Darktrace share price slides on downgraded cashflow

The Darktrace share price has undergone a big fall from grace over the past 18 months, from the post-IPO optimism that saw its share briefly trade as high as 1,000p to lots of questions about the transparency of the company’s accounting methods, which has seen its shares trade briefly below 200p.

In August last year, the shares spiked above 500p on reports that the company was in talks with Thoma Bravo.

Since it was announced that those talks had ended it’s been one-way traffic lower with many questions remaining about how well the business it is doing, with short seller Quintessential Capital Management expressing scepticism earlier this year over the validity of its financial statements, while also taking an active short position.

In response, Darktrace hired Ernst & Young to review its finances in an attempt to draw a line through the unwelcome speculation over its accounting practices.

In January the shares fell to record lows of just below 200p after management cut the recurring revenue growth forecasts for the full fiscal year to between 29.5% and 31%, from their previous forecast of 31% to 34%.

Management said they expected H1 revenue to come in at $258m, which would have been an increase of 35.2% from a year ago, while the number of customers had risen by 741 since the end of the last fiscal year to 8,178.

Today’s H1 numbers have seen H1 revenues beat expectations, coming in at $259.3m, while adjusted EBITDA came in at $59.69m.

The rate of customer growth in percentage terms does appear to be slowing, however, it is still in the mid-20%.

Net profits fell to $581k from $4.15m, largely due to share-based payments and tax charges, which look set to weigh on profitability over the course of the rest of the year.

On the full-year outlook, Darktrace reiterated its guidance from earlier in the year on annualised recurring revenue (ARR) and adjusted EBITDA basis, saying that January and February trading has been in line with expectations.

On free cash flow, however, it has guided lower on the basis of IPO-related tax obligations on vesting agreements for its non-executive directors, lowering it to between 50-55% of adjusted EBITDA from 60-65%.

This has prompted the shares to slip back despite management insisting that once this has been completed management said they expect free cash flow to revert to between 75% to 105% range.