REG - Darktrace PLC - Final Results
06/09/2023 07:00
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RNS Number : 4932L Darktrace PLC 06 September 2023
6(th) September 2023
Darktrace plc
Results for the Financial Year Ended 30(th) 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 30(th) 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 30 Sep 31 Dec 31 Mar 30 Jun
2022
2022
2022
2023
2023
FY24 CC $491.9 $518.7 $564.5 $591.8 $637.3
Rates
FY23 CC $484.9 $511.5 $556.6 $583.6 $628.4
Rates
((3)) Beginning in FY 2024, Adjusted EBITDA is the Group's earnings before
interest, taxation, depreciation and amortisation, adjusted to include
appliance depreciation attributed to cost of sales and amortisation of
capitalised commissions, and adjusted to remove uncapitalised share-based
payment charges and related employer tax charges, as well as certain one-off
charges including the impairment of right-of-use assets.
( )
((4)) Darktrace's Adjusted EBITDA for FY 2021, FY 2022 and FY 2023, as well as
FY 2024 guidance presented before and after changes to commissions plans
(effective FY 2024 only) and the changes to the definition of Adjusted EBITDA
(all periods):
($ 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
(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 (http://www.darktrace.com/) .
(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
luk.janssens@darktrace.com (mailto:luk.janssens@darktrace.com)
Sophia Martin-Pavlou - Financial Communications Manager
Direct: +44 7773002361
media@darktrace.com
CEO Statement
It is a pleasure to reflect on all that Darktrace has achieved in our second
year as a publicly listed company and our 10th year since founding. We have
delivered a robust set of financial results while also investing in the
foundations for our future growth; strengthening our executive team, upgrading
our systems, and bringing exciting new products to the market that have
expressly been developed to tackle a fast-changing cyber security environment
as we relentlessly pursue our mission to free the world of cyber disruption. I
would like to thank our employees, partners, suppliers, and everyone else who
has brought us one step closer to this mission this year.
Strong Financial and Operational Performance
Our financial performance for the year has been robust, delivering on growth
and demonstrating the underlying strength of the business model, all whilst
continuing to invest in the business. We added $143.6 million of net ARR in
the year, resulting in 29.6% year-over-year growth in ARR at FY 2023 constant
currency rates. Our adjusted EBITDA increased to $139.2 million, up from $91.4
million in FY 2022, and we delivered an operating profit margin of 6.7%. The
macro-economic backdrop has been a headwind for many businesses over the past
year, and we have not been immune from its impact. We now have 8,799 customers
globally but have seen a slow-down in new customer additions at a rate of
13.8% below the prior year - as pressure on business budgets has meant that
prospects have been more reluctant to run product trials. We are continuing to
generate cash, which has enabled us to continue investing in our product
pipeline and go-to-market operations, positioning us for the next phase of our
growth journey.
Watershed Moment for Artificial Intelligence
FY 2023 has been a year of significant change in the world around us. At
Darktrace, we have always understood that AI would eventually dramatically
change the game for businesses and their data but few predicted the seismic
shift that generative AI has created - for the world and for cyber security.
Generative AI was a transition point - we are now living in a generative AI
world that is already drastically changing the cyber sector, and it will
continue to do so.
Businesses are waking up to the idea that AI is no longer the domain of early
adopters with big budgets, it is a powerful technology that is accessible to
many. In June we reported that 74% of our customers had employees that were
interacting with publicly available generative AI tools through their
corporate IT. Whilst this provides opportunities for productivity gains,
businesses are also concerned about the related emerging risks; alongside data
privacy issues they are questioning how generative AI models are trained and
whether that data is trustworthy. Many CIOs are still developing their stance
on generative AI, and where they believe it sits on the risk/opportunity
spectrum. They are working out how they can use AI to benefit from their most
relevant and powerful knowledge repository, their own business data, without
putting it at risk through loss of IP or data leakage.
Security teams are also questioning how these advances in AI will be used
against them. Many fear that the age of AI-powered attacks is here, and the
speed, scale and sophistication of novel attacks is going to increase. In the
first two months of 2023 - just after ChatGPT hit the mainstream - Darktrace
saw an increase in social engineering email attacks. Those attacks showed
growing linguistic sophistication, meaning users are having a much harder time
knowing what is a legitimate message and what is a malicious phishing email.
This suggests that generative AI is making the job of the attacker easier -
the phishing attacks of today are more tailored and targeted and can be
delivered at scale.
Darktrace is uniquely prepared for this moment. For ten years, we have been
protecting our customers with Self-Learning AI. We bring our AI to the
customers' data to learn their business in real time to uniquely protect them
from evergreen novel attacks. This is wholly different from the rest of the
industry which focuses on historical attack data. Our differentiated approach
means that from ransomware to the rise of generative AI our customers are
protected not only from today's threats but from the emerging threats of
tomorrow.
Continuing to Innovate
We have a history of innovation at Darktrace that I am incredibly proud of. It
started with the launch of DETECT in 2013, which enabled human security teams
to see any and all threats inside their organisation. A few years later, we
brought RESPOND to the market allowing our customers to surgically stop
anomalous behaviour while allowing normal business activity to continue. At
the beginning of this fiscal year, we reached another milestone with the
launch of PREVENT in July 2022 which proactively hardens defences for our
customers based on its unique understanding of their business. Just as we
entered FY 2024, we launched HEAL which supports security teams to recover the
business back to a healthy state after an attack and enhances the capabilities
we already provide in PREVENT, DETECT and RESPOND.
All of this is down to the hard work of our technology team, led by our Chief
Technology Officer, Jack Stockdale OBE, which has driven forward our ambitious
technology vision and achieved what no other cyber security vendor has. The
strong team in our Cyber AI Research Centre has continued to innovate on our
existing capabilities so that every element of our offering to customers is
one step ahead of the fast-moving threat landscape and delivering value to our
customers. For example, during the year we announced the launch of Darktrace
Newsroom, a PREVENT capability which helps security teams understand their
exposure to new critical vulnerabilities, a major upgrade to Darktrace/Email
and the introduction of new risk and compliance models which help our
customers to monitor and respond to generative AI activity.
We have been building and iterating on our product set since we set out on our
mission in 2013 and will continue to do so. We trained our own large language
models on proprietary Darktrace security datasets and released them as part of
our product in 2021. We're already using generative AI in our attack
simulation phishing product as part of PREVENT, and in our Cyber AI Analyst to
perform incident investigation and analysis. Looking ahead, we're examining
how this can power new chat interfaces in our products, create new and novel
versions of simulated table-top exercises in HEAL, and generate, summarise and
translate reports across our products. While the rest of the market is racing
to keep up, Darktrace is one step ahead - because this era of AI-powered
attacks is what we have been preparing for.
Delivering for our Customers
The focus of our research and development efforts, and the innovations that we
bring to market, is our customers; keeping them - and their own customers,
employees and other stakeholders - safe from cyber disruption. We have
completed a wholesale review of our Go-To-Market organisation to ensure the
teams are structured, incentivised and enabled to seize the opportunities
ahead and drive our future growth. That team has worked hard to deliver not
only new customers but value for our existing customers, resulting in
increased product upsells across our customer base and a year-over-year
increase in average customer ARR of 9.5%.
Strengthening our Management Team
We have continued to invest in our people and have been focussed on bringing
in experienced top talent to help us on the next phase of our growth journey.
I was delighted to welcome several new members to the executive team in the
period. In July 2022, Carolyn Esser joined us from the Bill & Melinda
Gates Foundation as Chief Corporate Affairs Officer, and is responsible for
Darktrace's internal and external communications strategies, reputation
management and stakeholder engagement. Max Heinemeyer, previously our VP of
Cyber Innovation, took the position as Chief Product Officer in August 2022.
Denise Walter joined us as Chief Revenue Officer in February 2023. Denise
brings a track record of driving successful sales growth at blue-chip software
businesses over more than 25 years, most recently at VMWare, and is
responsible for all aspects of revenue generation, including new business
growth. Finally, in June 2023 Chris Kozup joined us from Zscaler as Chief
Marketing Officer. Chris is an industry veteran and brings proven experience
of leading high-performing marketing teams at fast-growing enterprise
technology companies. We also made additional senior hires in our go-to-market
and marketing teams, of people with deep experience in global partner
organisations, customer success, large enterprise sales, corporate marketing
and field marketing. We will continue to hire to enhance our capabilities, but
we now have a brilliant team in place that brings together deep experience in
running successful, high-growth, innovative technology companies and we are
well-placed to leverage our unique technology and market positioning.
Looking Ahead
The market opportunity ahead of us is enormous - we believe there are over
150,000 companies that could benefit from our AI - and we have the right team
and skills in place to ensure we can go after the market opportunity that they
represent. All the investments we have made in FY 2023 have laid the
foundations for our next phase of growth and our resilient business model
means that we have the resources to support these ongoing investments as we
continue to scale the business. We are prepared for this pivotal moment in the
technology sector and believe that our AI-powered technology has never been as
important to our customers as it is in this generative AI era. We will
continue to enhance security teams as they face new and evolving threat
landscapes, enabling them to focus on what they do best - delivering their own
products and services to their customers.
Poppy Gustafsson OBE
Chief Executive Officer
Key Performance Indicators (KPIs)
KPIs are financial and non-financial measures used by Darktrace Management,
its Board of Directors, its investors and other stakeholders, to assess
business performance, monitor principal risks and evaluate future
expectations.
One group of KPIs, including Annualised Recurring Revenue (ARR), net ARR added
and Remaining Performance Obligations (RPO), provide additional insight into
Darktrace's recurring revenue base, its ability to grow recurring revenue and,
given Darktrace's multi-year contract model and that in the range of 80% of
annual revenue is contracted before the start of each financial year, the
total remaining value it has under contract.
KPIs such as Number of customers and Average contract value also provide
additional understanding of how Darktrace is growing its business, and
demonstrate trends in its customer base, go-to-market strategy and product
penetration across its installed customers.
One-year gross ARR churn and Darktrace's Net ARR retention rate provide
visibility into activity within the installed customer base, including value
lost to departed customers and the ability of the business to sell additional
products to existing customers for additional value and improved retention
opportunities.
Management and the Board believe that Adjusted EBITDA margin is a useful
measure of underlying operating performance, alongside other KPIs such as
Operating profit margin (EBIT) and Adjusted EBIT margin. Adjusted EBITDA
excludes certain items, such as share-based payment and related tax charges,
certain depreciation and amortisation that are not indicative of, or that may
impair the period-to-period comparability of, Darktrace's core operating
performance. Darktrace uses Adjusted EBITDA margin as its primary
profitability measure when developing its internal budgets, forecasts and
strategic plan, in analysing the effectiveness of its operating performance,
and in other strategic assessments and communications. In prior years,
Darktrace also presented EBITDA, but has now determined that it does not add
significant value beyond that provided by the combination of Adjusted EBITDA,
Adjusted EBIT and core IFRS measures, including Operating profit (EBIT).
Free Cash Flow (FCF), in conjunction with IFRS measures such as net cash
inflows from operating activities, provides a view into Darktrace's viability
and ability to sustain its operations.
Most, but not all, KPIs are Alternative Performance Measures (APMs), which are
not defined under IFRS and are not intended to be a substitute for any IFRS
measures of performance; wherever appropriate and practical, Darktrace
provides reconciliations of its APMs to relevant IFRS measures. APMs are
developed and presented as Management and the Board consider them to be
important supplemental measures to enhance stakeholders' understanding of
business growth, underlying profitability, cash flows, and other business
performance and trends. APMs do not have standard definitions and therefore
may not be comparable to similar measures presented by other entities.
Annualised Recurring Revenue (ARR)
$'000 FY 2023 FY 2022
Annualised Recurring Revenue 628,444 484,880
Year-over-year increase (%) 29.6% 42.3%
Definition and relevance
ARR is the sum of the annualised committed subscription value of every
contract for which Darktrace is entitled to recognise revenue, measured at the
period's constant currency rate. In a very small number of cases where a
customer has an opt-out within six months of commencing a contract, Darktrace
does not recognise ARR on that contract until after that opt-out period has
lapsed. Where a one-off sale of appliances is required for legal or regulatory
reasons, or where training or other services are provided on a one-off basis,
this non-recurring portion of the contract value is excluded from ARR.
ARR is a key indicator of future revenues. In conjunction with other KPIs and
IFRS measures, it allows the growth of the business to be tracked on a more
current basis than can be measured by revenue alone, the success of its
go-to-market strategy to be assessed more quickly, and performance to be
compared between periods.
Performance
As of 30 June 2023, Darktrace increased its ARR by 29.6% over the prior year
end, driven primarily by an increase in customers from 7,437 to 8,799, and to
a lesser extent by an increase in upsells to existing customers enabled by
focused sales strategies and an expanded product set. Darktrace has seen ARR
growth across all regions in which it operates.
At 30 June 2023, the distribution of customers by ARR value reflected 54.1% of
customers with ARR over $100,000, compared to 49.5% at the prior year end.
This shift reflects Management's focus on both selling to larger customers and
driving product penetration while continuing to support the addition of
customers across the full range of customer sizes and requirements.
The calculated USD ARR for FY 2023 is $637.3 million. Refer to the RPO
disclosure for a reconciliation between ARR and short term RPO.
Net ARR added
$'000 FY 2023 FY 2022
Net ARR Added 143,564 144,178
Year-over-year (decrease)/increase (%) (0.4)% 36.1%
Definition and relevance
Net ARR Added is Darktrace's new customer ARR for a period, plus or minus the
net impact of upsell, downsell, and churn activity in the existing customer
base for that same period, measured in the current period's constant currency.
Net ARR Added is a key indicator of Darktrace's ability to secure future
revenue and a current measure reflecting changes in its internal and external
operating tactics or environment. As with ARR, it allows the growth of the
business to be tracked on a more current basis than can be measured by revenue
growth alone, the success of its go-to-market strategy to be assessed more
quickly, and performance to be more readily compared between periods.
Performance
The macro-economic environment that existed across Darktrace's 2023 financial
year had a significant impact on Net ARR Added during the period, both as a
result of fewer new customer additions and small increases in churn and
downsells, as prospects and customers navigated their own performance issues
and spend constraints. While Darktrace drove a significant increase in upsell
value year-over-year, this was unable to compensate for the decline in new
business ARR, particularly in the second half of the financial year. As a
result, Net ARR added declined by ($0.6 million), or (0.4)%, in FY 2023
compared to a 36.1% increase in Net ARR added in the prior year.
The hiring of a new CRO and CMO in the second half of FY2023 has led to a
restructuring of the Go-to-Market team that should drive improvements in this
metric in future periods, though we expect to continue to see a reduced growth
rate from the impact of the pressures on the global macro-economy in the
beginning of FY 2024.
One-year gross ARR churn rate
30 June 2023 30 June 2022
One-year gross ARR churn rate 6.8% 6.6%
Definition and relevance
One-year Gross ARR Churn rate is the Constant Currency ARR value of customers
lost from the existing customer cohort one year prior to the measurement date,
divided by the total ARR value of that existing customer cohort one year prior
to the current measurement date. This churn rate reflects only customer losses
and does not reflect customer expansions or contractions.
The one-year ARR gross Churn Rate is a key indicator of Darktrace's ability to
deliver value to its customers at commercially accepted terms. It is a major
factor that Management, the Board and other stakeholders consider when
assessing the ability to effectively capture market opportunity and continue
to drive the business on a growth trajectory.
Performance
Darktrace's One-year gross ARR churn rate increased by 0.2% from the prior
year, to 6.8% from 6.6%, primarily due to the impact that the macro-economic
environment has had in increasing bankruptcies and defaults across Darktrace's
customer base. The year-over-year increase in FY 2023 was minimised as
Management continued investing in the customer success function and
prioritising its significant focus on customer engagement.
Net ARR retention rate
FY 2023 FY 2022
Net ARR retention rate 104.7% 105.3%
Definition and relevance
Net ARR retention rate is the current period constant currency ARR value for
all customers that were customers one year prior to the measurement date,
divided by their ARR, in the same constant currency, one year prior to the
measurement date. This retention rate reflects the ARR impact of customer
losses, expansions, and contractions.
Net ARR retention expands on the insight provided in Darktrace's measurement
of churn, by also reflecting the impact of product upsells and downsells, as
well as other price or coverage expansions or contractions. This provides
Management, the Board and other stakeholders with information they can use to
assess the net benefit or cost of activity in the existing customer base.
This assessment is valuable to assumptions about future growth potential and
the long-term costs associated with customer acquisition and retention.
