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New premium listing: Darktrace

Darktrace was cautious with its pricing and in conditional dealings the share price went to a significant premium, but it was still trading far short of the £3bn at which the management had hoped it would be valued.

One of the main shareholders is Mike Lynch and there are other shareholders under the banner of his venture capital firm Invoke Capital. Mike Lynch is the former boss of software company Autonomy, which was acquired by Hewlett-Packard for $11bn in 2011. There have been subsequent legal actions against Mike Lynch because of the takeover and the claim that figures were inflated. The connection may have held back the valuation.

Existing shareholders raised £21.1m in the offer, while the company added £129m to its existing cash. This will help to fund higher R&D and marketing spending. That could account for more than £70m. The balance sheet would still have a significant cash pile.

The share price reached 360p at one point on 30 April. It ended the day at 330p, which values the company at £2.27bn.

There is an enormous potential market and Darktrace has shown that it can sell its technology internationally. Darktrace is making an underlying operating profit, but the higher R&D and marketing spend will hold back profit improvement in the short-term. The benefits should eventually show through. Darktrace should prove a good long-term investment.

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Darktrace (LON: DARK)

Offer

Darktrace Investor Relations

Market: Premium list

Placing

Flotation date:  6 May 2021

Issue price: 250p

Amount raised: £143.4m

Expenses: £14.3m

Market capitalisation: £1.72bn

Sponsor: Jefferies

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What does it do?

Cambridge-based Darktrace provides artificial intelligence (AI)-based cybersecurity services, and it was formed in 2013. The AI technology can detect and stop cyber attacks. There could be other uses for the AI technology the company has developed both within cyber security and in other areas.

The technology is easy to set up and uses machine learning to identify cyber threats. Three-quarters of trial deployments in 2020 detected security vulnerabilities and some had not been found by alternative technology and this proved to be an effective selling tool.

There are currently 4,700 business customers in more than 100 countries. The total addressable market is estimated to be worth $40bn.

Financials

In the three years to June 2020, revenues have increased from $79.4m to $199.1m. While the net loss has declined it was still $28.7m last year. In the latest interims, revenues jumped from $91.1m to $126.5m, but the loss more than doubled to $48.4m.

However, there was a cash inflow from operations of $25.3m during the interim period. If share-based charges and employer-related tax charges are excluded the interim operating profit is $7.45m. The interim loss was so high because there were $43m of finance costs. Most of that is not a cash cost and it related to convertible loans.

The convertible loans were used to help repurchase shares worth £127.1m. They were converted into 77.5 million shares on flotation.

Annual recurring revenues are £281.8m. There is a subscription-based revenue model. The cash is normally paid up front. At the end of 2020, there was $612m of revenues contracted but not yet recognised.

Full year revenues of more than $270m are anticipated and they could rise to around $350m in 2021-22. The high levels of deferred income mean that these figures should be reasonably predictable. R&D costs will continue to increase, and they will go above 10% of revenues.  

Pro forma NAV is $237.9m, while net cash is $282m, following the conversion of loans. Given the different financial structure, Darktrace could be profitable from now on although the additional spending may hold back profit progress.

Directors

Gordon Hurst (Chair)

Annual fee: £200,000

Poppy Gustafsson (Chief executive)

Annual salary: £475,000

Catherine Graham (Finance director)

Annual salary: £375,000

Vanessa Colomar (Non-exec)

Annual fee: £60,000

Stephen Shanley (Non-exec)

Annual fee: £60,000

Johannes Sikkens (Non-exec)

Annual fee: £60,000

Lord Willetts (Independent non-exec)                                                                                                                                       

Annual fee: £60,000

Paul Harrison (Independent non-exec)

Annual fee: £60,000

Sir Peter Bonfield (Independent non-exec)

Annual fee: £60,000

Non-executives will receive additional fees for being a member of a board committee.

Shareholders

Summit shareholders still have the largest stake with 20.7% (Johannes Sikkens is the board representative), KKR owns 13.2% (Stephen Shanley is the board representative) and Deep Defence 4.63%. EBT holds 6.96%.

Angela Bacares and her husband Michael Lynch, hold 11.7% and 4.5% respectively. They are part of the Invoke shareholders who own 23.2% in total. Vanessa Colomar has a 1.04% stake and is the board representative of Invoke.

The chief executive own 0.4% and the board, including Vanessa Colomar, hold 1.56%. Other management own a further 3.46%.

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