential Capital Management. Quintessential had criticised Darktrace's management and said it was "sceptical" about its growth figures.
In a 69-page long report alleging myriad improprieties, Quintessential had said it found "numerous transactions" in the run-up to Darktrace's initial public offering which involved simulated or anticipated sales to phantom end-users, meaning ones that do not actually exist.
It also alleged account anomalies which painted a "misleading picture" about the firm's gas generation, as well as accounting "red flags".
"We are of the opinion that Darktrace's financial statements may not be relied upon as the company looks like a sophisticated replica of the Autonomy debacle," Quintessential had said.
Back in May 2022, the Telegraph reported that Darktrace's strategy chief was part of a group of executives who helped to misrepresent the success of software company Autonomy, which was acquired by Hewlett-Packard in 2011.
However, on Tuesday Darktrace said that EY's review has concluded, and it believes it will not have "any impact" on its previously filed public financial statements.
"Today we've had the findings from the report and they've essentially proved that the cybersecurity expert doesn't have any skeletons in the closet, sending its share price soaring," said Danni Hewson, AJ Bell's head of financial analysis.
Shares in the FTSE-250 listed company surged 20% to 353.80 pence each in London around midday.
"Yes, there is some work to do with improving systems and controls, but nothing that impacts previous financial statements. Investors breathed a huge sigh of relief," she added.
German investment bank Berenberg concurred, judging this to be a "very good outcome for the firm".
The stock is trading well above its initial public offering price of 250p from April 2021, but still lags below its all-time high of around 945p in October 2021.
Darktrace also updated on its recent trading, revenue for the third quarter to March 31 was USD139.2 million, up 28% from USD109.8 million a year prior.
Darktrace said its annual recurring revenue was USD583.6 million, a 34% increase in constant currency from a year earlier.
The company's earnings before interest, taxes, depreciation, and amortisation margin for the third quarter of financial 2023 was at or above the top end of its previously stated 16% to 18.5% yearly guidance range, Darktrace said.
Looking ahead, the company said the macroeconomic environment continues to have a "significant impact" on new customer additions and related ARR growth.
However, Darktrace expects an increase in ARR for 2023 of around 29%, as well as revenue growth of approximately 31%. The company also upped its expectations for its full-year adjusted Ebitda margin to be around 19%.
"FY24 guidance comes in broadly in line with current consensus expectations: a slight beat on ARR growth, a slight miss on revenue growth, although margin guidance is again well ahead," noted Davy Research.
Berenberg concluded: "We are comforted by both the strong set of results and conclusion of the EY review."
By Elizabeth Winter, Alliance News senior markets reporter
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