Performance
Darktrace ended the year with a Net ARR Retention Rate of 104.7%, a 0.6
percentage point reduction on the prior year-end. The increase in churn was a
significant contributor to this decline, however, an increase in downsell
renewal contract value resulting from partial product non-renewal, coverage
elimination or price negotiation, was also a factor.
Adjusted EBITDA and margin
$'000 FY 2023 FY 2022
Adjusted EBITDA 139,163 91,412
Adjusted EBITDA margin (%) 25.5% 22.0%
Definition and relevance
Darktrace's Adjusted EBITDA is earnings before interest, taxes, depreciation
and amortisation, adjusted to include appliance depreciation attributed to
cost of sales, and to remove uncapitalised share-based payment (SBP) charges
and related employer tax charges, as well as certain one-off charges including
the impairment of right-of-use assets. Adjusted EBITDA as a percent of revenue
is the Adjusted EBITDA margin.
Due to the unpredictable nature of these non-cash charges, and that SBP
related employer tax charges are driven by movements in share price and are
therefore outside of Darktrace's control, these costs are excluded in the
calculation of Adjusted EBITDA. Management believes that this treatment
improves the ability to make period-to-period comparisons of core operating
performance and is consistent with treatment applied by listed European and US
software peer companies.
For the calculation of this measure, Darktrace treats the appliance
depreciation reflected in Cost of sales as though it were a current period
cash cost. As Darktrace is unusual in supporting on-premise software
deployments with appliances that it owns, maintains and reuses over their
useful lives, this treatment provides better comparability to software
companies that sell hardware to support similar deployments and recognise
those direct cash costs.
Performance
Year-over-year, Adjusted EBITDA increased by $47.8 million, resulting in a 3.5
percentage point increase in Adjusted EBITDA margin to 25.5%.
Reconciling Operating profit (EBIT) to Adjusted EBITDA for FY 2023, Darktrace
added back $56.7 million in net non-cash depreciation and amortisation
charges, an increase of $15.1 million in the period. In its calculation of
Adjusted EBITDA Darktrace does not add back to operating profit the $16.7
million of appliance depreciation included in Cost of sales which relates to
appliances used to deploy software at customer sites. For FY 2023, there was a
$2.3 million year-over-year increase in depreciation of appliances in Cost of
sales, reflecting new, on-premis1 customer deployments. Appliance depreciation
attributed to Cost of sales grew more slowly than might first be expected
considering Darktrace's revenue growth as more customers choose to have
products deployed virtually, and as Darktrace sells more products that are
only deployed virtually.
Darktrace also added back $44.2 million in net SBP and related employer tax
charges, an increase of $2.0 million in the period. This increase was due to a
$6.0 million increase in SBP related employer tax charges, primarily as a
result of increases in the share price across the period, partially offset by
a $4.0 million reduction to the underlying SBP charge as a result of a reduced
impact from IPO-related equity awards in FY 2023, with these awards having
fully vested in the first half of FY 2023. Darktrace also added back a
right-of-use asset impairment charge of $1.8 million reflecting its current
assessment of the cost it will incur to exit a lease contract on now-unused
office space.
For an analysis of the net profit, a related IFRS measure, see CFO statement
below.
Reconciliation of Net Profit to Adjusted EBITDA
$'000 FY 2023
FY2022 % Change
Revenue 545,430 415,482 31.3%
Net Profit 58,958 1,457 3,946.5%
Taxation (17,923) 3,856 n/a
Finance income (8,016) (518) 1,447.5%
Finance costs 3,493 2,807 24.4%
Operating profit (EBIT) 36,512 7,602 380.3%
Operating profit margin (%) 6.7% 1.8% n/a
Depreciation & amortisation 73,378 56,185 30.6%
EBITDA 109,890 63,787 72.3%
Appliance depreciation in cost of sales (16,721) (14,589) 14.6%
Impairment of right-of-use asset 1,781 - n/a
Share-based payment (SBP) charges 39,989 44,018 (9.2)%
SBP related employer tax charges 4,224 (1,804) n/a
Adjusted EBITDA 139,163 91,412 52.2%
Adjusted EBITDA margin (%) 25.5% 22.0% n/a
Adjusted EBITDA reconciliation by function
FY 2023 Adjustments to EBITDA FY 2023 FY 2022 Adjustments to EBITDA FY 2022
$'000 $'000 $'000 $'000 $'000 $'000
Revenue 545,430 - 545,430 415,482 - 415,482
Cost of Sales (COS) (38,921) - (38,921) (30,259) - (30,259)
COS-related depreciation and amortisation (16,721) - (16,721) (14,589) - (14,589)
Total COS (55,642) - (55,642) (44,848) - (44,848)
Gross Profit 489,788 - 489,788 370,634 - 370,634
Sales and marketing (S&M) costs (228,204) - (228,204) (186,693) - (186,693)
S&M related SBP charges (17,506) 17,506 - (15,347) 15,347 -
S&M-related depreciation and amortisation (43,993) 43,993 - (30,732) 30,732 -
Total S&M costs (289,703) 61,499 (228,204) (232,772) 46,079 (186,693)
Research and development (R&D) costs (31,307) - (31,307) (24,634) - (24,634)
R&D related SBP charges (8,228) 8,228 - (11,647) 11,647 -
R&D related D&A (8,359) 8,359 - (7,981) 7,981 -
Total R&D costs (47,894) 16,587 (31,307) (44,262) 19,628 (24,634)
General and administrative (G&A) costs (91,653) - (91,653) (63,064) - (63,064)
G&A related SBP charge (18,479) 18,479 - (15,220) 15,220 -
G&A-related depreciation, amortisation and impairment (6,086) 6,086 - (2,883) 2,883 -
Total G&A costs (116,218) 24,564 (91,653) (81,167) 18,103 (63,064)
Foreign exchange differences (2,127) - (2,127) (6,502) - (6,502)
Other operating income 2,666 - 2,666 1,671 - 1,671
Operating profit (EBIT) 36,512 36,512 7,602 7,602
Operating profit margin 6.7% 1.8%
Adjusted EBTIDA 139,163 91,412
Adjusted EBTIDA margin 25.5% 22.0%
Adjusted EBIT and margin
$'000 FY 2023 FY 2022
Adjusted EBIT 82,506 49,816
Adjusted EBIT margin (%) 15.1% 12.0%
Definition and relevance
Darktrace's Adjusted EBIT is its earnings before interest and taxes, adjusted
to remove uncapitalised share-based payment (SBP) charges and related employer
tax charges, as well as certain one-off charges including the impairment of
right-of-use assets. Adjusted EBIT as a percentage of revenue is the Adjusted
EBIT margin.
Adjusted EBIT considers both cash and non-cash charges incurred by Darktrace
in the period, demonstrating what underlying operating profit would have been
without the impact of certain charges that are both unpredictable and outside
of Darktrace's control. This includes SBP related employer tax charges which
are driven by movements in share price. Management believes this treatment
aids period-to-period comparison of operating performance with Darktrace's
peers, and by excluding the impact of these unpredictable or uncontrollable
charges, further enhances Management's ability to predict and communicate
Darktrace's longer-term expected 'steady-state' economic model.
Performance
Year-over-year, Adjusted EBIT increased by $32.7 million to $82.5 million,
resulting in a 3.1 percentage point increase in Adjusted EBIT margin to 15.1%.
Reconciling Operating profit (EBIT) to adjusted EBIT, Darktrace added back
$44.2 million in net SBP and related employer tax charges, an increase of $2.0
million in the period. This increase was due to a $6.0 million increase in SBP
related employer tax charges, primarily as a result of increases in the share
price across the period, partially offset by a $4.0 million reduction to the
underlying SBP charge as a result of a reduced impact from IPO-related equity
awards that fully vested in the first half of FY 2023. Darktrace also added
back a right-of-use asset impairment charge of $1.8 million reflecting its
current assessment of the cost it will incur to exit a lease contract on now
unused space.
Reconciliation of Operating profit (EBIT) to Adjusted EBIT
$'000 FY 2023 FY2022 % Change
Operating profit (EBIT) 36,512 7,602 380.3%
Impairment of right-of-use asset 1,781 - n/a
Share-based payment (SBP) charges 39,989 44,018 (9.2)%
SBP related employer tax charges 4,224 (1,804) n/a
Adjusted EBIT 82,506 49,816 65.6%
Adjusted EBIT margin (%) 15.1% 12.0% n/a
Number of customers
30 June 2023 30 June 2022 % Change
Number of customers 8,799 7,437 18.3%
Definition and relevance
This is a count of total end-user entities that are generating ARR at the
measurement date.
Performance
Darktrace added 1,362 net new customers in FY 2023, a year-over-year growth
rate of 18.3%. New customer additions slowed during the year as a challenging
macro-economic environment made prospects more reluctant to trial software
they did not believe they would have budget for and extended sales cycles for
purchases. Growth in new customers is a key driver of net ARR added and the
13.8 percentage point reduction in year-over-year growth of net new customers
was a key factor in the decline of Net ARR added to (0.4)% below the amount
added in the prior year.
Average contract ARR
$ 30 June 2023 30 June 2022 % Change
Average contract ARR 71,422 65,198 9.5%
Definition and relevance
Average contract ARR is the total ARR at the measurement date, divided by the
number of customers at that measurement date. In combination with other
measures, including shifts in the value distribution of ARR, metrics such as
Average contract ARR are key to assessing whether go-to-market strategies,
such as sales team segmentation and changing in pricing or packaging, are
being reflected in Darktrace's performance.
Performance
Average contract ARR at 30 June 2023 increased by 9.5% year-over-year to
$71,422. This expansion was driven by the larger average value of new customer
contracts added during the period, in combination with an increase in upsells
across Darktrace's existing customer base.
Customer distribution by ARR
Parallel to the year-over-year increase in average contract ARR, and the
underlying increases in both new and existing contract ARR values, the
distribution of customer contracts above and below $100,000 in ARR also
shifted towards larger contract sizes.
30 June 2023 30 June 2022
ARR from customers with ARR greater than $100,000 54.1% 49.5%
ARR from customers with ARR less than $100,000 45.9% 50.5%
The number of customers with ARR greater than $100,000 represent 17.9% of
total customers, a 2.7 percentage point increase from 15.2% at 30 June 2022.
Remaining Performance Obligation (RPO)
$'000 30 June 2023 30 June 2022 % Change
RPO 1,258,350 1,003,932 25.3%
Definition and relevance
RPO represents committed revenue backlog and is calculated by summing all
committed customer contract ARR values that have not yet been recognised as
revenue, valued at the exchange rates on the last day of the reporting period
rather than at constant currency (as for example with ARR). For clarity, any
contracted amounts that are subject to opt-out or other cancellation
provisions are not included in RPO.
RPO is a common KPI used by software and Software-as-a-Service ("SaaS")
companies to provide stakeholders with an indication of future recurring
revenue and baseline revenue growth. It includes only future recurring
contract value - more than 99% of Darktrace's contract value is
subscription-based - with all one-time future contract values excluded. RPO
reflects actual contract status so unrenewed contract values cease to be
reflected at their termination dates and future-dated contract values only
become included at their start dates.
RPO and the 'Future contracted revenue' amount reported in the financial
statements under the requirements of paragraph 120 of IFRS 15 are both
measures of future revenue and differ for various reasons including:
· the assumptions made about, and the application of, foreign
exchange rates differ between the two calculations;
· one-time revenue is included for the purpose of IFRS 15 reporting
but is not included in RPO; and
· future contracted revenue recognises future values rateably over
the term of the contracts, in line with Darktrace's revenue recognition
principles, whereas RPO, aligning with ARR, considers the status of the
contract on the last day of the reporting period.
Performance
At 30 June 2023, RPO was 25.3% higher than it was at 30 June 2022, driven
primarily by the acquisition of new customers with multi-year contracts.
Darktrace's multi-year contract strategy, and the resulting RPO, creates
significant revenue visibility.
$'000 30 June 2023 30 June 2022
Within 12 months 574,184 438,043
Between 1 - 2 years 397,063 316,752
Between 2 - 3 years 214,018 187,844
Between 3 - 4 years 69,894 57,193
Over 4 years 3,191 4,100
Total 1,258,350 1,003,932
The difference between USD ARR ($637.3 million at 30 June 2023) and RPO within
12 months is that not all of the ARR at 30 June 2023 will contribute to
revenue for a full 12 months.
Free cash flow (FCF)
$'000 FY 2023 FY 2022 % Change
Free cash flow 93,753 99,517 (5.8)%
Definition and relevance
Free cash flow (FCF) is the net cash from operating activities less purchases
(other than purchases made in connection with business combinations) of
intangible assets and property plant and equipment (PPE), and payments for
leases. Darktrace presents this measure only at year-end as seasonality in its
business would make comparisons between interim periods difficult and
potentially misleading.
While Adjusted EBITDA continues to be effective for measuring underlying
profitability trends within the business, Management believes that stakeholder
understanding of its profitability can be enhanced by also providing a
market-comparable cash-based profit measure as a tool to better assess
Darktrace's potential for cash generation and the related implications for
reinvestment and returns.
Performance
During FY 2023, Darktrace generated FCF of $93.8 million compared to $99.5
million in the prior year. This represents approximately 67.4% of Adjusted
EBITDA, slightly below the 75% to 105% range that Darktrace considers typical,
reflecting the high variability in invoicing, collections and other cash flow
and working capital timings. This level of FCF in FY 2023 was slightly lower
than its typical range due to the impact of the decision to net settle a
significant equity vesting for its two Executive Directors in the period.
Reconciliation of Adjusted EBITDA to FCF
$'000 FY 2023 FY2022
% Change
Adjusted EBITDA 139,163 91,412 52.2%
Appliance depreciation in cost of sales 16,721 14,589 14.6%
SBP related employer tax charges (13,920) 1,526 n/a
Loss on disposal or impairment 2,961 3,117 -5.0%
Other non-cash movements (952) 9,612 n/a
Working capital movements (6,384) 26,498 n/a
Tax related payments (3,542) (6,510) -45.6%
Net cash inflow from operating activities 134,047 140,244 (4.4)%
Capitalised research and development (1,813) (1,292) 40.3%
Property, plant and equipment purchased (24,306) (31,863) -23.7%
Lease costs capitalised (14,175) (7,572) 87.2%
Free Cash Flow (FCF) 93,753 99,517 -5.8%
FCF conversion (as % of Adjusted EBITDA) 67.4% 108.9% n/a
CFO Statement
Leveraging its multi-year contract model, Darktrace delivered strong revenue
growth and operating performance against a challenging macro-economic
backdrop. Despite a 13.8 percentage point reduction in year-over-year customer
growth, significant contracted revenue backlog (Remaining performance
obligations or RPO) supported 31.3% year-over-year revenue growth for FY 2023.
A high variable cost operating model, along with strong continuing controls
around discretionary spend, underpinned a 380.3% year-over-year increase in
operating profit, despite making significant investments in Darktrace's
Go-to-Market strategy and teams in the second half of the financial year.
Darktrace continues to generate cash to fund these investments and believes
that having had, and still having, the ability to do so through an economic
period testing many businesses, will put it in the best possible position to
capitalise on what remains a large available market opportunity.
Income Statement Analysis
$'000 FY 2023 FY 2022 %Change
Revenue 545,430 415,482 31.3%
Gross profit 489,788 370,634 32.1%
Gross margin (%) 89.8% 89.2% n/a
Operating profit (EBIT) 36,512 7,602 380.3%
Net Profit 58,958 1,457 3,946.5%
Revenue
Revenue increased by $129.9 million, or 31.3%, to $545.4 million for the year.
This increase was primarily attributable to an 18.3% net increase in new
customers since 30 June 2022 and, to a lesser extent, a 9.5% year-over-year
increase in average contract ARR in the same period.
99.6% of all revenue came from recurring subscription contracts with
customers, with new contracts typically averaging over 36 months. These
multi-year contracts result in significant contracted revenue expected to
convert to revenue in future years (see note 4 in the Financial statements).
Subscription revenue is recognised in accordance with IFRS 15 on a
straight-line basis over the service period, from commencement date to
termination date.
Cost of sales (COS)
$'000 FY 2023 FY 2022 % Change
Employment and other related costs (18,593) (13,490) 37.8%
Hosting costs (16,887) (10,653) 58.5%
Appliance depreciation (16,721) (14,589) 14.6%
Shipping & other direct costs (3,441) (6,115) -43.7%
Total COS (55,642) (44,848) 24.1%
Cost of sales includes all costs relating to the deployment of Darktrace's
software to customers, whether through physical appliances or in the cloud,
and for providing both customer technical support and supplementary monitoring
and response capabilities.
