Founded in 2013 and listed on the London Stock Exchange (LSE) with DARK like your ticker symbol As part of the FTSE 250, Darktrace has a strong track record of developing innovative products and services. We suggest trading Darktrace on the LSE because it has the most liquidity, with an average daily volume of 3.2 million shares. There are currently 702 million shares outstanding, giving Darktrace a market capitalization of just over £2bn, which equates to just over $2.4bn. Since Darktrace reports its financial results in US dollars, I will use USD as the base currency in this article.
Unfortunately, the Darktrace website contains mostly download-only links, but you will be able to find all the relevant information and financial documentation at this link.
What does Darktrace do?
In particular, the company is known for its AI-powered cybersecurity platform, which helps companies defend against cyber threats in real time. In addition to its core cybersecurity offering, Darktrace has also forged strategic alliances with companies in a variety of industries.
For example, in 2020 the company announced a partnership with the McLaren F1 team to improve your cyber protection. This not only allows Darktrace to showcase its high-profile clients, but also allowed the brand to earn more name recognition.
These partnerships demonstrate Darktrace’s commitment to staying at the forefront of the cybersecurity industry and positioning itself for long-term growth.
The company’s focus on AI-powered cybersecurity solutions positions it well to benefit from the growing demand for advanced cyber protection, and its partnerships with leading companies in various industries demonstrate its potential for future growth.
Darktrace currently has more than 7,700 customers in more than 110 countries.
Darktrace’s software model is based on the Cyber AI Loop, a continuous feedback system that uses artificial intelligence to understand and protect a company’s networks and systems. Through the Cyber AI Loop, Darktrace is able to provide a comprehensive and constantly evolving cybersecurity solution that helps organizations prevent, detect, respond to, and heal from cyberthreats.
The Cyber AI Loop is made up of 4 pillars:
- dark stroke To prevent is a real-time cyber threat monitoring and mitigation system that uses artificial intelligence to identify and prioritize potential threats, such as malware and phishing attacks. It continuously monitors an organization’s networks and systems for any suspicious activity and provides actionable insights, including the type and criticality of risks detected, to help prioritize and address them.
- dark stroke Detect is a tool that analyzes various metrics to identify deviations from normal behavior that may indicate the presence of a threat. You can identify attacks that might go undetected by other security systems. The information collected by Darktrace Detect serves as the basis for Darktrace Respond, which is triggered when a violation is detected.
- dark stroke Reply it is a system that can autonomously contain and disarm ongoing attacks across an entire digital state. It uses self-learning artificial intelligence to identify and stop threats as they occur, and can be customized to meet the specific needs of an organization.
- dark stroke Cure is a tool that restores assets after a cyber attack, without interrupting business operations. Ensures that systems are returned to an operational state efficiently and smoothly.
Darktrace has a simple business model: it provides a solution to a problem (security) using modern technology (AI). With a wide range of offerings, you have a large total addressable market. It attracts customers by offering multi-year subscription contracts, creating a large pipeline of contracted revenue for future periods and high revenue visibility, as well as attractive margins for the business.
Does this translate to free cash flow?
Looking at the company’s income statement, the revenue growth is very impressive: while revenue came in at $285 million in fiscal 2021, it increased nearly 50% in fiscal 2022 to just over $415 million. Because underlying cost of sales is close to zero, gross profit was $370.6 million.
Darktrace’s main operating expense is sales and marketing costs, but revenue grows much faster than marketing costs, which increased ‘only’ 25%.
While Darktrace reported an operating loss of nearly $35 million in fiscal 2021, it was able to turn this into an operating profit of $7.6 million in fiscal 2022, resulting in a net profit of $1.5 million. .
While that shows the company is only breaking even, there’s more here than meets the eye. A large portion of general and administrative expenses consists of share-based payments. While that is an expense, it is not a cash expense and has no impact on Darktrace’s ability to generate cash flows.
As you can see below, Darktrace reported operating cash flow of $118.6 million before working capital changes and before taxes. After deducting the $3.9 million in taxes due and the $7 million in lease payments and interest payments on these leases, adjusted operating cash flow was approximately $108 million.
Total capital expenditure was $33 million, resulting in an adjusted free cash flow result of $75 million, clearly an improvement over the prior year’s negative free cash flow. Free cash flow per share was approximately 6 pence.
I anticipate another strong result this year. Guidance for fiscal year 2023 calls for revenue growth of 30-33% with an adjusted EBITDA margin of 15-18%.
Applying a 31% revenue increase to fiscal year 2022 revenue of $415 million would result in anticipated fiscal year 2023 revenue of $545 million. Applying an EBITDA margin of 15-18% would result in adjusted EBITDA of $81-$98 million. That’s perhaps a bit disappointing considering that last year’s adjusted EBITDA was already $91.4M while I’m also taking the 60-65% EBITDA conversion rate with a grain of salt as it includes working capital investments.
It looks like 2023 will be a year of transition, as median analyst consensus estimates call for EBITDA to nearly double its performance in 2022.
Although the company is trading at about 22 times its EBITDA for fiscal years 2022 and 2023, I believe the company is slowly heading into my “buy” zone. Revenue and EBITDA growth should accelerate from 2024 and the net cash position (currently estimated at $390 million or 46 pence per share) will likely increase on the back of anticipated free cash flow.
I get it The Retirement Pot Disappointment after a possible offer for the company It didn’t materialize, but I think Darktrace deserves an initial look at its current stock price. I am considering writing puts and a P250 for February at 22 pence (midpoint between bid and ask) and/or a P200 for January at 13 pence (midpoint) look attractive.