6th September 2023
Darktrace plc
Results for the Financial Year Ended 30th June 2023
Strong operating and financial performance amidst challenging macro headwinds
31.3% year-over-year revenue growth
18.3% year-over-year growth in customer base
Confirming FY 2024 ARR and revenue expectations; increase to underlying FY 2024 margin
Darktrace plc (DARK.L) (together with its subsidiaries, “Darktrace” or “the Group”) a global leader in cyber security AI, today provides its results for the year ended 30th June 2023.
FY 2023 Financial Performance
| $’000 | FY 2023 | FY 2022 | % |
| Revenue | 545,430 | 415,482 | 31.3% |
| Gross margin (%) | 89.8% | 89.2% | n/a |
| Net profit | 58,958 | 1,457 | 3,946.5% |
| Adjusted EBIT* | 82,506 | 49,816 | 65.6% |
| Adjusted EBITDA* | 139,163 | 91,412 | 52.2% |
| Free cash flow* | 93,753 | 99,517 | (5.8)% |
| Net cash inflow from operating activities | 134,047 | 140,244 | (4.4)% |
*See “Key Performance Indicators (KPIs)” below for the meanings of non-IFRS measures and other key performance indicators
FY 2023 highlights
· Resilient business model, underpinned by multi-year contracts and a flexible cost structure, supported continued revenue growth and improvements in all earnings measures.
· Strong year-over-year revenue growth across all geographic markets and customer sizes.
· Adjusted EBITDA margin improvement of 3.5 percentage points over prior year, reflects scale efficiencies, ongoing discretionary cost management and some benefit from certain late-year, largely non-cash, factors including foreign exchange movements.
· Adjusted EBIT margin improvement of 3.1 percentage points over prior year supports continued progress towards long-term steady state model with Adjusted EBIT margins in the mid-20%s.
· Free cash flow (FCF) of $93.8 million, reflecting 67.4% of Adjusted EBITDA, reflects continued strong cash generation, though somewhat reduced from prior year by net settlement of vesting equity grants for Executive Directors in the period.
Operating Performance
| FY 2023 | FY 2022 | % | |
| ARR* at 30 June ($’000) | 628,444 | 484,880 | 29.6% |
| Net ARR Added* ($’000) | 143,564 | 144,178 | (0.4)% |
| One-year ARR gross churn* at 30 June | 6.8% | 6.6% | n/a |
| Net ARR retention rate* at 30 June | 104.7% | 105.3% | n/a |
| Number of customers* at 30 June | 8,799 | 7,437 | 18.3% |
| USD Remaining performance obligation (RPO) at 30 June* ($’000) | 1,258,350 | 1,003,932 | 25.3% |
*See “Key Performance Indicators (KPIs)” below for the meanings of non-IFRS measures and other key performance indicators
· Strong year-over-year growth in constant currency ARR supported by Darktrace’s multi-year contract model, despite slower new customer additions in a challenging macro-economic environment.
· Net constant currency ARR added down only $600,000 year-over-year as a 9.5% increase in average contract ARR largely offset lower ARR from new customer additions.
· Declines in gross and net retention metrics were minimised with increased focus on customer engagement:
o One-year gross constant currency ARR churn increased by 0.2 percentage points year-over-year, driven by higher bankruptcies and other defaults across the customer base; and
o Net constant currency ARR retention rate decreased by 0.6 percentage points year-over-year, reflecting the impact of increased churn and customers reducing coverages to meet budget requirements.
· Remaining performance obligations (RPO), or contracted revenue backlog, expanded to over $1.2 billion through acquiring new, and expanding existing, multi-year contracts, providing continuing future revenue support and visibility.
· Significant investments made in Go-to-market (GTM) strategy and teams in the second half of FY 2023 and continuing into FY 2024, are expected to support sales, ARR and revenue expansion through FY 2024 and beyond.
FY 2024 Outlook (Unaudited)
Darktrace is confirming the FY 2024 constant currency ARR and revenue guidance provided in its 19th July 2023 trading update, but is updating its Adjusted EBITDA margin guidance to reflect the expected impact of changes to sales compensation structures implemented for FY 2024. These changes have accounting impacts that alter the timing of commission cost recognition, as well as accelerating cash outflows, thus changing expectations for Adjusted EBITDA and Free Cash Flow. Darktrace does not expect this to have any material impact to its long-term financial profile and its long-term steady-state economic model remains unchanged.