Cost of sales increased by $10.8 million, or 24.1%, to $55.6 million in the
year. This increase was due to a $6.2 million increase in hosting fees in the
period to $16.9 million, driven by additional virtual deployments for new and
existing customers, which reflected a decrease in per unit hosting costs from
volume-based discount plans with providers. It was also due to an increase in
employment and other related costs of $5.1 million to $18.6 million.
Correspondingly, appliance depreciation attributed to cost of sales grew $2.1
million to $16.7 million for the year; the lower growth in physical deployment
costs is offsetting higher growth in hosting costs as more customers chose to
have products deployed virtually, and as Darktrace offers more products that
are only deployed virtually.
On a percentage of revenue basis, the decrease in appliance depreciation
attributed to cost of sales, along with a decrease in shipping and other
carriage costs related to fewer physical deployments, more than offset the
increase in hosting fees. This resulted in a 0.6 percentage point improvement
in gross margin to 89.8% for the period. The remaining components of cost of
sales, such as salary-related costs for customer technical support and
monitoring services, largely scaled in line with revenue growth.
Sales and marketing (S&M) costs
$'000 FY 2023 FY 2022 % Change
Employment and other related costs (157,831) (119,102) 32.5%
Other operating costs (47,183) (50,856) -7.2%
Facilities costs (16,071) (12,498) 28.6%
Travel and Entertainment (7,119) (4,165) 70.9%
Depreciation and amortisation (43,993) (30,804) 42.8%
Share-based payment (SBP) charges (16,525) (20,084) -17.7%
SBP related employer tax charges (981) 4,737 n/a
Total S&M costs (289,703) (232,772) 24.5%
S&M costs increased by $56.9 million, or 24.5%, to $289.7 million for the
year. This increase was largely attributable to a $38.7 million, or 32.5%,
increase in employment costs (excluding share-based compensation) to $157.8
million. This was primarily as a result of a 25.0% increase in average
headcount during the period, although increased average cost per head as we
hired more experienced staff and recruited in a competitive job market, was
also a factor. This headcount included, for the first time, full time
equivalent (FTE) headcount of Customer Success Managers (CSMs), reflecting
this team's new commercial renewal and upsell responsibilities from 1 July
2022. Given this change, Darktrace now apportions CSM headcount on an FTE
basis, as well as the pro rata costs associated with these new commercial
responsibilities, to S&M, where in prior periods, all CSM employees and
related costs were reflected in the general and administrative category.
$23.5 million of the year-over-year increase in S&M employment costs was
related to the first-time inclusion of CSM salaries, commissions, and related
employment costs. This included $13.3 million of a total $22.8 million
increase in salary related costs and $6.5 million of a total $12.0 million in
commissions costs. The remaining increases were the result of additional
hiring in sales and marketing teams, in-period commissions costs and increased
recruitment costs related to the hiring, or planned hiring, of senior roles in
both sales and marketing.
The largest component of other operating costs is direct marketing costs,
which declined by $4.4 million to $35.7 million because of ongoing and
successful efforts to increase the efficiency and effectiveness of Darktrace's
direct and other marketing.
The $13.2 million increase in depreciation and amortisation to $44.0 million
was mostly driven by a $10.7 million increase in the amortisation of
capitalised commission. Depreciation of IFRS 16 lease assets increased by $2.7
million, largely related to new offices in London, New York, and Los Angeles.
Darktrace also saw the further return of travel, facilities and other costs
suppressed by the pandemic in the prior period, amplified by a high
inflationary environment.
Share-based payment charges decreased by $3.6 million to $16.5 million for the
year as the costs associated with the 2H FY 2022 modification of awards made
at the time of IPO terminated when they vested in the first quarter of FY
2023.
SBP related tax costs of $1.0 million compared to an income of $4.7 million in
FY 2022, when a reduction in the year-end share price reversed a portion of
the related provision for taxes to be paid. The FY 2023 charge was driven by
the timing of awards exercised and vested during the year, as well as
movements in the share price.
Research and Development (R&D) Costs
$'000 FY 2023 FY 2022 % Change
Employment and other related costs (26,749) (21,454) 24.7%
Facilities costs (3,729) (2,799) 33.2%
Travel and Entertainment (829) (363) 128.4%
Depreciation and amortisation (8,359) (7,999) 4.5%
Share-based payment (SBP) charges (6,709) (6,522) 2.9%
SBP related employer tax charges (1,519) (5,125) -70.4%
Total R&D costs (47,894) (44,262) 8.2%
R&D costs increased by $3.6 million, or 8.2%, to $47.9 million in the
year, with the total cost growth kept down by lower SBP and related employer
tax costs. Employments costs increased by $5.3 million, or 24.7%, to $26.7
million, primarily driven by a 28.3% increase in average number of R&D
employees as Darktrace maintained its focus on research and new product
development. $3.8 million of this increase was directly attributable to having
a full year of costs for former Cybersprint (acquired in March 2022)
employees. The increase in employment costs also resulted from an increase in
average salaries from both newly hired senior roles and salary increases to
retain existing employees in a competitive job market.
Share-based payment related tax charges have decreased by $3.6 million to $1.5
million. The current year charge was driven by the timing of awards exercised
and vested during the year, as well as movements in the share price.
General and administrative (G&A) costs
$000 FY 2023 FY 2022 % Change
Employment and other related costs (59,807) (44,224) 35.2%
Other operating costs (25,444) (12,365) 105.8%
Facilities costs (4,775) (3,812) 25.3%
Travel and Entertainment (3,412) (2,992) 14.0%
Depreciation and amortisation (4,305) (2,553) 68.6%
Share-based payment (SBP) charges (16,753) (17,412) -3.8%
SBP related employer tax charges (1,722) 2,192 n/a
Total G&A costs (116,218) (81,166) 43.2%
G&A costs increased by $35.0 million, or 43.2%, to $116.2 million for the
year. The largest portion of this increase was employment costs, which
increased $15.6 million, or 35.2%, in the period, despite only having a 14.0%
increase in average headcount (the FTE headcount cost of Customer Success
Managers (CSMs) is attributed to G&A in proportion to their non-commercial
responsibilities).
The disproportionate increase in employment costs was largely the result of
bonus costs increasing by $8.5 million period-over-period, to $13.7 million.
This increase was driven by increases in CSM bonus costs as a part of their
transition to dual support and commercial responsibilities. All other
employment costs largely increased in line with headcount growth.
The increase in other operating costs of $13.1 million or 105.8% was largely
driven by a $10.6 million year-over-year increase in professional, legal, and
consulting fees, to $21.0 million.
This increase was the result of consulting fees relating to the implementation
of a new ERP system, a financial controls review, and the expansion of
Darktrace's recently established Federal entity, as well as project specific
legal, consultancy and accounting costs.
Depreciation and amortisation increased by $1.8 million to $4.3 million,
primarily because of significant leasehold improvement additions during the
year.
SBP related tax costs of $1.7 million, down from an income of $2.2 million in
the previous year, reflected the movement in the related provision, which is
estimated using the fair value of the underlying shares awarded at each
reporting date, primarily driven by a lower share price. To a lesser extent,
it was also driven by the timing of awards exercised and vested during the
period. See note 10 to the financial statements for more details.
Foreign exchange differences
$000 FY 2023 FY 2022 % Change
Foreign exchange differences (2,127) (6,502) -67.3%
Foreign exchange differences decreased $4.4 million from the prior year,
primarily because of rate volatility impacting the translation of monetary
assets and liabilities denominated in currencies other than Darktrace's U.S.
Dollar reporting currency, most significantly, the British Pound and the Euro.
Financial Position Analysis
$'000 30 June 2023 30 June 2022 % Change
Total Assets
Goodwill 38,164 38,164 0.0%
Intangible assets 12,571 15,649 (19.7)%
property
Property, plant and equipment 65,789 61,001 7.8%
Right-of-use assets 44,439 58,160 (23.6)%
Capitalised commission 76,653 57,154 34.1%
Deferred tax assets 19,849 1,041 1,806.7%
Deposits 8,234 9,260 (11.1)%
Inventory 100 - n/a
Trade and other receivables 123,595 95,481 29.4%
Tax receivables 5,485 2,828 94.0%
Cash and cash equivalents 356,986 390,623 (8.6)%
Total Liabilities
Trade and other payables (109,342) (81,690) 33.8%
Deferred revenue (312,117) (251,851) 23.9%
Lease liabilities (57,608) (63,840) (9.8)%
Provisions (8,668) (17,292) (49.9)%
Equity
Share capital 9,779 9,812 (0.3)%
Share premium 16,308 16,117 1.2%
Share capital redemption reserve 255 - n/a
Merger reserve 305,789 305,789 0.0%
Foreign currency translation reserve (8,126) (8,126) 0.0%
Stock compensation reserve 50,333 74,883 (32.8)%
Treasury shares (104,946) (11,683) 798.3%
Retained earnings (5,879) (72,104) (91.8)%
Intangible assets
Darktrace capitalised $2.5 million of development costs in the period in line
with the amount capitalised in the prior year. Capitalised development costs
are amortised on a straight-line basis over a three-year period, and acquired
third-party software costs are amortised over a period of five years This
resulted in an amortisation charge in the period of $5.6 million, also in line
with amortisation in the prior period. At 30 June 2023, the Group had $12.6
million of intangible assets, a decrease of $3.0 million from $15.6 million at
30 June 2022.
Right-of-use assets
In the period, the overall net book value decreased by $13.7 million, mainly
as a result of the amortisation of the assets being recognised. New York
office lease amortisation began in June 2022, resulting in a $2.5 million
charge, and London office amortisation started in March 2022, resulting in a
charge of $1.9 million. A further $4.5 million reduction in Right-of-use
assets resulted from recognition of lease incentives during the period.
Amortisation of these assets is on a straight-line basis over the life of the
lease, and resulted in an amortisation charge in the period of $10.3 million.
This was a $3.8 million increase from previous year driven by new leases that
went into service in the year.
Capitalised commission
Most sales commissions are paid in two instalments, the first being when the
contract is signed and the second upon the earlier of payment for the entire
contract value or one year from the date of sale. For the first instalment,
the Group capitalises sales commissions and the associated payroll taxes, as
required under IFRS 15, and amortises them over the related contract term. As
there are continued employment and customer service obligations required for
the employee to receive the second instalment, these commissions are not
eligible for capitalisation under IFRS 15 and are expensed over the one-year
term until they are paid. Capitalised commissions on the Group's Statement of
Financial Position increased by 34.1% to $76.7 million at 30 June 2023, from
$57.2 million at 30 June 2022, as a result of continuing sales.
Deferred tax asset
At 30 June 2023 the Group has significant tax losses in the UK available for
offset against future taxable profits, mainly related to Darktrace Holdings
Limited (note 25). Darktrace has, for the first time, recognised a deferred
tax asset of approximately $19.8 million (30 June 2022: $1.0 million). It
continues to have an unrecognised deferred tax asset of approximately $78.3
million (30 June 2022: $93.2 million). As there is not yet sufficient
convincing evidence that the remaining unrecognised asset will be able to be
used in the foreseeable future as is required under IAS 12 when there is a
history of losses.
Especially in the current economic environment, evidence to support certainty
of sufficient near term future taxable profits is less clear when a period
longer than two years is considered; therefore $50.7 million UK deferred tax
asset on losses carried forward remain unrecognised at 30 June 2023 (see note
25 to the consolidated financial statements for further details).
Trade and other receivables
Trade and other receivables increased by $28.1 million, or 29.4%, to $123.6
million at 30 June 2023. The largest portion of this increase was in trade
receivables, which increased $29.8 million, or 46.7%, in the year, mainly
driven by growth of revenue from increased billing. Included in this was a
$4.1 million increase for indirect tax recoverable from customers that was
recognised at the end of the year.
Cash and cash equivalents
The Group had cash and cash equivalents at 30 June 2023 of $357.0 million, a
decrease of $33.6 million from 30 June 2022. This decline was primarily
attributable to the Group repurchasing $145.2 million (£120.8 million) of its
shares in the year as both purchases into the Employee Benefits Trust (EBT)
and a share buy back and cancellation scheme (see equity below). This cash was
generated by the operating activity for $132.5 million. See cash flow analysis
below for more details.
Deferred revenue
Total deferred revenue increased by 23.9% to $312.1 million at 30 June 2023,
from $251.9 million at 30 June 2022. This year-over-year growth was a result
of the increases in invoicing driven by growth in contracted revenues.
Darktrace has typically raised between 41 to 45% of its total invoicing in the
first half of the financial year (44.1% in FY 2023) with more deferred revenue
expansion being in second half. It is therefore most representative to look at
year-over-year growth for underlying trends in deferred revenue rather than to
compare different periods. As Darktrace rarely invoices its multi-year
contracts more than a year in advance, growth in deferred revenue is typically
driven by movements in current, rather than non-current, deferred revenue.
Occasionally, customers will pay full contract values in advance but because
this has become increasingly infrequent and represents an increasingly small
proportion of total invoicing, growth in non-current deferred revenue balances
will lag those of current deferred revenue.
Equity
As a result of transactions with shareholders, Darktrace reported a decrease
in equity of $110.1 million during the year consisting of:
· A $94.3 million reduction in equity related to the EBT market
purchase programme, for which 28,301,976 ordinary shares were purchased during
the year to be used to satisfy existing, planned, and anticipated options and
awards under Darktrace's employee share schemes, or as otherwise permissible
under the terms of the EBT trust deed. These shares were acquired at an
average price of £2.81 ($3.33) per share.
· A $50.9 million reduction in equity related to a Share Buyback
Programme, which during the year purchased 15,440,726 shares on-market. The
shares were acquired at an average price of £2.68 ($3.30) per share. The
purpose of this Share Buyback Programme is to reduce Darktrace's issued share
capital and the shares purchased pursuant to it will be cancelled. As of 30
June 2023, 13,280,100 ordinary shares had been repurchased and cancelled.
Through this Share Buyback Programme, Darktrace returns value to shareholders,
while still maintaining a strong cash position so it can fund continued
investments in the business.
· A $37.1 million increase in equity as result of the share-based
payments granted to employees in the year.
· A $1.7 million decrease in equity as result of the awards vested
and options exercised in the year.
Cash flows analysis
$'000 FY 2023 FY 2022 % Change
Operating cash flows before movements in working capital 141,307 118,585 19.2%
Net cash inflow from operating activities 134,047 140,244 (4.4)%
Cash outflow from investing activities (18,103) (68,365) (73.5)%
Cash outflow from financing activities (151,658) (15,513) 877.6%
Net changes in cash and cash equivalents (35,714) 56,365 n/a
Cash and cash equivalents, beginning of year 390,623 342,358 14.1%
Unrealised exchange difference on cash and cash equivalents 2,077 (8,100) n/a
Cash and cash equivalents, end of year 356,986 390,623 (8.6)%
Cash inflow from operating activities before working capital
Cash generated from operating activities before working capital movements
increased by $22.7 million, or 19.2%, compared to the prior year, as a result
of Darktrace's continued revenue growth, maintenance of its invoicing profiles
and actions to control discretionary costs.
Net cash inflow from operating activities
The Group had a net cash inflow from operating activities of $134.0 million in
the year, a 4.4% decrease from $140.2 million in FY 2022. This $6.2 million
reduction in the net cash inflows from operating activities was primarily due
to a $32.9 million decrease in cash from working capital, this was offset by
an $22.7 million increase in non-cash movements.
Cash outflow from investing activities
The Group had cash outflows from investing activities of $18.1 million, a
decrease of $50.3 million on the prior year. This decrease in cash outflows
was primarily a result of comparing to the FY 2022 period that contains the
cash outflow for the acquisition of Cybersprint. Furthermore, the overall cash
outflow decrease was contributed to by a $7.5 million increase in finance
income, due to increases in interest earned on cash deposits and a $4.6
million decrease in cash outflow for the purchase of appliances, reflecting a
longer-term shift in product deployments to the cloud.
Cash outflow from financing activities
Darktrace had a $134.6 million increase in cash outflows from financing
activities, mainly due to a net $131.9 million year-over-year increase in cash
outflow for share buyback programmes.
Going concern
In adopting the going concern basis for preparing the financial statements,
the Directors have considered the Group's principal risks and uncertainties in
the current operating environment and assessed these risks via a series of
scenario analyses designed to evaluate the capacity of the Group to withstand
a prolonged period of adverse financial conditions.
Forecasts and sensitivities have been prepared based on a series of scenarios
incorporating plausible yet severe impacts on revenue and ARR, the Group's
cost base, and the Group's consolidated statement of financial position
including its ability to meet financial covenants.
