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Earnings

How will the Darktrace share price react to earnings?

Darktrace share price: A Darktrace software demonstration

The Darktrace [DARK.L] share price has been one of the market’s success stories since the Cambridge-based cybersecurity firm went public earlier this year. Will its 2021 fiscal year results, being reported at 7am on 15 September, make the Darktrace share price a buying opportunity?

Darktrace share price falls after shareholder scandal 

The Darktrace share price has been a hot ticket since its 30 April IPO, which was priced at 250p per share. The Darktrace share price has climbed 191.2% from that date to 728p at the close on 10 September. 

The Darktrace share price peaked at an all-time high of 787p on 21 July as hungry retail investors poured into the stock. The share price plunged the next day because of a UK court ruling that majority shareholder and British tech entrepreneur Mike Lynch can be extradited to the US on fraud charges. 

The Darktrace share price fell back to as low as 543p in August before getting a boost in early September, following news the company will be admitted to the FTSE 250 index.

According to Michael Hewson, our chief market analyst at CMC Markets, “any fallout from Lynch’s problems with the US could prompt an unwelcome distraction for Darktrace”. But judging by an update on its 2021 fiscal year performance that was provided by the company in July, things are looking good so far. 

Revenue for fiscal 2021 is expected to be $278m, a year-on-year increase of 40%. It has already been disclosed that the client base increased by 42% to 5,600. Annualised recurring revenue (ARR) is expected to be at least $340m, which would be a growth of 44% from 2020. 

The company has forecast 2022 revenue to grow between 29% and 32%, up from the previous guidance of a range of 27% to 30%. ARR for the year has been upgraded from a range of 26.5% to 29.5% to between 32% and 34%. 

Strong growth outlook, but concerns remain

Though the figures seem strong, there are reasons to be cautious. 

Will Wallis, head of research at Numis Securities, has questioned how Darktrace measured its rate of customer churn rate cited in its IPO registration document. Darktrace reported a churn rate of 7% to 8%, but Wallis argued in a note to clients seen by The Times that the figure was probably between 14% and 15%. Investors should take “great care” and “the underlying situation may be less strong”, wrote Wallis. 

Darktrace has since rebutted Wallis’s analysis, with a spokesperson telling Sifted that churn was a “rather narrow issue” to be focusing on. 

Another figure that has raised eyebrows is the company’s marketing spend, which totalled $163m in 2020, or 82% of total revenue, although this was down from 115% of sales reported in 2018. 

Darktrace’s PR company told Sifted that it had an aggressive marketing strategy as it pushes to acquire more customers These costs are likely to come down over time. 

Cautious investors will be keeping a close eye on the marketing spend for 2021 and any further revisions to future ARR. Another number they’ll be on the lookout for is the percentage of customers that have bought two or more products across Darktrace’s platform. For the 12 months to the end of December 2020, this figure was 81% compared to 27% of customers in the fiscal year 2018. The higher this percentage goes – the more likely customer churn will be lower and retention higher. 

 

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