Darktrace reports ARR in constant currency rates established at the start of each year(1). Applying FY 2024 rates to its ARR balance for 30th June 2023 results in a rebased ARR balance of $637.3 million, the new amount against which it will measure constant currency ARR growth for FY 2024.(2) It is confirming its expectation for year-over-year constant currency ARR growth of between 21% and 23%. This implies FY 2024 net ARR additions of between $133.8 million and $146.6 million, for year-over-year growth in Net ARR added of between (8)% and 1%.
In balancing ongoing macro-economic uncertainty with early signs of recovery, and reflecting the time expected to see a benefit from recent investments in its GTM strategy and teams, Darktrace is framing FY 2024 in terms of first half stabilisation and second half re-acceleration. Reflecting this “tale of two halves”, Darktrace currently expects approximately 45% of FY 2024 Net ARR added to be added in the first half and approximately 55% to be added in the second half.
Expecting ARR growth to be more second half weighted than is typical has an impact on Darktrace’s revenue growth, as a larger number of contracts are likely to be generating revenue for a smaller portion of the year. Furthermore, as trends in revenue typically lag developments in ARR by 6 to 12 months, the impact of ARR trends seen in FY 2023 will have an increasing impact on Darktrace’s expected FY 2024 revenue. This was considered previously and Darktrace confirms its expectation for year-over-year revenue growth of between 22.0% and 23.5%.
Of the changes made to Darktrace’s commissions structures, the most financially impactful is the decision to pay 100% of sales commissions up front, a change from past practice where 50% of commission was paid up-front with the remaining 50% typically paid one year later. This change has been made to better align with market practice, better supporting Darktrace’s ability to hire and retain key experienced talent.
From a cost recognition perspective, however, Darktrace will now capitalise substantially all sales commissions and recognise them over the lives of the related contracts, unlike under past plans where it capitalised the first 50% but expensed the second 50% typically over the first year. Generally, this has the effect of moving more commission cost recognition to later periods, better aligning with revenue recognition. However, Darktrace notes that FY 2024 will be a transition year as it will still be accruing remaining portions earned, and paying out mostly all, of the second 50% of commissions it owes under FY 2023 plans.
In its July trading update, Darktrace guided to an expected FY 2024 Adjusted EBITDA of at or around 22%. This guidance was based on forecasts using prior period commission plans and related accounting treatments. If prior period plans had been maintained, Darktrace would expect to now be providing an updated guidance range of between 22.0% and 24.0%. If Darktrace maintained its existing definition of Adjusted EBITDA, but netted the cost recognition benefit it will see from capitalising 100% of commissions against the continued accruing of costs related to FY 2023 plans, it calculates that commission plan changes alone would have added approximately 3 percentage points to its FY 2024 Adjusted EBITDA guidance range.
However, with 100% of commissions now being capitalised, and after reviewing comparable peer practices, Darktrace has determined that to be prudent, and to better align revenue, profitability and cash flow measures for its next phase of growth, it will change its definition of Adjusted EBITDA(3) to treat all amortisation of commissions as though they were cash costs. On this basis, Darktrace is now guiding to an FY 2024 Adjusted EBITDA range of 17.0% to 19.0%. Demonstrating that while changes to commissions payout timing and its Adjusted EBITDA definition are resetting its baseline, underlying performance trajectory is not changing, a comparison of Adjusted EBITDA margin expansion between FY 2021 results and FY 2024 guidance, both before and after changes, shows the same expected margin expansion of 11.2 percentage points in each case(4).
For FY 2024, transitioning to new commission payout schedules will have an impact on Free Cash Flow (FCF) as Darktrace pays out both all new commissions and second half commissions from FY 2023; this impact will be temporary and largely confined to FY 2024 and early FY 2025. Longer term, its expectation for FCF expressed in terms of a range of percentages of Adjusted EBITDA will change, almost entirely due to the change it is making to the definition of Adjusted EBITDA. Considering these factors, Darktrace expects FCF for FY 2024 to be in the range of 50% to 60% of Adjusted EBITDA and, more typically, to fall in the range of 100% of Adjusted EBITDA, plus or minus 20 percentage points. As under its prior expectations for FCF (90% plus or minus 15 percentage points), Darktrace is providing a range of normal FCF outcomes to account for variable trends in ARR, invoicing, collections, ranges of share option exercises influenced by share price, and other cash flow timings. It has, however, now expanded its range of outcomes to plus or minus 20 percentage points to reflect additional variability in paying out higher commissions in-period, as well as now factoring in assumptions for future deferred tax asset recognition and cash tax payments.