Throughout, the Directors have considered the viability of the Group's
operations with respect to the following fundamental properties of the
business:
· A high quality, fast-growth recurring revenue model with high
levels of future revenues for which remaining obligations have been
fulfilled;
· A variable cost structure which allows the Group to mitigate
adverse financial conditions via the flexing of its major cost items; and
· The strong liquidity position of the Group arising from a highly
cash-generative model.
Based on the Group's forecasts, the Directors are satisfied that the Group has
adequate resources to continue as a going concern for a period of at least 12
months from the date of approval of the financial statements. Accordingly, the
Directors have prepared the financial statements on the going concern basis.
Viability statement
In accordance with the UK Corporate Governance Code, the Directors are
required to assess Darktrace's prospects over an appropriate period and state
whether they reasonably expect that it will be able to continue to operate and
meet its liabilities throughout this period. In doing so, the Directors have
considered Darktrace's principal risks and uncertainties in its current
operating environment and have assessed those risks using a range of scenario
analyses designed to evaluate its capacity to withstand a prolonged period of
adverse financial conditions
The Directors first considered these fundamental properties of Darktrace's
business:
· A growing business with a high quality, multi-year, recurring
revenue model that results in significant amounts of committed future
revenues;
· A highly variable cost structure that enables relatively rapid
adjustments in material costs if necessary to mitigate adverse financial
conditions; and
· A strong liquidity position arising from a highly cash-generative
model.
Forecasts and sensitivities have then been prepared, incorporating a range of
plausible, but severe, impacts on Darktrace's revenue and ARR, cost base,
consolidated statement of financial position and ability to meet its financial
covenants.
Viability Period
The Directors have determined that three years represents the most appropriate
period of assessment for Darktrace. This aligns viability considerations with
internal planning frameworks and, given typical three-year contract lengths,
revenue visibility. The lifespan of Darktrace's technologies and services is
open-ended so this is not a determining factor. Furthermore, this assessment
period is in line with that used by peers in the sector, reflecting the
sector's high-growth and fast-changing operating and financial profiles.
The Directors have no reason to believe that Darktrace will cease to be viable
over a longer period, however, given the nature of data available and the
visibility of near-term operations in an evolving market, they consider that a
reasonable assessment of its long-term viability is most appropriately formed
on a three-year period.
Viability Scenario Frameworks
To assess Darktrace's viability throughout the assessment period, the
Directors have built upon the analyses supporting the Going Concern assertion
and extended these to varying degrees so as to represent plausible, but
severe, scenarios that may be encountered over the three-year viability period
of three years. Throughout, the threshold at which continued operations might
become unviable has been tested.
The base case against which the scenarios are measured is Darktrace's FY 2024
budget and its forecasts for FY 2025 - FY 2026, which represent a broad
continuation of recent trends, incorporating known and expected changes, into
its assumptions. These trends reflect the sales and profitability trends
exiting FY 2023 and anticipate both the impact of significant changes it has
made in its go-to-market organisation and the ongoing uncertainties inherent
in the current global economic environment. As such, Darktrace is bridging
from FY 2023, where macro-economic conditions had a significant impact on new
customer additions and related ARR growth, to FY 2024, where this
macro-economic uncertainty is expected to continue to affect new and existing
customer behaviour. However, with early signs of recovery across the global
economy, and with the opportunity to benefit from the recent and ongoing
investments in its go-to-market organisation, Darktrace is framing its FY 2024
expectations in terms of first half stabilisation and second half
re-acceleration. In the longer-term, the Directors do not believe the current
macro-economic uncertainty will have any impact on Darktrace's longer-term
economic model, which as previously disclosed, anticipates adjusted EBIT
margins in the mid-20% range.
If scenarios such as those tested were to occur, the Directors would have a
number of options available to maintain Darktrace's financial position,
including cost reduction measures, drawing on existing financing and the
arrangement of additional financing.
Each scenario assessed is outlined in detail in the Annual Report with the
first three considering different operating and financial challenges. These
three scenarios do not incorporate elements of cost mitigation, instead
demonstrating the extent to which Darktrace could remain viable, and continue
to invest for growth and/or recovery, during the periods of disruption
outlined in each scenario.
The fourth and final scenario - which combines the three standalone scenarios
as one extreme scenario - explores available cost mitigation actions, the
impact of different cost saving levers on the business, and how Darktrace
could remain viable even in this extreme scenario. Without these cost
mitigation actions, Darktrace would not remain viable in the period.
In each of the first three standalone scenarios, Darktrace is forecast to have
sufficient resources to continue to meet its liabilities as they fall due, and
for each of the revenue/ARR, cost, and balance sheet scenarios, active cost
saving actions were not instigated as part of the analysis. In the event that
any of these adverse scenarios were to occur in reality, controllable
mitigating actions are available should they be required.
When the scenarios are combined into an extreme 'worst case' scenario,
Darktrace does not remain viable in the period without any cost saving
mitigations. Indeed, in the unmitigated 'worst case' scenario Darktrace would
turn cash negative by July 2025 and would therefore likely be at risk of
breaching its financial covenants around this time, if not before. In such a
scenario, as with the others, the Directors would have at their disposal a
number of balanced and controllable mitigating actions, which once instigated
would enable Darktrace to maintain sufficient cash headroom to remain viable
throughout the period and in compliance with its financial covenants.
Macro-economic Environment
Each of the scenarios outlined above has been considered with respect to the
ongoing impact of the uncertainties inherent in the current global economic
environment as well the potential impacts from a pandemic or global health
crisis. The Directors have noted that Darktrace's commercial performance
remained largely unaffected by COVID-19, as evidenced by the strong
performance in FY 2021 and FY 2022, so have no current plans for rent holidays
or other cost adjustments in the event that employees are unable to work from
Darktrace's offices.
The Directors are of the view that the current turbulent geopolitical
background is making long-term cyber risk an even higher priority for Chief
Information and Security Officers and senior executives. They are confident
that Darktrace will continue to be able to meet the technological needs of
customers at times of heightened uncertainty and workforce disruption, and are
of the view that security will remain a structural growth industry for the
foreseeable future.
Confirmation of Longer-term Viability
Based on the assessments outlined above, in accordance with the UK Corporate
Governance Code, the Directors have assessed Darktrace's prospects over a
period they deem to be appropriate and confirm that they have a reasonable
expectation that it will be able to continue in operation and meet its
liabilities as they fall due throughout this period.
Principal and Emerging Risks
The principal risks and uncertainties faced by Darktrace and its approach to
internal control and risk Management are set out on pages 65 to 71 of the FY
2023 Annual Report which will be available on the Group's website at
www.ir.darktrace.com (http://www.ir.darktrace.com) .
Principal risks
Darktrace considers the principal risks and uncertainties it faces to be the
following:
Inability to innovate Darktrace products
Failure to innovate, develop and enhance the AI Cyber Loop, to adapt to the
increasingly sophisticated and changing nature of cyber-attacks posed by
threat actors and the emergence of new generative AI LLMs. Darktrace may also
fail to innovate against the market's current requirements and in line with
Darktrace's overall business strategy.
Customer service delivery failure
The Group may fail to anticipate and understand customer needs appropriately
and in a timely manner, therefore risking failure to deliver value to the
customers.
Inadequate channel sales and support
The Group relies on the channel i.e., third parties, including distributors,
resellers, referral partners and managed service providers, to generate a
significant portion of its revenue.
Cloud service providers downtime
The Group relies on Cloud Service Providers, such as Amazon Web Services
("AWS") and its own data servers to host and operate an increasing number of
deployments for the Darktrace product line.
Failure to retain and attract employees
The Group relies on the performance of highly skilled personnel, including key
employees, to deliver on its strategic objectives.
Darktrace cyber incident
Risk of failure of its systems and compromise of its data, through
cyber-attack, cyber-intrusion, insider threats or otherwise. Failure to
responsibly collect, process and store data, together with ensuring an
appropriate standard of cyber security across the business.
Intellectual property theft or exposure
The Group may fail to adequately protect its intellectual property,
proprietary rights and prevent others from making unauthorised use of its
platform and technologies, especially at a time when competitors are embracing
new generative AI LLMs.
Autonomy Related Matters
The Autonomy related litigation represents a potential risk for Darktrace from
both a reputational and a legal perspective.
Major changes
Brand & Reputation
The Audit & Risk committee analysed the Brand & Reputation Principal
Risk, and it was assessed that Brand and Reputation are risk impact factors
for all risks, rather than a standalone Principal Risk. The Brand and
Reputation Principal Risk has been distilled into four Business risks that
impact Darktrace's brand and reputation (Misinformation Campaigns, Market
Share, Third Party Endorsement and Brand Awareness) and the Principal Risk
name changed to Autonomy Related Matters.
All risks now have a reputation impact rating to help assess the materiality
of reputational impact if those risks were to occur. The reputation impact
rating scheme has been embedded within the ERM Framework for all risks. All
Principal Risks have been assessed for their brand and reputational impact and
this is monitored by the Audit & Risk Committee
Customer Service Delivery Failure
The Principal risks Understanding & Responding to Customer Needs and
Customer Service Delivery were combined into one Principal Risk as the threat
and impact of the two risks were both customer focused and posed the same
potential threat to the business. The Audit & Risk Committee, with the
advice of the Risk Steerco formally accepted the combination of those two
principals risks.
Principal Risk Downgrading
As part of the ERM Framework evolution the Principal Risks were scrutinised
for their potential material impact on the business goals, and a Principal
Risks was downgraded:
· Covid-19: As the world learned to deal with COVID-19 so did
Darktrace. The impact of COVID-19 was assessed to no longer have a potential
material financial impact on Darktrace. As such, a new Strategic Business Risk
for Pandemics has been created to ensure there is resiliency for any potential
future pandemics. The Audit & Risk Committee, with the advice of the Risk
Steerco formally accepted the downgrading of the principal COVID-19 risk.
Emerging risks
During 2023, in line with Darktrace's evolving ERM Framework, all Emerging
Risks, were re-evaluated to focus on risks that could have a potential
material impact on the business. This re-evaluation led to two significant
changes, the number of Emerging Risks and the definition of an Emerging Risk.
This evaluation has enabled Darktrace to better focus its mitigations on risks
that are more likely to affect its business model.
Darktrace defines Emerging Risks as risks that may, in time, pose a threat to
Darktrace's business model and are more unpredictable, have a greater level of
uncertainty or in relation to which there may be less relevant data or
detailed information available to formally assess the materiality of the risk.
Darktrace has procedures in place to identify Emerging Risks, including
horizon scanning, and monitoring market and consumer trends. Darktrace also
identifies Emerging Risks utilising in-house expertise that forms part of the
ERM Governance structure and in turn "crowd sources" for emerging risks from
its own industry experts.
Emerging Risks are reviewed quarterly by the Risk Steerco to assess their
relevance, potential impact and status. Potential mitigations are prepared and
if an Emerging Risk is assessed as quantifiable it is incorporated within the
wider ERM Framework Risk registers. Any updates or significant changes to an
Emerging Risk are presented to the Audit & Risk committee. The Board
considers Emerging Risks on a regular basis and manages them accordingly,
taking into account the expected timing of the risk.
Market Product Saturation
Darktrace is a at the forefront of Cyber AI products, as the Group's
reputation grows more imitation products will appear using the same core
product principles alongside the growth in new generative AI LLMs that
competitors are incorporating in their own products which could potentially
lead to an over saturation of the market, with cheaper and inferior product
lines and the use of new generative AI LLMs trained on inferior data.
AI & Cyber Regulatory uncertainty
Current regulatory trends have prompted companies to re-examine the
effectiveness of their governance and oversight. The continued adoption of new
or proposed regulations can lead to compliance challenges and to increasing
regulatory complexity for Darktrace.
Directors' Responsibility Statement
The Directors are responsible for preparing the Annual Report and the
financial statements in accordance with applicable law and regulations. The
Act requires the Directors to prepare financial statements for each financial
year that give a true and fair view of the financial position of the Group and
Darktrace and the financial performance and cash flows of the Group for that
period. Under that law the Directors have prepared the consolidated financial
statements of the Group in accordance with UK-adopted International Accounting
Standards and with the requirements of the Companies Act 2006 as applicable to
companies reporting under those standards. In preparing these financial
statements, the Directors are required to:
· select suitable accounting policies and then apply them
consistently;
· make judgements and accounting estimates that are reasonable and
prudent;
· state whether applicable international accounting standards in
conformity with the requirements of the Companies Act 2006, as amended have
been followed, subject to any material departures disclosed and explained in
the financial statements; and
· prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the company will continue in
business.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain Darktrace plc and the Group's transactions and
disclose with reasonable accuracy at any time the financial position of
Darktrace plc and the Group and enable them to ensure that the financial
statements and the Directors' Remuneration Report comply with the Act and, as
regards the Group financial statements, Article 4 of the IAS Regulation. They
are also responsible for safeguarding the assets of Darktrace plc and the
Group and hence for taking reasonable steps for the prevention and detection
of fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for
preparing a strategic report, directors' report, directors' remuneration
report and corporate governance statement that comply with that law and those
regulations.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on Darktrace's Investor Relations
website. Legislation of the UK governing the preparation and dissemination of
financial statements may differ from legislation in other jurisdictions.
Each of the Directors, whose names and functions are listed on pages 82 to 85
in the FY 2023 Annual Report confirm that, to the best of each person's
knowledge:
· the Annual Report, taken as a whole is fair, balanced and
understandable and provides the information necessary for shareholders to
assess Darktrace plc and the Group's performance, business model and strategy;
· the Group financial statements, which have been prepared in
accordance with UK-adopted International Accounting Standards and with the
requirements of the Companies Act 2006 as applicable to companies reporting
under those standards, which give a true and fair view of the assets,
liabilities, financial position and profit of the Group and Darktrace plc; and
· the Strategic Report and Directors' Report include a fair review
of the development and performance of the business and the position of
Darktrace plc and the Group, together with a description of the principal
risks and uncertainties that they face.
