# Darktrace delivers high revenue and constant currency ARR growth in the period

- Link: https://www.directorstalkinterviews.com/darktrace-delivers-high-revenue-and-constant-currency-arr-growth-in-the-period/4121109131
- Published: 2023-03-08T08:06:21+00:00
- Author: Amilia Stone

**Darktrace plc **(LON:DARK), a global leader in cyber security AI, has provided
its results for the six months ended 31 December 2022.

**1H FY 2023 Highlights**

Darktrace delivered continued high revenue and constant currency ARR growth in the
period, underpinned by its multi-year contract model. This growth was achieved despite
a noticeable second quarter slowdown in new customer additions resulting from the
current macro-economic environment. To offset this new customer slowdown, the Group
leveraged its past and ongoing investments in customer success, and increased focus
on larger account sales and upsells, to drive increases in both average new contract
and existing customer contract ARR.

As it continues to generate cash, Darktrace is well positioned to continue investing
in its product pipeline and go-to-market strategy, and is pleased to welcome new
Chief Revenue Officer, Denise Walter, to develop revenue generation strategies for
its next phase of growth. Leveraging its solid financial and operating base, the
Group believes it can emerge from this uncertain macro-economic environment in an
even stronger position.

With results for the first two months of 2H FY 2023 being as expected, Darktrace
is reiterating the FY 2023 guidance for ARR, net ARR added, revenue, and adjusted
EBITDA provided in its 11 January 2023 1H FY 2023 trading update.

**Financial Highlights**

| ** $000** | **Six-months ended
31-Dec-22Unaudited | Six-months ended31-Dec-21UnauditedRestated | % Change | 
| Revenue | 259,259 | 190,873 | 35.8% | 
| Gross margin (%) | 89.7% | 89.2% | n/a | 
| EBIT | 577 | 6,879 | -91.6% | 
| Adjusted EBIT | 32,430 | 25,754 | 25.9% | 
| Net profit | 581 | 4,148 | -86.0% | 
| EBITDA | 36,092 | 33,076 | 9.1% | 
| Adjusted EBITDA | 59,691 | 44,934 | 32.8% | 
| Net cash inflow from operating activities | 27,094 | 57,142 | -52.6% |

_See: “Alternative Performance Measures Definitions” below for the meanings of non-
IFRS measures and other key performance indicators._

_There was a restatement of revenue to FY 2021 that had an impact on the 1H FY 2022
disclosed revenue. Refer to note 1 in the consolidated unaudited interim financial
statements for more details._

·    Continued strong year-over-year revenue growth across all geographic markets
and customer sizes amidst a challenging macro-economic environment, including a 
comparatively unfavourable foreign exchange rate environment.

·    99.3% of revenue from recurring subscription-based contracts that continue 
to average approximately 36 months.

·    Operating profit (EBIT) decreased $6.3 million between periods to $0.6 million
primarily due to elevated share-based payment and associated employer tax charges
related to vesting of a significant block of grants made at IPO; share-based payment
charges are expected to normalise in 2H FY 2023.

·    Continued investment in product pipeline and go-to-market strategy, as well
as the impact of inflation on its cost base, also contributed to the EBIT decrease.
The Group expects to continue investments in 2H FY 2023 as well as incur certain
one-time review, legal and communications costs.

·    Adjusted EBIT (not impacted by share-based payment and related employer tax
charges) increased $6.7 million between periods, though comparatively slower revenue
growth resulted in a 1.0 percentage point decrease in margin.

·    Adjusted EBITDA (further deducts appliance depreciation allocated to cost of
sales) increased $14.8 million between periods, and in parallel with adjusted EBIT,
resulted in a 0.5 percentage point decrease in margin.

·    At $27.1 million, net cash inflows from operating activities represented a 
decrease of $30.0 million from the prior period due to the expected $20.7 million
increase in employer taxes related to the vesting of employee share grants, as well
as accelerated go-to-market investments.

**Operating Highlights**

| **$000** | **Six-months ended
31-Dec-22Unaudited | Six-months ended31-Dec-21Unaudited | % Change | 
| Constant currency (CC) ARR at 31 Dec^(1) | 556,604 | 407,578 | 36.6% | 
| Net CC ARR Added | 71,725 | 66,876 | 7.3% | 
| One-year CC ARR gross churn at 31 Dec (%) | 6.5% | 6.3% | n/a  | 
| Net CC ARR retention rate at 31 Dec (%) | 105.1% | 105.2% | n/a  | 
| Number of customers at 31 Dec (#) | 8,178 | 6,573 | 24.4% | 
| Remaining US$ performance obligations at 31 Dec | 1,117,390 | 880,863 | 26.9% |

_^(1)__Darktrace’s USD ARR at 31st December 2022 was $558.7 million, representing
year-over-year growth of 31.7%._

_Customers, ARR and ARR-related measures have been re-cast to treat Cybersprint 
as though it had been owned in all periods presented._

_See “Alternative Performance Measures Definitions” below for the meanings of non-
IFRS measures and other key performance indicators._

·    Strong year-over-year growth in CC ARR supported by Darktrace’s multi-year 
contract model, despite a noticeable late second quarter slowdown in new customer
additions.

·    Year-over-year net CC ARR added growth driven primarily by the addition of 
1,605 net new customers, of which 741 were added in 1H FY 2023.

·    A year-over-year increase in average contract ARR of 9.8% partially offset 
lower gross ARR added related to reduced new customer additions. This increase is
reflected in both average new contract ARR (up 17.7% period-over-period) and average
existing customer ARR (up 12.4% year-over-year for customers of at least one year),
from the increased focus the Group has put on expanding its capabilities in larger
account sales and upsells.