(1) The Group’s primary currency exposures are the British Pound and the Euro converting to its US Dollar reporting currency. For FY 2024, its constant currency rates are 1.2682 and 1.0908 for the Pound and the Euro, respectively. For FY 2023, constant currency rates were 1.2146 and 1.0450 for the Pound and the Euro, respectively.
(2) For reference, ARR at the end of the most recent five quarters, at FY 2024 and FY 2023 constant currency rates, rebase to the following amounts:
| ($ million) | 30 Jun 2022 | 30 Sep 2022 | 31 Dec 2022 | 31 Mar 2023 | 30 Jun 2023 | |
| FY24 CC Rates | $491.9 | $518.7 | $564.5 | $591.8 | $637.3 | |
| FY23 CC Rates | $484.9 | $511.5 | $556.6 | $583.6 | $628.4 |
(3) Beginning in FY 2024, Adjusted EBITDA is the Group’s earnings before interest, taxation, depreciation and amortisation, adjusted to include appliance depreciation attributed to cost of sales and amortisation of capitalised commissions, and adjusted to remove uncapitalised share-based payment charges and related employer tax charges, as well as certain one-off charges including the impairment of right-of-use assets.
(4) Darktrace’s Adjusted EBITDA for FY 2021, FY 2022 and FY 2023, as well as FY 2024 guidance presented before and after changes to commissions plans (effective FY 2024 only) and the changes to the definition of Adjusted EBITDA (all periods):
| ($ million) | FY 2021 | FY 2022 | FY 2023 | FY 2024e* | ∆ FY 21-24e |
| Adjusted EBITDA (pre-changes) | $33.5 | $91.4 | $139.2 | N/A | |
| Adjusted EBITDA margin % | 11.8% | 22.0% | 25.5% | 23.0% | 11.2 ppts |
| Amortisation of capitalised commission | $(14.1) | $(21.8) | $(32.5) | N/A | |
| Adjusted EBITDA (post-changes) | $19.4 | $69.6 | $106.7 | N/A | |
| Adjusted EBITDA margin % | 6.8% | 16.8% | 19.6% | 18.0% | 11.2 ppts |
* Midpoint of Darktrace’s FY 2024 Adjusted EBITDA guidance range
Analyst and Investor Webcast
Management will hold an analyst and investor webcast on our FY 2023 Results at 13:00 (UK time). Please register here: https://brrmedia.news/DARK_FY23
About Darktrace
Darktrace (DARK.L), a global leader in cyber security artificial intelligence, is on a mission to free the world of cyber disruption. Breakthrough innovations in our Cyber AI Research Centre in Cambridge, UK have resulted in over 156 patents filed and research published to contribute to the cyber security community. Rather than study attacks, Darktrace’s technology continuously learns and updates its knowledge of your business data and applies that understanding to optimise your state of optimal cyber security. Darktrace’s cyber AI technology provides a full lifecycle approach to cyber resilience across the entire organisation that can autonomously spot and respond to novel in progress threats within seconds. Darktrace employs over 2,200 people around the world and protects approximately 8,800 customers globally from advanced cyber threats. Darktrace was named one of TIME magazine’s ‘Most Influential Companies’ in 2021. To learn more, visit http://www.darktrace.com.
Cautionary Statement
This announcement contains certain forward-looking statements, including with respect to Darktrace’s current targets, expectations and projections about future performance, anticipated events or trends and other matters that are not historical facts. These forward-looking statements, which sometimes use words such as “aim”, “anticipate”, “believe”, “intend”, “plan”, “estimate”, “expect” and words of similar meaning, include all matters that are not historical facts and reflect the directors’ beliefs and expectations, made in good faith and based on the information available to them at the time of the announcement. Such statements involve a number of risks, uncertainties and assumptions that could cause actual results and performance to differ materially from any expected future results or performance expressed or implied by the forward-looking statement and should be treated with caution. Any forward-looking statements made in this announcement by or on behalf of Darktrace speak only as of the date they are made. Except as required by applicable law or regulation, Darktrace expressly disclaims any obligation or undertaking to publish any updates or revisions to any forward-looking statements contained in this announcement to reflect any changes in its expectations with regard thereto or any changes in events, conditions or circumstances on which any such statement is based.
Enquiries
Luk Janssens – Head of Investor Relations, Darktrace
Direct: +44 7811 027918
Sophia Martin-Pavlou – Financial Communications Manager
Direct: +44 7773002361
media@darktrace.com