Consolidated Statement of Comprehensive Income
FY 2023 FY 2022
$'000 $'000
Revenue 545,430 415,482
Cost of sales (55,642) (44,848)
Gross profit 489,788 370,634
Sales and marketing costs (289,703) (232,772)
Administrative expenses
Research and development costs (47,894) (44,262)
General and administrative costs (116,218) (81,167)
Foreign exchange differences (2,127) (6,502)
Other operating income 2,666 1,671
Operating profit 36,512 7,602
Finance costs (3,493) (2,807)
Finance income 8,016 518
Profit for the year before taxation 41,035 5,313
Taxation 17,923 (3,856)
Net profit for the year attributable to the equity 58,958 1,457
shareholders of Darktrace plc
Items that are, or may be, subsequently reclassified to profit or loss:
Exchange differences on translating foreign operations - (3,728)
Total comprehensive profit/(loss) for the year 58,958 (2,271)
Earnings per share
Basic earnings per share $0.09 $0.00
Diluted earnings per share $0.09 $0.00
Consolidated Statement of Financial Position
30 June 2023 30 June 2022
$'000 $'000
Non-current assets
Goodwill 38,164 38,164
Intangible assets 12,571 15,649
Property, plant and equipment 65,789 61,001
Right-of-use assets 44,439 58,160
Capitalised commission 42,182 32,519
Deferred tax asset 19,849 1,041
Deposits 8,234 9,260
231,228 215,794
Current assets
Inventory 100 -
Trade and other receivables 123,595 95,481
Capitalised commission 34,471 24,635
Tax receivable 5,485 2,828
Cash and cash equivalents 356,986 390,623
520,637 513,567
Total assets 751,865 729,361
Current liabilities
Trade and other payables (109,959) (81,690)
Deferred revenue (283,678) (222,419)
Lease liabilities (4,873) (3,710)
Provisions (6,927) (15,954)
(405,437) (323,773)
Non-current liabilities
Deferred revenue (28,439) (29,432)
Lease liabilities (52,735) (60,130)
Provisions (1,741) (1,338)
(82,915) (90,900)
Total liabilities (488,352) (414,673)
Net assets 263,513 314,688
Equity
Share capital 9,779 9,812
Share premium 16,308 16,117
Share capital redemption reserve 255 -
Merger reserve 305,789 305,789
Foreign currency translation reserve (8,126) (8,126)
Stock compensation reserve 50,333 74,883
Treasury shares (104,946) (11,683)
Retained earnings (5,879) (72,104)
Total equity attributable to equity shareholders of Darktrace plc 263,513 314,688
These financial statements were approved by the Board of Directors and
authorised for issue on 5 September 2023. They were signed on its behalf by:
Catherine Graham
Chief Financial Officer
Company No. 13264637
Consolidated Statement of Changes in Equity
Share capital Share premium Share capital redemption reserve Merger reserve Foreign currency translation reserve Stock compensation reserve Treasury Shares Retained earnings Total equity
$'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000
1 July 2021 9,756 224,782 - 305,789 (4,398) 35,723 (761) (308,873) 262,018
Profit for the year - - - - - - - 1,457 1,457
Other comprehensive loss - - - - (3,728) - - - (3,728)
Total comprehensive loss - - - - (3,728) - - 1,457 (2,271)
Share issued for acquisition 34 15,782 - - - - - - 15,816
Share premium cancellation - (224,782) - - - - - 224,782 -
Share buyback - - - - - - (13,525) (89) (13,614)
Options exercised 22 335 - - - (6,609) 2,603 10,619 6,970
Share-based payment charge - - - - - 45,769 - - 45,769
Transactions with shareholders 56 (208,665) - - - 39,160 (10,922) 235,312 54,941
30 June 2022 9,812 16,117 - 305,789 (8,126) 74,883 (11,683) (72,104) 314,688
Profit for the year - - - - - - - 58,958 58,958
Other comprehensive loss - - - - - - - - -
Total comprehensive profit - - - - - - - 58,958 58,958
Share cancellation (255) - 255 - - - 43,665 (43,665) -
Share buyback - - - - - - (145,214) (284) (145,498)
Options exercised/awards vested 222 191 - - - (61,591) 8,286 51,216 (1,676)
Share-based payment charge - - - - - 37,041 - - 37,041
Transactions with shareholders (33) 191 255 - - (24,550) (93,263) 7,267 (110,133)
30 June 2023 9,779 16,308 255 305,789 (8,126) 50,333 (104,946) (5,879) 263,513
Consolidated Statement of Cash Flows
FY 2023 FY 2022
$'000 $'000
Cash generated from operations
Profit for the year after tax 58,958 1,457
Depreciation of PPE* and Right of Use Assets 35,310 28,295
Amortisation of intangible assets 5,597 6,073
Amortisation of capitalised commission 32,471 21,817
Impairment of capitalised commission and Right-of-use assets 3,336 996
Loss on disposal of PPE 1,406 2,121
Unrealised foreign exchange differences (3,001) 9,467
Credit loss charge 2,049 145
Share based payment charge 39,989 43,740
Net settled share-based payment (9,696) -
Finance costs 3,493 2,807
Finance income (8,016) (518)
Other operating income (2,666) (1,671)
Taxation (17,923) 3,856
Operating cash flows before movements in working capital 141,307 118,585
Increase in trade and other receivables (30,577) (19,601)
Increase in capitalised commission (53,525) (40,952)
Increase in trade and other payables 26,177 27,129
Decrease in provisions (8,625) (5,653)
Increase in deferred revenue 60,266 65,575
Increase in inventory (100) -
Net cash flow from operating activities before tax 134,923 145,083
Tax paid (876) (4,839)
Net cash inflow from operating activities 134,047 140,244
Investing activities
Cybersprint acquisition - (35,728)
Development costs capitalised (1,813) (1,292)
Purchase of PPE* (24,306) (31,863)
Finance income 8,016 518
Cash outflow from investing activities (18,103) (68,365)
Financing activities
Proceeds from share issues and exercises 8,014 7,020
Share buyback (145,498) (13,614)
Repayment of borrowings - (1,347)
Repayment of lease liabilities (10,682) (4,837)
Payment of interest on lease liabilities (3,493) (2,735)
Cash outflow from financing activities (151,658) (15,513)
Net changes in cash and cash equivalents (35,714) 56,365
Cash and cash equivalents, beginning of year 390,623 342,358
Unrealised exchange difference on cash and cash equivalents 2,077 (8,100)
Cash and cash equivalents, end of year 356,986 390,623
* Property, plant and equipment
Notes to the Consolidated Financial Statements
1 General information
Company Information
Darktrace plc is a company incorporated in England and Wales under company
number 13264637. The principal place of business is Maurice Wilkes Building,
St John's Innovation Park, Cowley Road, Cambridge, CB4 0DS.
The Company and Group Information
The parent company, Darktrace plc has been defined as 'the Company' and
Darktrace plc group as 'the Group' or 'Darktrace'.
Basis of Preparation
These consolidated financial statements are for the year ended 30 June 2023.
The consolidated financial statements of the Group have been prepared in
accordance with UK-adopted International Accounting Standards and with the
requirements of the Companies Act 2006 as applicable to companies reporting
under those standards.
They have been prepared under the historical cost convention except for
certain financial instruments which are measured at fair value.
The policies set out below have been applied consistently throughout all
periods presented.
All amounts in the consolidated financial statements and notes have been
rounded off to the nearest thousand USD, unless otherwise stated.
The financial information set out in this document does not constitute the
Group's statutory accounts for the years ended 30 June 2023 but is derived
from those accounts. Statutory accounts for FY 2022 have been delivered to the
registrar of companies. The auditors have reported on those accounts; their
reports were (i) unqualified, and (ii) did not contain a statement under
section 498 (2) or (3) of the Companies Act 2006. Statutory accounts for FY
2023 will be delivered to the registrar of companies in due course. The
auditors have reported on those accounts; their reports were (i) unqualified,
and (ii) did not contain a statement under section 498 (2) or (3) of the
Companies Act 2006. The financial statements for the year ended 30 June 2023
(including the comparatives for the year ended 30 June 2022) were approved and
authorised for issue by the Board of Directors on 5 September 2023. This
results announcement for the year ended 30 June 2023 was also approved by the
Board on 5 September 2023.
New Standards, Amendments, IFRIC Interpretations and new Relevant Disclosure
Requirements Adopted by the Group
There are no amendments to accounting standards, or IFRIC interpretations that
are effective for the period ended 30 June 2023 that have a material impact on
Darktrace's financial statements.
Going Concern
In adopting the going concern basis for preparing the financial statements,
the Directors have considered Darktrace's principal risks and uncertainties in
the current operating environment and assessed these risks via a series of
scenario analyses designed to evaluate the capacity of Darktrace to withstand
a prolonged period of adverse financial conditions. The Directors have further
reviewed liquidity and covenant forecasts for the period to 30 September 2024
as part of their assessment of going concern.
The Directors have considered how a change in circumstances might impact the
Group's expected financial performance for the period. Specifically, testing
has been performed on the base case forecast for the period and a number of
adverse scenarios have been modelled, including but not limited to:
· Annual Recurring Revenue (ARR)/revenue scenarios: The impact of
material reputational damage on new customer acquisition and existing customer
churn arising as a result of a data breach or cyber incident, combined with
significant operational disruption and declines in salesforce productivity, as
a result of a service provision downtime or a lack of future product
innovation. Each of the scenarios would materially reduce Darktrace's ARR and
revenue, and it was assumed, for example that there would be zero new logo ARR
across the entire period along with a material deterioration in net ARR
retention trends. No active cost saving measures were implemented during the
period.
· Cost scenarios: Either as a result of increased industry
competition and/or reputational damage, the impact of a material and prolonged
failure in Darktrace's ability to attract and retain employees was considered,
leading to significant increases in employee churn and hiring and compensation
related costs. For example, expected employee churn rates for the entire
salesforce and the remaining wider workforce were increased by 25% and 20%
respectively. Meanwhile hiring and compensation costs were materially
increased, particularly for technical and sales-related personnel, and
extended general cost inflation was considered, with material increases to key
unit costs (such as appliance and hosting costs). No active cost saving
measures were implemented during the period.
· Balance sheet scenarios: Either as a result of a significant
macro-economic event with recessionary impact and/or inadequate channel
partner management and support, the impact of changes to direct and indirect
customer payment terms and increased customer insolvencies was considered. For
example, forecast collection rates were modelled to drop lower than at any
point during the worst of the COVID-19 uncertainty and corresponding payment
delays. Meanwhile estimated bad debt expense for the period was increased
fivefold vs. the base case forecast, and the Group's base case forecast
invoicing profile was amended to include a material shift towards quarterly
and monthly invoicing.
· Combined, 'worst case' scenario: This scenario sought to present
an extreme and unreasonable 'worst case' outcome by combining the three
aforementioned scenarios. No active cost saving measures were enacted during
the period and the Group remained viable and in compliance with its covenants
within the period.
In each variation and combination of the adverse scenarios, Darktrace is
forecast to have sufficient resources to continue to meet its liabilities as
they fall due for at least 12 months from the date of approval of the
financial statements, and for each scenario, active cost saving actions were
not instigated as part of the analysis. In the event that any of these adverse
scenarios were to occur, controllable mitigating actions are available to the
Directors should they be required.
As an additional provision, the Directors also reviewed the results of reverse
stress testing performed to provide an illustration of the level of churn and
deterioration in new customer acquisition and customer payment terms which
would be required to trigger a breach in Darktrace's covenants or exhaust cash
down to minimum working capital requirements. The conditions necessary to
approach either of these parameters are extreme and would ultimately require
no active cost saving actions to be enacted at any point. As such, the
Directors consider their likelihood as highly remote given the resilient
nature of the business model, as demonstrated by the growth in revenues,
customer numbers and employees in recent reporting periods. The robust
consolidated statement of financial position, with $357.0 million of cash
available and continued strong receivables collection rate of the Group
demonstrated during the COVID-19 pandemic and the macro-economic uncertainties
through FY 2023 gives further support to the resilience of Darktrace's
business-model.
The results of these assessments have enabled the Directors to assert a
reasonable expectation that Darktrace has adequate resources to continue as a
going concern for a period of at least 12 months from the date of approval of
the financial statements. Accordingly, the Directors are of the view that the
preparation of the consolidated financial statements on a going concern basis
continues to be appropriate and in accordance with UK-adopted International
Accounting Standards and with the requirements of the Companies Act 2006.
Foreign Currency Translation
Functional and Presentation Currency
The consolidated financial statements are presented in U.S. Dollars ("USD")
which is the functional currency of the Company.
Group Companies
Items included in these consolidated financial statements are measured using
the functional currency for Darktrace plc. The functional currency of
Darktrace plc is also the functional currency of all subsidiaries.
In the previous year, goodwill and fair value adjustments arising on the
acquisition of a foreign operation were treated as assets and liabilities of
the foreign operation and translated at the closing rate, since 1 July 2022
the functional currency of that foreign operation has changed to USD.
In the previous year, the results and financial position of foreign operations
(none of which has the currency of a hyperinflationary economy) that have a
functional currency different from the presentation currency are translated
into the presentation currency as follows:
· assets and liabilities for each statement of financial position
presented are translated at the closing rate at the date of that statement of
financial position;
· income and expenses for each statement of profit or loss and
statement of comprehensive income are translated at average exchange rates
(unless this is not a reasonable approximation of the cumulative effect of the
rates prevailing on the transaction dates, in which case income and expenses
are translated at the dates of the transactions); and
· all resulting exchange differences are recognised in other
comprehensive income.
Transactions and Balances
Foreign currency transactions are translated into the functional currencies of
Darktrace plc and all of its subsidiaries using the exchange rate as at the
time of transaction. Foreign exchange gains and losses resulting from the
settlement of such transactions, and from the translation of monetary assets
and liabilities denominated in foreign currencies at month end exchange rates,
are generally recognised in the consolidated statement of comprehensive
income. All foreign exchange gains and losses are presented in the
consolidated statement of comprehensive income on a net basis within foreign
exchange differences. Translation differences on assets and liabilities
carried at fair value are reported as part of the fair value gain or loss.
Realised foreign exchange differences relating to working capital balances are
included in the relevant lines within the cash flow statement; unrealised
foreign exchange differences are reported separately in the cash flow.
Basis of Consolidation
These financial statements present the results of Darktrace plc and its
subsidiaries as the Group. Intercompany transactions and balances between
Darktrace and its subsidiaries are therefore eliminated in full.
Subsidiaries are entities over which Darktrace plc is exposed or has rights to
variable returns from its involvement with the subsidiary, and it can affect
those returns through its power over the subsidiary. Darktrace plc can direct
decisions through its ownership and, if applicable, voting rights. Except for
Darktrace Netherland BV, all Company's subsidiaries have been created by,
rather than acquired by, Darktrace plc, and no subsidiaries have been closed
or otherwise disposed of. Where subsidiaries are acquired, the profit or
loss attributable to shareholders includes the profit or loss of the
subsidiary from the date of acquisition. Were subsidiaries to be disposed of
during the year, the profit or loss attributable to shareholders would include
the profit or loss of the subsidiary to the date of disposal.
The directors have determined that they control a company called Darktrace
Employee Benefit Trust ('EBT'), even though Darktrace plc owns 0% of the
issued capital of this entity. Equiniti Trust (Jersey) Limited is the trustee
of the EBT. It is a controlled entity of Darktrace plc, because Darktrace plc
is exposed to, and has right to, variable returns from this entity and is able
to use its power over the entity to affect those returns, therefore EBT Trust
has been consolidated.
Impairment of Non-Financial Assets
Assets are tested for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. Intangible assets
that are not subject to amortisation because they are not yet in use are
tested annually for impairment, or more frequently if events or changes in
circumstances indicate that they might be impaired. An impairment loss is
recognised for the amount by which the asset's carrying amount exceeds its
recoverable amount. The recoverable amount is the higher of an asset's fair
value less costs of disposal and value in use. For the purposes of assessing
impairment, assets are grouped at the lowest levels for which there are
separately identifiable cash inflows which are largely independent of the cash
inflows from other assets or groups of assets (cash-generating units).
Non-financial assets that suffered an impairment are reviewed for possible
reversal of the impairment at the end of each reporting period. Reversals of
impairment losses are limited such that the value of the asset cannot exceed
the carrying amount it would have had no impairment been recognised.
Key judgements and estimates
The preparation of consolidated financial statements in accordance with IFRS
requires Management to make judgements, estimates and assumptions that affect
the reported amount of assets and liabilities and disclosure of contingent
assets and liabilities at the year end and the reported amount of revenues and
expenses during the reported period. Actual results may differ from these
estimates. Estimates and underlying assumptions are reviewed on an ongoing
basis. Revisions to accounting estimates are recognised in the period in which
the estimates are revised and for any future periods affected. The areas
involving significant judgements and estimates are:
· Significant judgement in revenue recognition in determining one
performance obligation exists - see note 4
· Significant judgement in assessment of control of appliances -
see note 18
· Significant estimate in deferred tax asset recognised on losses
carried forward - see note 25; and
· Significant estimate in share price used to calculate the
provision for share option related employer tax changes - see note 15.
Performance of the Group
3 Operating segment
Segment Reporting policy
The Group has concluded that it operates in one business segment as defined by
IFRS 8: Operating Segments, being the development and sale of cyber-threat
defence technology. The Chief Operating Decision Makers (the "CODMs"), which
have been identified as the Chief Executive Officer (CEO) and Chief Financial
Officer (CFO), make operating decisions for a single operating unit and
operating performance is assessed as a single operating segment. The
information used by the CODMs is consistent with, and prepared on the same
basis as, that presented in these financial statements. Further there are no
separately identifiable assets attributable to any separate business activity
or business unit.
The information used by the Group's CODMs to make decisions about the
allocation of resources and to assess performance is presented on a
consolidated Group basis.
Refer to note 4 for disaggregated analysis on revenue from contracts with
customers.
The non-current assets presented below exclude any deferred tax assets and
deposits.
30 June 2023 30 June 2022
Non-current assets by geographical market $'000 $'000
USA 62,827 63,408
United Kingdom 76,743 83,223
Europe 36,355 34,357
Rest of world 27,220 24,505
203,145 205,493
The information used by the Group's CODMs to make decisions about the
allocation of resources and to assess performance is presented on a
consolidated Group basis.
4 Revenue from contracts with customers
Revenue Recognition policy
The Group does not recognise any revenue until there is a legally binding
contract in place direct with a customer or with a reseller partner acting on
behalf of a customer (i.e. end-user), the commencement date of that agreement
has passed, and the obligations to fulfil that contract have been met. It
applies the IFRS 15: Revenue from Contracts with Customers, principles-based,
five step model to all contracts as follows:
· Identify the contract with the customer;
· Identify the distinct performance obligations in the contract;
· Determine the transaction price;
· Allocate the transaction price to the performance obligations in
the contracts, on a relative stand-alone selling price basis; and
· Recognise revenue when the entity satisfies its performance
obligations.
The Group has only a single performance obligation for most contracts, giving
access to the Group's Cyber AI Platform and ancillary services to its
customers as such the transaction price is the total amount charged to the
customer over the service period.
Most of the Group's revenue is derived from multi-period subscription or
licence contracts that allow access to the Cyber AI Platform. This revenue is
recognised on a straight-line basis over the subscription or licence period as
the customer simultaneously receives and consumes the benefits from the
products it purchased within the Group's Cyber AI Platform as throughout the
life of the contract. The Group's efforts are expended evenly throughout the
subscription period and therefore using the input method under IFRS 15, it is
appropriate to recognise revenue on a straight-line basis. The Group does not
have any variable consideration as defined under IFRS 15.
