Darktrace (LON: DARK) shares dropped 11.6% at one point yesterday on the Q3 trading update. The perceived problem was not, in fact, the trading results – which we’ll come to – but the announcement, reminder even, that the post- IPO lockup was coming to an end.
This means that those staff who owned shares before the listing will be able to sell. Which isn’t a surprise, how long a lockup will last is part of a listing document. It was the other part of this which raises the occasional eyebrow. There are some 85 million shares in such staff and lockedin hands. Darktrace announced that up to 20 million of them, 25%, might come onto the market as a result of the end of the lockup.
That’s quite a large proportion and Darktrace is to run a bookbuilding exercise to try and gain an orderly placing. Sure, orderly is good, but that volume of stock coming onto the market obviously surprises.
The base business idea at Darktrace is both fun and useful. We’re all much more concerned about cybersecurity these days. AI is growing in power, So, use AI to gain cybersecurity, why not? More specifically, map out the network, get an AI to monitor it for unusual activity, that unusualness might well be someone trying to break in – or the evidence that someone has.
One of the problems Darktrace has is the involvement of Mike Lynch. The continuing battles over HP and Autonomy mean that some investors are just nervous of the corporate culture. Maybe they should be, maybe they shouldn’t but that some are matters. Leaving aside what HP has been saying there definitely was, at Autonomy, a pressure to hit financial targets.
So, does this also apply at Darktrace? Without ears in the boardroom it’s not really possible to say. Although the company’s insistence on displaying results by their own measures – ARR is a useful and oft used measure of success in a software as a service environment, but it’s not an official measure – might lead us to thinking that they are indeed target oriented.
As ever with corporate announcements it’s also useful to look at what is not being said – or what is mentioned in passing. Those can often be the most important parts. The fun, here, is that Darktrace tells us about ARR, OK. It also talks about the cost base increasing for known and entirely fair reasons. Then we get told about the EBITDA margin likely for the coming year. What we don’t get told anything about is profit – you know, the reason for being in business in the first place?
Although we do get told this “Darktrace continues to expect higher-than-typical share-based payment and associated employer tax charges” as a result of moving to a listed company form of equity compensation for employees etc. That is, after all the staff have been paid – if we were to be cynical about it – despite those wondrous ARR and EBITDA numbers there might not be much left over for shareholders.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.