·    Maintained stability in its customer and ARR bases during 1H FY 2023, by leveraging
multi-year investments made in its customer success function, with one-year gross
ARR churn and net ARR retention rates largely in line with prior year.

·    Remaining performance obligations (RPO), representing contracted revenue backlog,
expanded to over $1.1 billion through acquiring new, and expanding existing, multi-
year contracts.

·    A substantial portion of Darktrace’s revenue is contracted and in RPO prior
to the beginning of each period, providing significant revenue visibility.

**FY 2023 Outlook (Unaudited)**

Darktrace communicated expectations for the current financial year on 11 January
2023, in its 1H FY 2023 trading update. Results for January and February were in
line with these expectations, so it is reiterating the FY 2023 guidance and related
commentary it provided for ARR, net ARR added, revenue, and adjusted EBITDA.

It is, however, updating its expectation for free cash flow, solely to reflect the
accounting treatment for the net settlement of tax obligations that arose in 1H 
FY 2023 from the vesting of certain IPO-related share awards for its two Executive
Directors. As a part of the Group’s 1H FY 2023 financial review, it determined that
the taxes paid on behalf of these Directors should be classed as an operating cash
outflow in the period, not the financing cash outflow that would have arisen had
these executives executed open market “sell to cover” transactions. The offset to
this operating cash reduction, however, is that Darktrace issued fewer shares to
these Executives, reducing the dilution related to the vesting of their grants.

Solely because of this net settlement accounting, Darktrace is lowering its FY 2023
guidance range for free cash flow and now expects this measure to be approximately
50% to 55% of adjusted EBITDA (previously 60% to 65%). As a reminder, the Group 
was already predicting FY 2023 free cash flow to be lower than typically expected
due to high employer tax payments related to the vesting of grants made to a broad
group of employees at IPO. As this was an unusually large block of grants that is
now fully vested and converted to shares, employer tax payments should normalise,
and the Group expects its future annual free cash flow calculation to move back 
to its more normal 75% to 105% range, where movements are primarily impacted by 
variable trends in invoicing, collections, share option exercise timing influenced
by share price, and other cash flow timings.

**Cybersecurity Landscape**

Today, organisations are dealing with a rapidly shifting threat landscape. “Hacktivist”
threats are on the rise and within ransomware, Ransomware-as-a-Service is now the
dominant operating model with tools widely sold to would-be threat actors. Against
this backdrop, governments such as those in the U.S. and the EU are legislating 
to impose additional requirements on the private sector to ensure they implement
robust cyber protections for their increasingly digital environments.

The launch of ChatGPT has also ignited a conversation about the implications of 
generative AI for cyber security. Darktrace does not believe that ChatGPT has yet
lowered barriers to entry for threat actors significantly, but it does believe that
it may have helped increase the sophistication of phishing emails, enabling adversaries
to create more targeted, personalised, and ultimately, successful attacks. Darktrace
has found that while the number of email attacks across its own customer base remained
steady since ChatGPT’s release, those that rely on tricking victims into clicking
malicious links have declined, while linguistic complexity, including text volume,
punctuation, and sentence length among others, have increased. This indicates that
cyber-criminals may be redirecting their focus to crafting more sophisticated social
engineering scams that exploit user trust.

Against this evolving backdrop, Darktrace continues to advance its product portfolio.
Since the start of this calendar year, it has launched two exciting new capabilities:
Darktrace PREVENT/OT, which identifies the paths adversaries may take to disrupt
the operations of critical infrastructure, and Darktrace Newsroom, an AI-driven 
tool that monitors open-source intelligence sources for new critical vulnerabilities
and assesses each organisation’s exposure based on its unique external attack surface.
Looking ahead, the Group’s R&D teams are working hard to bring the next component
of the Darktrace Cyber AI Loop, HEAL, to the market in calendar year 2023 and it
is already with early adopter customers. Together, Darktrace PREVENT, DETECT, RESPOND,
and soon, HEAL, will reinforce each other, continuously learning, adapting, and 
strengthening security across the entire digital ecosystem through the power of 
the Darktrace Cyber AI Loop.

> **Poppy Gustafsson, CEO, said:**
> “Our business continues to deliver against a challenging macro-economic backdrop,
> with continued strong year-on-year revenue growth. Although there has been a slowdown
> in new customer wins, I am pleased that our investments in retaining customers
> and increasing the value of both new and existing contracts are paying off. Our
> strong cash position and ongoing cash generation means that we can continue to
> invest in expanding our product pipeline and evolving our go-to-market strategies.
> Making these investments now should not only allow us to successfully navigate
> this challenging economic period, but set us up for success when economic tides
> eventually begin to turn.   
> From our beginnings ten years ago, we’ve built our entire approach around defending
> our customers against the threat of AI and automation being leveraged by attackers.
> We’ve built our whole product set around the notion of defending against threats
> never seen before through our AI’s bespoke understanding of each individual organisation.
> So, from increases in Ransomware-as-a-Service to the rise of generative AI, Darktrace
> ensures that our customers are resilient not only in the face of today’s threats,
> but also the emerging threats of tomorrow.”

**Third-party Review**

On 20 February 2023 Darktrace announced that it had appointed Ernst & Young LLP 
to provide an additional independent third-party review of the key financial processes
and controls outlined in its statement on 1 February 2023. E&Y has commenced this
review process and Darktrace will report the key findings of the E&Y review once
it is complete.

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