In a very small number of cases, the Group sells supplementary training or
extra appliances separately from its software product deployments, but always
to customers who have software product deployments. The revenue from these
contracts is recognised at the point in time when the training or appliance is
delivered.
Contracts where terms are subsequently modified (for upsells, license
expansions, etc) are assessed in accordance with IFRS 15 and are treated
either as a separate contract with revenue recognition commencing from the
modification date or as a cumulative catch-up adjustment to revenue recognised
at the point of modification based on the new contractual terms.
Contracts where it is not probable that the entity will collect the
consideration to which it will be entitled in exchange for the goods or
services that will be transferred to the customer and for which a suspension
notice has been applied and the performance obligations relating to future
services is considered curtailed, are considered ceased and therefore related
deferred revenue balance derecognised and any receivable balance fully
provided or written off. In this case, Management accounts for the remainder
of the contract as if the criteria to be a contract had not been met (IFRS
15).
The Group deploys a significant portion of its software on appliances that it
delivers to the customer. These appliances are encrypted devices that can only
be used to run the Group's software. They cannot be used for any other purpose
and have no separate value to the customer, and as the Group retrieves its
appliances at the end of deployments, each appliance may be redeployed
multiple times, in multiple situations over its useful life. The Group
considers that the appliances it deploys are an integral part of the delivery
mechanism for the service to the customer and are not normally sold to the
customer unless required for legal or regulatory reasons.
Customers are generally billed in advance, with credit terms of typically
30-60 days, in line with market practice. In instances where payment for the
subscription is within 12 months or less of the service being provided
Darktrace has taken the practical expedient under the standard of not
adjusting for any financing component. In some instances, the Group bills in
advance for periods of greater than one year. In these instances no financing
component is deemed to be present as this arrangement is customer driven.
Principal vs agent assessment
Darktrace sells its products and services either directly to end users or
through channel partners. The business operates two types of partner
relationships, one where the contract is with the reseller partner and another
where it is with the end user but the partner receives a referral fee.
Most partner deals involve a reseller partner who takes Darktrace to the
end-users. In these instances, Darktrace sells to the reseller partner, who is
the contracting entity, and therefore different from the end-user that will be
provided with the services. Darktrace will only invoice the partner and it is
the partner who controls pricing with the end-user, and bears the credit and
foreign currency risk.
When revenues are generated through a reseller partner, Darktrace requires
that every partner contract be related to a specific end-user (Darktrace has a
direct operating relationship with the end-user as most partner contracts are
co-sold and Darktrace employees carry out the vast majority of pre-sale
product scoping directly with the end-user). Darktrace only recognises revenue
for the contract value between Darktrace and the partner, it does not
recognise any benefit from any mark-up that the partner adds to determine its
price to the end-user. Once the Darktrace/partner and partner/end-user
contracts have been finalised and the end-user is able to deploy the purchased
products and services, Darktrace will recognise revenue as required under IFRS
15.
An intermediary partner is the principal in an arrangement with the end-user,
and therefore, Darktrace's customer, if it controls the offering before it is
transferred to the end-user. As Darktrace controls all aspects of the products
and services it sells, including setting the price to the reseller partner
(but not the end-user), and bears the credit and foreign exchange risk in its
contract with the reseller partner, it has concluded that Darktrace is a
principal in its contracts with reseller partners. Darktrace has also
considered the role of the reseller partner in their contract with the
end-user, and based on all information available, primarily considering the
control of pricing and the assumption of credit and foreign exchange risk, has
concluded that the reseller is principal in their contract with the end-user.
While Darktrace has responsibility under its Master Service Agreement for
fulfilment of the products and services provided to the end-user, the reseller
partner has responsibility for the pricing of Darktrace products to the
end-user, and any invoicing and credit concerns.
There is a smaller cohort of referral partners who Darktrace works with who
will initiate the customer contact, but who do not take on the contractual
risk. In these cases, Darktrace enters into a direct contract with the end
user and is therefore the principal in these transactions. The partner will
earn usually a commission or a fee which is classified as cost of sales.
Significant Judgement in Revenue Recognition in Determining one Performance
Obligation Exists
Group revenue is from subscription contracts and is recognised over the term
of the contract.
Management considers that these contracts consist of a single performance
obligation, which is the ongoing access to the portions of the Cyber AI
platform purchased by the customer. The Cyber AI platform is a single combined
solution, with customers able to choose the appropriate product mix based on
their own needs. The key contractual elements considered by Management
included the deployment of the software (on appliances or virtually), the core
software products and subsequent updates. Appliance deployments typically take
an hour or less once the appliance is received by the customer, and virtual
deployments can be enabled immediately, so deployment is in line with the
start of the subscription contract that has, on average, a three-year life.
Subsequent updates to the platform ensure that the latest software is
available with the latest capabilities but do not materially change the
functionality of the platform. The products and to a lesser extent, services
are significantly integrated to provide a combined output and services which
are highly interdependent with (and are not separately available from) the
subscription to product within the Cyber AI platform. Some customers may
purchase ancillary services or training, but these are immaterial to the total
contract value and are not deemed to impact the assessment of there being only
a single performance obligation.
Disaggregation of revenue
Revenue recognised at a point in time is not significant to the reported
results in any year. This includes revenue generated by separate contracts for
training and sale of appliances. In the year ended 30 June 2023, this revenue
amounted to $0.3 million (year ended 30 June 2022 $1.5 million).
Management has assessed that the single performance obligation that it is
providing to customers is access to products, primarily software, within the
Darktrace Cyber AI platform to protect customers' digital estates from the
impact of cyber threats.
Revenue geographical market FY 2023 $'000 % of revenue FY 2022 $'000 % of revenue
USA 188,808 34.6% 142,697 34.3%
United Kingdom 82,841 15.2% 69,228 16.7%
Europe 135,667 24.9% 100,244 24.1%
Rest of World 138,114 25.3% 103,313 24.9%
545,430 100% 415,482 100%
Revenue from customers has been attributed to the geographic market based on
contractual location. No single customer accounted for more than 10% of
revenue in FY 2023 or FY 2022.
Contract assets and liabilities related to contracts with customers
The following table provides information on accrued income and deferred
revenue from contracts with customers.
30 June 2023 30 June 2022
$'000 $'000
Accrued income 3,445 4,152
Total accrued income 3,445 4,152
Current deferred revenue 283,678 222,419
Non-current deferred revenue 28,439 29,432
Total deferred revenue 312,117 251,851
Accrued income has decreased year over year due to timing in raising invoices
and remains a reasonably small value relative to revenue recognised.
Contracts are typically invoiced between one month and more than three years
in advance, with the majority of contracts being invoiced annually in advance.
Deferred revenue reflects the difference between invoicing and associated
payment terms, and fulfilment of the performance obligation and has increased
year-over-year as expected with the continued growth in revenue.
Details of costs to obtain contracts with customers are shown in note 12.
Revenue recognised in relation to deferred revenues (contract liabilities)
The following table shows how much revenue recognised in each reporting period
related to brought-forward contract liabilities:
FY 2023 FY 2022
$'000 $'000
Revenue recognised that was included in the contract liability balance at the
beginning of the period
222,419 154,505
% of total revenue recognised in the period 40.8% 37.2%
Future contracted revenue (formerly revenue expected to be recognised)
Future contracted revenue represents revenue expected to be recognised over
the term of the contract, i.e. over the subscription period, from the contract
commencement date to the end of the subscription period as identified in the
contract, calculated by valuing all uninvoiced future contract value,
including one-time product or service purchases, at the exchange rates in
effect on the reporting date, and all previously invoiced future revenue at
the relevant transaction exchange rates. In line with IFRIC 22, the date of
the transaction for the purpose of determining the exchange rate to use on
initial recognition of the related asset, expense or income (in whole or part)
is the date on which an entity initially recognises the non-monetary asset or
non-monetary liability arising from the payment or receipt of advance
consideration. One-time revenue is included in the calculation but because
of the high proportion of subscription revenue in Darktrace's revenue base, it
is not material. Future contract value does not include any opt-out clauses
i.e. revenue expected after opt-out date, up to the termination date of the
contract.
Prior year adjustment to the disclosure
However, subsequent to the publication of its FY 2022 Annual Report, Darktrace
identified that ''Revenue expected to be recognised'' i.e. future contracted
revenue mistakenly included expected revenue after the opt-out date,
inconsistent with IFRS 15 paragraph 11. This error accounts for $33.0 million
mistakenly disclosed in the expected future revenue to be recognised.
Darktrace has corrected the error in its disclosure in these financial
statements as presented below. This did not affect any reported numbers in the
primary financial statements and the error was limited to this disclosure
only.
30 June 2022 Restatement 30 June 2022
Reported Restated
$'000 $'000 $'000
Due within 12 months 477,025 (25,595) 451,430
Due within 1-2 years 330,045 (4,335) 325,710
Due within 2-3 years 196,546 (1,833) 194,713
Due within 3-4 years 60,793 (433) 60,360
Due over 4 years 4,621 (41) 4,580
1,069,030 (32,237) 1,036,793
30 June 2023 30 June 2022
Restated
$'000 $'000
Due within 12 months 576,326 451,430
Due within 1-2 years 397,783 325,710
Due within 2-3 years 216,513 194,713
Due within 3-4 years 72,263 60,360
Due over 4 years 3,552 4,580
1,266,438 1,036,793
5 Material profit and loss items
Cost of Sales
Cost of sales is made up of two primary cost categories: the cost of software
deployment and labour costs for support or supplemental monitoring and
response services.
The largest of the deployment costs is depreciation on appliances used to
deliver the software to customers under contracts. The depreciation of
appliances is apportioned to Cost of sales based on the proportion of the
Group's appliance pool deployed to customer sites and all appliance
depreciation related to customer contracts is recognised in Cost of sales.
Where the Group deploys software to a contracted customer virtually, the
associated hosting costs are also recognised in Cost of sales. Cost of sales
also includes shipping costs and other costs necessary to deploy the Group's
software products.
Operating Cost Apportionment
Wherever possible, operating costs are attributed to either Sales and
marketing, Research and development or Other administrative costs by the
direct method. When costs apply to more than one cost category, they are
apportioned using an allocation methodology based on the most appropriate
direct data source.
The Group apportions the depreciation of appliances used to run Proof of Value
("POV") demonstrations for prospects (see note 18 for additional detail) to
Sales and marketing. Similarly, for POVs of virtually deployed products, the
associated hosting costs are recognised as Sales and marketing costs. Also,
pre-sales support staff, whose costs are primarily attributed to Sales and
marketing, may also perform post-sales support functions. This work is
tracked, and the compensation costs associated with that work are allocated to
Cost of sales.
Research and development ("R&D") primarily consists of compensation and
other directly attributable costs of the staff who develop the Group's
software products. The Group capitalises the costs of development work that
meets the criteria for capitalisation and amortises those costs beginning once
the software is released to production and/or brought into use. Developers and
Analysts working in the Group's R&D function may also provide supplemental
monitoring and response services to customers. This work is tracked and the
compensation costs associated with that work are allocated to Cost of sales.
Research and development expenditures that do not meet the criteria for
capitalisation, are recognised as expenses when incurred. Development costs
previously recognised as expenses are not recognised as assets in any
subsequent period. Development costs for features and enhancements that are
available to all customers without additional charge, are expensed as
incurred. Amortisation of capitalised development costs is recognised as
R&D cost (note 17).
Share-based payment cost and related share-option related employer tax charges
are apportioned on a direct basis depending on the department the employee
reports into. The Group has identified a number of items which are material
due to the significance of their nature and or amount. These are listed
separately here to provide a better understanding of the financial performance
of the Group, if not presented elsewhere in these financial statements.
The Group has identified a number of items which are material due to the
significance of their nature and or amount. These are listed separately here
to provide a better understanding of the financial performance of the Group,
if not presented elsewhere in these financial statements.
FY 2023 FY 2022
$'000 $'000
Hosting fees 21,353 15,191
Legal and professional fees 11,588 7,208
New software implementation costs 3,873 -
Accounting advice costs 3,765 1,604
Auditors' remuneration 2,042 1,398
Brand strategy costs - 2,030
Hosting fees related to customer contracts are classified within cost of sales
for an amount of $16.9 million (FY 2022 $10.7 million) and those related to
POV are classified to sales and marketing costs for an amount of $4.5 million
(FY 2022 $4.5 million).
Legal and professional fees increased as a result of costs spent in
preparation for Darktrace Federal Inc trading activity and other corporate
activities including the equity transactions, the refinancing activity and
some legacy litigation cost. Accounting advice costs increased due to the EY
independent review and other advisory services in relation to corporate
activities.
Brand strategy costs in prior year related to costs for Darktrace's new
branding and logo change.
Auditors' remuneration
FY 2023 FY 2022
$'000 $'000
Audit of the Group and parent company accounts 1,167 700
Audit of the accounts of the Company's subsidiaries by the Group auditors and 735 623
its associates
Total audit fees 1,902 1,323
Audit-related assurance services 124 75
Other non-audit services 16 -
Total non-audit fees 140 75
Audit related assurance services includes the fees in relation to the review
of the Group interim consolidated financial statements as at 31 December.
7 Earnings per share ("EPS")
Earnings per Share
Basic Earnings per Share
Basic earnings per share is calculated by dividing: the profit attributable to
owners of Darktrace, excluding any costs of servicing equity other than
ordinary shares, by the weighted average number of ordinary shares outstanding
during the reporting period, adjusted for bonus elements in ordinary shares
issued during the year.
Diluted Earnings per Share
Diluted earnings per share adjusts the figures used in the determination of
basic earnings per share to take into account: the after-income tax effect of
interest and other financing costs associated with dilutive potential ordinary
shares, and the weighted average number of additional ordinary shares that
would have been outstanding assuming the conversion of all dilutive potential
ordinary shares.
FY 2023 FY 2022
$'000 $'000
Profit attributable to ordinary shareholders 58,958 1,457
Weighted average ordinary shares 714,928,452 698,145,263
Effect of treasury shares (54,608,143) (54,866,296)
Weighted-average number of ordinary shares at period end 660,320,309 643,278,967
Add dilutive effect of share-based payment plans 17,590,707 52,302,067
Weighted-average number of shares for calculating diluted earnings per share 677,911,016 695,581,034
at period end
FY 2023 FY 2022
Basic earnings per share $0.09 $0.00
Diluted earnings per share $0.09 $0.00
Debt and Equity
9 Share capital and share premium
Contributed Equity
Ordinary shares are classified as equity. Incremental costs directly
attributable to the issue of new shares are shown in equity as a deduction,
net of tax, from the proceeds.
Equity comprises the following:
· Share capital: represents the nominal value of equity shares.
Where shares are redeemed or purchased wholly out of profits available for
distribution, a sum equal to the amount by which the company's share capital
is diminished on cancellation of the shares (the nominal value of the shares)
is transferred to the capital redemption reserve in line with section 733 of
Companies Act.
· Share premium: represents the excess over nominal value of the
consideration received for equity shares, net of any transaction costs
associated with the issue of shares.
· Merger reserve: At IPO Darktrace plc issued equity shares in
consideration for securing a holding of 100% of the nominal value of each
class of equity in Darktrace Holdings Limited, therefore the application of
merger relief is compulsory. Merger relief is a statutory relief from
recognising any share premium on shares issued. Instead, a merger reserve is
recorded equal to the value of share premium which would have been recorded if
the provisions of section 612 of the Companies Act 2006 had not been
applicable. Furthermore, as Management has used the retrospective presentation
method (merger accounting), the equity structure (that is, the issued shares
capital) reflects that of the new entity (Darktrace plc), with other amounts
in equity (such as retained earnings or cumulative translation reserve) being
those from the consolidated financial statements of the previous Group holding
entity (Darktrace Holdings Limited). The resulting difference has been
recognised as a component of the equity as a merger reserve.
· Foreign currency translation reserve: result of translating the
financial statement items from the functional currency into the presentational
currency using the exchange rate at the statement of financial position date
before Darktrace Holdings Limited and its subsidiaries changed their
functional currency on 1 July 2019. Cybersprint changed its functional
currency from Euro to US Dollar on 1 July 2022 (see note 2 for details).
· Stock compensation reserve: The grant-date fair value of
share-based payments awards granted to employees (note 10) is recognised as an
employee expense, with a corresponding increase in stock compensation reserve,
over the period that the employees become unconditionally entitled to the
awards.
· Treasury reserve: includes shares bought back by Darktrace plc
during the year and shares that are held by the Equiniti Trust (Jersey)
Limited for the purpose of issuing shares under the Darktrace plc employee
share scheme. Shares issued to employees are recognised using the weighted
average price method.
· Retained earnings: represents retained profits and losses.
Share capital Number of ordinary shares of £0.01 each Number of preference shares of £1 each Number of deferred shares of £0.01 each Total number of shares Share capital $'000 Share premium $'000 Share capital redemption reserve $'000
1 July 2021 697,630,127 50,000 120,063 697,800,190 9,756 224,782 -
Share cancellation - - - - - (224,782) -
Shares issued 1,581,578 - - 1,581,578 22 335 -
Shares issued for acquisition 2,573,648 - - 2,573,648 34 15,782 -
30 June 2022 701,785,353 50,000 120,063 701,955,416 9,812 16,117 -
Shares issued in the year 18,250,239 - - 18,250,239 222 191 -
Preference and deferred shares cancellation - (50,000) (120,063) (170,063) (71) - 71
Ordinary shares cancellation (13,280,100) - - (13,280,100) (184) - 184
30 June 2023 706,755,492 - - 706,755,492 9,779 16,308 255
FY 2022 Share premium cancellation
The share-premium cancellation received shareholder approval prior to the IPO
on 29 April 2021. The share premium was cancelled on 28 September 2021
following the registration of the order of the High Court of Justice (Chancery
Division) by the Registrar of Companies. The total amount of share premium at
the time of cancellation has been reclassified to retained earnings.
FY 2022 Shares issued
During prior year certain employees have exercised their options (see note 10
for details on share-based payment transactions). These have been satisfied
through the issuance of new shares before the share buyback happened or if the
Darktrace Employee Benefit Trust (see below) could not satisfy the request as
a result of its legal and regulatory framework.
FY 2022 Shares issued for acquisition
2,573,648 shares in Darktrace plc were issued as part of the business
combination (see note 2).
FY 2023 Preference and deferred shares cancellation
On 15 May 2023 50,000 redeemable preference shares were cancelled. On 23 May
2023 120,063 deferred shares were redeemed for a consideration of £1 and
cancelled.
Treasury Reserve
FY 2022 Company Shares buyback
During December 2021 the company purchased 2,460,678 shares on-market to
satisfy, in part, Darktrace's pre-existing obligations arising from its share
incentive programmes. The shares were acquired at an average price of £4.11
($5.47) per share, with prices ranging from £3.90 ($5.19) to £4.31 ($5.74).
The total cost of $13.6 million, including transaction costs, was deducted
from equity.
FY 2023 Share Buyback Programme and Cancellation
On 1 February, 2023, Darktrace commenced a share buyback programme of up to 35
million of its ordinary shares to be completed no later than 31 October, 2023.
The maximum amount allocated to the Programme is £75.0 million and Darktrace
is making and will continue to make appropriate disclosures during the Buyback
Period of the number of Shares it has repurchased.
The purpose of the Programme is to reduce Darktrace's issued share capital and
the purchased shares will be cancelled. As at 30 June 2023 15,440,726 shares
have been bought back and 13,280,100 have been cancelled. At cancellation a
capital redemption reserve equal to the nominal amount of ordinary shares
cancelled is created. The shares were acquired at an average price of £2.68
($3.72) per share, with prices ranging from £2.20 ($3.5) to £3.40 ($4.72).
The total cost of $0.3 million, including transaction costs, was deducted from
equity.
At 30 June 2023 the company holds 3,621,634 shares in treasury (30 June 2022:
2,038,774).
2023 EBT Market Purchase Programme
During the year Equiniti Trust (Jersey) Limited, as Trustee of the Darktrace
Employee Benefit Trust ('EBT'), completed market purchases of ordinary shares
of £0.01 each in the Company. The January EBT Market Purchase Programme
completed on 18 April 2023 with the purchase of 28,301,976 shares for a total
aggregate consideration of £80.0 million ($94.3 million inclusive of
brokerage and dealing charges) which has been deducted from equity. Shares
purchased under the January EBT Market Purchase Programme are used to satisfy
existing, planned and anticipated options and awards under Darktrace's
employee share schemes, or as otherwise permissible within the terms of the
EBT trust deed. The shares were acquired at an average price of £2.83 ($3.33)
per share, with prices ranging from £2.09 ($2.53) to £3.98 ($4.58). At 30
June 2023 the EBT holds 63,121,031 shares (30 June 2022: 43,900,170).
10 Share-based payments
Share Based Payments
The Group operates equity settled share-based payment schemes. The equity
settled share-based payments are measured at fair value at the date of grant.
Having a graded vesting schedule, the fair value determined is expensed on a
straight-line basis over the requisite service period for each separately
vesting portion of the award as if the award was, in-substance, multiple
awards. The charge for the period is allocated to the relevant statement of
comprehensive income categories where the employment costs of the employee who
is granted the equity options are charged.
The fair value of options and awards granted is recognised as an employee
benefits expense, with a corresponding increase in equity. The total amount to
be expensed is determined by reference to the fair value of the options
granted:
· including any market performance conditions (e.g. the entity's
share price);
· excluding the impact of any service and non-market performance
vesting conditions (e.g. profitability, sales growth targets and remaining an
employee of the entity over a specified time period); and
· including the impact of any non-vesting conditions (e.g. the
requirement for employees to save or hold shares for a specific period of
time).
The total expense is recognised over the vesting period, which is the period
over which all of the specified vesting conditions are to be satisfied. At the
end of each period, the entity revises its estimates of the number of options
and awards that are expected to vest based on the non-market vesting and
service conditions. It recognises the impact of the revision to original
estimates, if any, in profit or loss, with a corresponding adjustment to
equity. When the options or awards are exercised, the appropriate number of
shares are issued to the employee. The proceeds received from exercised
options, net of any directly attributable transaction costs, are credited
directly to equity.
Modification of share-based payments
Where the effect of the modification is to increase the value of the award to
an employee, the incremental fair value is recognised as a cost. The
incremental fair value is the difference between the fair value of the
original award and that of the modified award, both measured at the date of
modification.
Share based payment charges have been made in the consolidated statement of
comprehensive income within the following functional areas:
FY 2023 FY 2022
$'000 $'000
Sales and marketing 16,524 20,084
Research and development 6,712 6,522
Other administrative 16,753 17,412
Total share-based payment expense 39,989 44,018
Other administrative share-based payment expense includes $3.7 million related
to shares issued in connection with the acquisition of Cybersprint, treated as
remuneration under IFRS 2 Share-Based Payments (FY 2022: $1.4 million) see
note 2 for details. $0.7 million of the share based payment expense has been
capitalised under software underdevelopment (FY 2022: $3.2 million).
Share based payments are calculated in accordance with IFRS 2 - Share-based
Payment. The Company has used a Black-Scholes valuation model to value the
options and growth shares granted up to the IPO and a Monte Carlo Model for
the awards granted at and since IPO. Where an option scheme has no
market-based performance conditions attached to the award, a Black-Scholes
model is typically appropriate. The growth shares have a hurdle, which is a
market-based performance condition, however, this is used as a proxy for an
exercise price. Therefore, Black-Scholes is still an appropriate model.
Option Schemes in Place Before IPO
Share options are exercisable at prices determined at the date of grant. All
awards vest over three years from the grant date in six-month intervals, (i.e.
1/6 of the Awards will vest every six months over 36 months) subject to
continued employment.
Movements in the number of share options outstanding and their related
weighted average exercise prices ("WAEP") are as follows:
FY 2023 FY 2022
WAEP Options WAEP Options
$ Number $ Number
Outstanding at 1 July 1.94 38,886,044 1.56 54,970,631
Lapsed 5.02 (158,074) 4.67 (948,289)
Exercised 0.98 (10,086,689) 0.46 (15,136,298)
Outstanding at 30 June 2.23 28,641,281 1.94 38,886,044
Exercisable at 30 June 2.39 26,605,865 1.66 33,226,669
Options exercised during the year had an average share price at exercise of
£3.87 ($4.91) (FY 2022: £4.75 ($5.99)).
The table below presents the weighted average remaining contractual life
('WACL') and the price range for the options outstanding at each year end:
FY 2023 FY 2022
Range of exercise prices WACL Options number WACL Options number
$
$
$0.00 - $0.23 (£0.00 - £0.18) 1.40 7,577,970 2.40 12,712,035
$0.41 - $0.67 (£0.32 - £0.53) 3.19 2,647,949 4.19 4,032,118
$1.37- $1.45 (£1.07 - £1.13) 4.45 1,703,785 5.45 2,564,592
$2.09 - $2.21 (£1.61 - £1.70) 4.89 2,059,364 5.89 2,270,226
$2.76 - $2.87 (£2.06 - £2.14) 5.98 8,818,333 6.98 11,218,529
$5.20 (£3.73) 7.72 5,833,880 8.72 6,088,544
5.72 28,641,281 6.72 38,886,044
AIP Awards
Performance Based Conditional Award (the 'Performance Awards')
Vesting of Tranche 1 is dependent on Darktrace's total shareholder return
('TSR') performance over the period from the Grant Date to the end of the
second Financial Year, ranked in comparison to the constituents of the FTSE
350 (ex. Investment companies). Tranche 2 vests dependent on the same terms,
albeit the measurement period runs from the Grant Date to the end of the third
Financial Year (i.e. an additional year). Awards do not incorporate an
exercise price.
Awards issued during the year also have market-based vesting criteria with up
to 80% of the awards vesting in accordance with the conditions of the TSR and
up to 20% of the awards vesting in accordance with ARR growth targets at the
end of the performance period.
Executive Director Conditional Awards ('Executive Awards')
The Executive Awards carry the same market-based vesting criteria as the
Performance Awards. Additionally, they have a holding period which determines
that vested shares must be retained for a period of five years from grant.
Awards do not incorporate an exercise price.
Top-Up Awards and modification
These awards vested according to a share price performance hurdle measured
over a one-year period following the Admission Date. In essence, no shares
vest where the closing share price was £2.50 or less, where the closing share
price was £5, 100% of the shares vested and where the closing share price was
between £2.50 and £5 the number of awards vested on a straight-line basis.
These Awards did not incorporate an exercise price.
The performance period for the vesting of Top-Up awards ended on 6 May 2022
with the original calculation based on the share price for the 30-days up to
the 6 May 2022. Management determined that a much longer measurement period
was needed to ensure that the share price used to determine vesting of the
awards reflected Management's performance and the underlying performance of
the business. Management offered a modification to the employees to extend the
performance averaging period to 12 months ending on the first anniversary of
IPO resulting in 100% of the award vesting but extending the service period to
31 October 2022.
The effect of the modification was to increase the value of the award to the
employees by allowing them to have the maximum number of shares subject to a
small extension of the employment period i.e. vesting period, the incremental
fair value increase must be recognised as a cost over the vesting period. The
incremental fair value is the difference between the fair value of the
original award (measured using the Monte Carlo model) and that of the modified
award (time-based award means the valuation is the share price at grant date),
both measured at the date of modification. There were no compensation payments
for this modification.
Time-based Awards
These awards vest according to time only. There is no market-based vesting
criteria and awards do not incorporate an exercise price. The value of the
time-based awards will simply be the value of the underlying equity. Movements
in the number of share awards outstanding are as follows:
FY 2023 FY 2022
Awards number Awards number
Outstanding 1 July 23,903,647 21,959,096
Granted 14,173,831 3,311,747
Lapsed (1,250,518) (1,055,798)
Exercised (19,872,266) (311,398)
Outstanding at 30 June 16,954,694 23,903,647
Exercisable at 30 June 179,290 26,000
In the UK, an award of shares or options to an employee gives rise to a
personal tax liability for the employee, related to the fair value of the
award when it vests. In order to meet this tax liability, two executives
surrendered as many shares as are needed to raise proceeds equal to the tax
liability ('net settlement'). This tax collection arrangements meant that the
equity-settled awards resulted in a cash cost for the Company for the income
tax for $9.7 million and an equal deduction from equity.
Valuation
The fair value of share-based payments has been calculated using the Monte
Carlo option pricing model. Monte Carlo models are used to simulate a
distribution of TSRs/share prices. The model utilises random number generation
with the distribution determined by volatility, risk free rate and expected
life.
The Performance Awards carry market-based vesting criteria which must be
incorporated into the valuation. Vesting is dependent upon the Company's TSR
performance ranked against the constituents of the FTSE 350 (ex. investment
trusts) ('FTSE Index'). TSR is defined as the change in Net Return Index for a
company over a relevant period. The Net Return Index is equal to the index
that reflects movements in share price over a period, plus dividends which are
assumed to be reinvested on a net basis in shares on the ex-dividend date.
Up to 80% of the Awards will vest in accordance with the TSR conditions and up
to 20% in accordance with the ARR conditions.
TSR is calculated over the 'Performance Period' using the following formula:
(TSR2-TSR1)/TSR1.
· TSR1 is the Net Return Index at admission date
· TSR 2 is the average Net Return Index over each weekday during
the three months period ending on the last day of the TSR performance period.
The Company's annualised recurring revenue (ARR) growth will be measured
between the basis year and the year ending on the performance period end date.
A correlation coefficient is included to model the way in which the price of a
listed company's stock tends to move in relation to the stock of other listed
companies. Expected volatility was determined based on the historic volatility
of comparable companies. The expected life is the expected period from grant
to exercise based on Management's best estimate.
Time-based Awards vest according to time only. There is no strike price, no
market-based vesting criteria and no expectation of dividends. For purposes of
the valuation, the fair value of the time-based awards will simply be the
value of the underlying equity at the time they were granted.
The table below presents the key assumptions for the awards valued at
different grant dates during the prior year:
Performance awards Time based awards Top up Awards Modifications
Grant dates 23/08/2021 - 28/06/2022 05/11/2021 - 26/05/2022 14/04/2022 - 17/06/2022
Share price at grant date £3.29 ($4.04) - £5.78 ($7.87) £3.63 ($4.55) - £5.78 ($7.84) £3.24 ($3.97) - £4.11 ($5.35)
Exercise price - - -
Fair value per award (range) £2.04 ($2.57) - £5.19 ($7.07) £3.63 ($4.56) - £5.78 ($7.84) £1.04 ($1.26) - £1.48 ($1.94)
Expected life in years (range) 1.01 - 3.00 N/A 0.03 - 0.04
Expected volatility (range) 40% - 50% N/A 70%
Risk free interest rate (range) 0.34% -2.19% N/A 0.26% - 0.42%
Cancellation rate 10% N/A 10%
Dividend yield 0% N/A 0%
Correlation (range) 15% - 20% N/A 0%
Number of awards 840,013 2,471,734 18,586,362
The table below presents the key assumptions for the awards valued at
different grant dates during the current year:
Time based awards Performance awards
Grant dates 21/09/2022 - 22/05/2023 21/09/2022 -17/05/2023
Share price at grant date £2.62 ($3.23) - £3.69 ($4.25) £2.62 ($3.23) - £3.69 ($4.25)
Exercise price - -
Fair value per award (range) £2.62 ($3.23) - £3.69 ($4.25) £0.95 ($1.17) - £3.69 ($4.25)
Expected life in years (range) N/A 1.78 - 3.00
Expected volatility (range) N/A 50%
Risk free interest rate (range) N/A 3.07% - 3.94%
Cancellation rate N/A 10%
Dividend yield N/A 0%
Correlation (range) N/A 20 - 25%
Number of awards 7,179,220 6,994,611
Working capital
12 Capitalised commission
Commission Cost Recognition
Commission costs are all recognised as Sales and marketing costs. The Group
pays commissions to sales staff and to referral partners. IFRS 15 requires
that certain costs incurred in both obtaining and fulfilling customer
contracts be deferred on the statement of financial position where recoverable
and amortised over the period that an entity expects to benefit from the
customer relationship. The only significant cost falling within the remit of
IFRS 15 is the portion of commission costs classified as a cost of contract
acquisition. Depending on their role in sales, staff receive either the first
50% or 100% of commission at the point of contract signing, which is deemed to
meet the criteria of being incurred solely to acquire the contract. These
transaction related commission costs, including related social security and
similar contributions, are therefore capitalised and amortised over the
customer contract term, with the amortisation being recognised as a Sales and
marketing cost. Commissions paid to referral partners are also capitalised and
amortised to Sales and marketing costs over the life of the related contracts.
The remaining 50% of sales staff commission is paid on the earlier of the full
contract value being paid, or, most frequently, after one year. Because these
commissions have additional service and performance requirements, they are not
eligible to be capitalised under IFRS 15. Instead, the commission and
associated social security costs are accrued based on the expected period
between the sale and payment, then the accrual is released when the commission
is paid or earlier if commission is recouped due to the customer defaulting on
payments or salesperson ceases to be employed prior to the commission becoming
payable. Refer to note 14 for treatment of the commission accruals.
Refer to note 1 for impairment of non-financial asset.
Capitalised commissions, which primarily represent approximately 50% of
commissions paid to the Group's salesforce and partners, are deemed to be a
cost of obtaining a contract and are spread over the expected contract term.
30 June 2023 30 June 2022
By Geographic market $'000 $'000
USA 23,303 17,321
United Kingdom 10,933 10,142
Europe 23,742 17,060
Rest of World 18,675 12,631
76,653 57,154
Current 34,471 24,635
Non-current 42,182 32,519
76,653 57,154
Amortisation in the year 32,471 21,817
Impairment in the year 1,555 996
15 Provisions
Dilapidation provision
Darktrace is required to restore the leased premises of its offices to their
original condition at the end of the respective lease terms. A provision has
been recognised for the present value of the estimated expenditure required to
remove any leasehold improvements. These costs have been capitalised as part
of the right-of-use asset and are amortised over the term of the lease.
Provision for share-based payment tax
The Group accounts for a provision on tax payments when the employer has the
primary liability to pay for social security-type contributions on share-based
payments. In some jurisdictions, the employer rather than the employee has the
legal obligation to pay taxes on employee awards. Darktrace recognises the
cost and liability in relation to those countries where this type of payment
is required. Management calculates the liability arising from the obligation
to pay taxes as a provision in accordance with IAS 37 using the market value
of the total options at each reporting date to estimate the provision to be
accrued over the vesting period. Also, provisions are recognised where a legal
or constructive obligation exists at the balance sheet date, as a result of a
past event, where the amount of the obligation can be reliably estimated and
where the outflow of economic benefit is probable.
Significant Estimate in the Share Price Used to Calculate the Provision for
Share-Option Related Employer Tax Charges
The provision represents the best estimate of the amount payable by the Group
at year end if all options were exercised at that date. The key input for the
calculations is the percentage applicable for each country and the share price
at each period end. The key element subject to change in future periods is the
share price, and for this reason the Group has prepared the following
sensitivity analysis:
FY 2023 FY 2022
$'000 $'000
+/- 10% share price value - change in value of provision for the year ($'000 933 3,852
absolute value)
FY2023 FY2022
Provision for share-based payment tax Other provisions Total Provision Provision for share-based payment tax Other provisions Total provision
$'000 $'000 $'000 $'000 $'000 $'000
Opening provision 15,192 2,100 17,292 22,945 - 22,945
Accruals/(release) 4,315 (316) 3,999 (1,526) 2,100 574
Reclassification from lease liability (note 19) - 1,528 1,528 - - -
Utilisation (13,351) (800) (14,151) (6,227) - (6,227)
Closing provision 6,156 2,512 8,668 15,192 2,100 17,292
Current 5,943 984 6,927 14,654 1,300 15,954
Non-current 213 1,528 1,741 538 800 1,338
Total provision 6,156 2,512 8,668 15,192 2,100 17,292
The Group accounts for a provision on tax payments when the employer has the
primary liability to pay for social security-type contributions on share-based
payments at the time of exercise.
In the UK, an award of shares or options to an employee gives rise to a
personal tax liability for the employee, related to the fair value of the
award when it vests.
In most other countries where social security-type obligations arise on share
awards, the obligation to accrue applies irrespective of whether the shares
are RCAs or not. Calculation of social security-type contributions can be
complex as they involve changing or tiered cost ceilings and differing
percentages applied depending on the salary level of the employees.
Other provision includes an estimate of tax charges related to new permanent
establishments in countries where Darktrace plc does not currently have a
subsidiary.
Long term assets
17 Intangible assets
Intangible Assets
Software
Software acquired in a business combination is recognised at fair value at the
acquisition date. It has an estimated useful economic life of 5 years and is
subsequently carried at cost less accumulated amortisation and impairment
losses.
The Group capitalises allowable costs related to the development of new
products and related significant functional enhancements to its Cyber AI
platform. The directly attributable costs capitalised are employee costs
including the appropriate portion of relevant compensation-related overheads.
Costs are only capitalised when the following criteria are met:
· it is technically feasible to complete the software so that it
will be available for use;
· Management intends to complete the software so that it will be
available for use;
· There is an ability to use or sell the software;
· it can be demonstrated how the software will generate probable
future economic benefits;
· adequate technical, financial and other resources to complete the
development and to use or sell the software are available; and
· the expenditure attributable to the software during its
development can be reliably measured.
These capitalised development costs are recorded as intangible assets and
amortised from the point at which the developed assets are released for use,
typically as a part of major version or product releases.
Capitalised development costs are amortised on a straight-line basis over a
three-year period unless the related software is removed from service prior to
that date, in which case the remaining amortisation related to the software
removed from use would be accelerated. Amortisation is classified as Research
and development costs.
Costs associated with maintaining software programmes are recognised as an
expense as incurred.
Customer relationship
Customer relationships acquired in a business combination are recognised at
fair value at the acquisition date. It has an estimated useful economic life
of 12 years and is subsequently carried at cost less accumulated amortisation
and impairment losses.
Software consists of capitalised development costs being internally generated
intangible asset of $2.2 million (30 June 2022 $4.9 million) and acquired
software from acquisition of $ 6.6 million (30 June 2022 $8.6 million) with a
remaining useful life of 3.7 years. The Group has not identified any
impairments to the intangibles.
All amortisation of intangible assets is charged to the consolidated statement
of comprehensive income and is included within research and development costs.
FY 2023 FY2022
Customer Relationship Software under development Customer Relationship Software under development
Software Total Software Total
$'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000
Cost
As at 1 July 869 25,535 1,517 27,921 - 13,286 - 13,286
Additions - - 2,519 2,519 - 2,391 2,368 4,759
Business combination (no - - - - 930 9,647 - 10,577
Reclassification - 1,082 (1,082) - - 851 (851) -
Foreign exchange difference - - - (640) - (701)
-
(61)
As at 30 June 869 26,617 2,954 30,440 869 25,535 1,517 27,921
Amortisation
As at 1 July (26) (12,246) - (12,272) - (6,199) - (6,199)
Charge for the year (5,525) - (5,597) (26) (6,047) - (6,073)
(72)
As at 30 June (98) (17,771) - (17,869) (26) (12,246) - (12,272)
Net book value as 30 June 8,846 2,954 12,571 13,289 1,517 15,649
771 843
843 -
18. Property, Plant and Equipment
Property, plant and equipment is stated at historical cost less depreciation.
Historical cost includes expenditure that is directly attributable to the
acquisition of the items. Subsequent costs are included in the asset's
carrying amount or recognised as a separate asset, as appropriate, only when
it is probable that future economic benefits associated with the item will
flow to the Group and the cost of the item can be measured reliably. The
carrying amount of any component accounted for as a separate asset is
derecognised when replaced. All other repairs and maintenance are charged to
the statement of comprehensive income during the reporting period in which
they are incurred.
The depreciation methods and periods used by the Group are as follows:
Appliances 5
years straight line
Leasehold improvements Lower between EUL and lease term on
straight line
Equipment 2-5 years
straight line
The assets' residual values and useful lives are reviewed, and adjusted if
appropriate, at the end of each reporting period. Gains and losses on
disposals are determined by comparing proceeds with carrying amount. These are
included in the consolidated statement of comprehensive income.
Other assets
Other assets included within property, plant and equipment are generally IT
equipment for employee use and a small amount of infrastructure equipment. The
Group also has office fit out costs, furniture, other tangible property
including leasehold improvements.
Appliances
Most of the Group's property, plant and equipment is comprised of the
appliances used to deploy its software. Appliances are encrypted with the
Group's software and deployed both to customers for the fulfilment of
contracts and potential customers for POV demonstrations. These appliances are
deployed, retrieved and redeployed many times over their useful lives and may
be on customer or prospect sites, interchangeably, at any given time. The
Group retains ownership of these appliances and depreciates them over an
estimated five-year useful economic life. The depreciation of these assets is
apportioned to either cost of sales or sales and marketing based on the
proportion of appliances deployed to customers and prospects in each period.
Significant Judgement in Assessment of Control of Appliances
The Group is required to assess if, as part of the assessment of the
performance obligations, there is an embedded lease within the contract
relating to the appliances used to deploy its software. Due to the length of
the contracts, averaging approximately three years, and the underlying asset
value, it is appropriate to assess if there is an inherent lease embedded
within the contract.
The Group considered its continued ownership of the appliances, the appliances
having a useful economic life in excess of the typical contract length
(appliances are accounted for on an estimated useful life of five years based
on the Group's experience to date) in determining if there was a lease. It is
Management's judgement that the Group retains control of the appliances
throughout the performance period as the Group directs the use of the asset.
It is also Management's judgement that the Group's contracts do not contain
leases under IFRS 16.
FY 2023 FY 2022
Leasehold Improvements Equipment Appliances Total Leasehold Improvements Equipment Appliances Total
$'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000
Cost
As at 1 July 2,327 16,583 112,301 131,211 - 12,161 92,606 104,767
Additions 1,199 18,409 31,230 2,327 4,951 24,585 31,863
11,622
Business combination (note 4) - - - -
- 108 - 108
Foreign exchange difference - - - -
- (7) - (7)
Disposals - (685) (5,141) (5,826) - (630) (4,890) (5,520)
As at 30 June 13,949 17,097 125,569 156,615 2,327 16,583 112,301 131,211
Depreciation
As at 1 July - 9,621 60,589 70,210 - 6,634 45,237 51,871
Charge for the period 935 19,864 24,984 - 3,391 18,355 21,746
4,185
Impairment loss - 52 52 - - - -
-
Disposals - (510) (3,910) (4,420) - (404) (3,003) (3,407)
As at 30 June 935 13,296 76,695 90,826 - 9,621 60,589 70,210
Net book value as at 30 June 13,014 3,801 48,974 65,789 51,712 61,001
2,327 6,962
Depreciation of appliances is apportioned to cost of sales based on the
proportion of the Group's appliance pool deployed to customer sites in each
period, and all appliance depreciation related to customer contracts is
recognised in Cost of sales. Depreciation of appliances used to run POV
demonstrations for prospects is apportioned to Sales and marketing based on
the proportion of the Group's appliance pool deployed to prospect sites in
each period. Where appliances are at client sites or in transit and there is
doubt about their recoverability, they are impaired: the impairment for the
year amounted to $0.1 million (2022:nil).
The depreciation charges for Property, plant and equipment have been made in
the consolidated statement of comprehensive income within the following
functional areas:
FY 2023 FY 2022
$'000 $'000
Depreciation
Cost of sales 16,721 14,589
Sales and marketing 4,599 4,945
Research and development 1,262 1,018
Other administrative 2,402 1,194
24,984 21,746
Inventory - appliances for Federal use
Inventory includes those appliances that are purchased for the purpose of
being sold to potential and future customers for Darktrace Federal Inc. Under
the specific requirements of segregation of this entity, those future
customers require that the appliances used to deploy the software as POV or
for future contracts be sold to them. Those appliances are distinct from
appliances used in any other country or for any other Industry as they are
purchased specifically for this subsidiary and retained in dedicated space
before they are deployed to the potential or future customer.
Inventory is stated at the lower of cost and net realisable value. Cost is
determined on the basis of weighted average costs and comprises direct
materials and, where applicable, direct labour costs and those overheads that
have been incurred in bringing the inventories to their present location and
condition.
FY 2023 FY 2022
$'000 $'000
Inventory 100 -
Financial risk management
20 Cash and Cash equivalents
Cash and Cash Equivalents
For the purpose of presentation in the consolidated statement of cash flows,
cash and cash equivalents includes cash on hand and other short-term, highly
liquid investments with original maturities of three months or less that are
readily convertible to known amounts of cash and which are subject to an
insignificant risk of changes in value. Deposits at call are presented as cash
equivalents if they have a maturity of three months or less from the date of
acquisition and are repayable with 24 hours' notice with no loss of interest.
30 June 2023 30 June 2022
$'000 $'000
Cash at bank and in hand 132,396 156,912
Deposits at call 224,590 233,711
Cash and cash equivalents 356,986 390,623
Deposits at call are presented as cash equivalents if they have a maturity of
three months or less from the date of acquisition and are repayable with 24
hours' notice with no loss of interest.
Other notes
25 Income tax
Income Tax
The income tax expense or credit for the period comprises current tax for the
year, based on the applicable income tax rate for each jurisdiction, adjusted
by changes in deferred tax assets and liabilities attributable to temporary
differences and to unused tax losses, where applicable.
Current tax is the expected tax payable or receivable on the taxable income
for the year, using tax rates enacted or substantively enacted at the end of
the reporting period, and any adjustment to tax payable in respect of previous
periods in the countries where the Group operates and generates taxable
income. Any uncertain tax treatments are reviewed, documented and communicated
to the Board as appropriate. The Group finance function monitors any uncertain
items on a regular basis, working closely with the Head of Tax to understand
any potential changes to the associated risk. The amount of current tax
payable or receivable is the best estimate of the tax amount expected to be
paid or received that reflects uncertainty related to income taxes.
Deferred tax assets are recognised only if it is probable that future taxable
amounts will be available to utilise those temporary differences and losses.
Deferred tax assets and liabilities are offset where there is a legally
enforceable right to offset current tax assets and liabilities and where the
deferred tax balances relate to the same taxation authority. Current tax
assets and tax liabilities are offset where the Group entity has a legally
enforceable right to offset and intends either to settle on a net basis, or to
realise the asset and settle the liability simultaneously.
Deferred income tax is determined using tax rates (and laws) that have been
enacted or substantively enacted by the end of the reporting period and are
expected to apply when the related deferred income tax asset is realised, or
the deferred income tax liability is settled.
Income tax is recognised as an expense or income and included in the
consolidated statement of comprehensive income for the period, except to the
extent that the tax arises from a transaction or event that is not itself
recognised in the consolidated statement of comprehensive income, for example
when it relates to items recognised in other comprehensive income or directly
in equity. In this case, the tax is also recognised in other comprehensive
income. In this case, the tax is also recognised in other comprehensive income
or directly in equity, respectively.
Significant judgement and estimate in deferred tax asset (DTA) recognised on
UK losses carried forward
At 30 June 2023 the Group has significant tax losses in the UK available for
offset against future taxable profits. The Group has recognised a DTA on UK
losses carried forward of approximately $10.9 million (30 June 2022: nil) and
an unrecognised DTA on UK losses carried forward of approximately $50.7
million (30 June 2022: $51.7 million) as Management believes there is
insufficient convincing other evidence that the potential asset will be
utilised in the foreseeable future, which is required for recognition under
IAS 12 when there is a history of losses.
Significant judgement
When assessing if it is probable that future taxable profits will be
available, given the long history of tax losses, Management has determined
whether sufficient positive evidence outweighs existing negative evidence. The
longer the estimates or forecasts extend into the future, the less reliable
they are. Management believes the most appropriate period to be used in order
to make the assessment on the future taxable profit and the recoverable
deferred tax asset on UK losses carried forward is two years. In particular,
whilst from a cash flow perspective given the strong cash position, a three
year period for a viability analysis is considered appropriate, the
profitability is sensitive to changes that depend much more on the current and
future macro-economic environment, inflation and foreign exchange trends.
Had a three-year period been considered, a further $6.3 million UK deferred
tax asset on losses carried forward would have been recognised at 30 June
2023.
Significant estimate
The estimates or forecasts used for the determination of the future taxable
profits for the UK entity used consistent assumptions to those used elsewhere.
Currently there is sufficient convincing other evidence on the certainty of
sufficient future taxable profits in the UK over the next two years, which
will enable Darktrace Holdings Limited to start utilising its' brought forward
tax losses, therefore an initial recognition of the deferred tax asset in
relation to losses carried forward has been done in the year for an amount of
$10.9 million.
The estimates take account of the inherent uncertainties constraining the
expected level of profit as appropriate, however part 12 deductions have not
been taken into account given the uncertainty of the tax deduction in excess
of IFRS2 change recognised for share based payments. Possible changes in the
estimates made, will affect future profits and therefore the recoverability of
the deferred tax assets. An increase in operating costs by 10% would bring the
UK entity into tax loss position over the next two years and therefore no DTA
($10.9 million) on UK losses carried forward should be recognised. In
contrast, a decrease in operating costs by 10% would bring a significant
increase in the tax profit for the UK entity increasing the recognisable DTA
by $16.5 million.
FY 2023 FY 2022
$'000 $'000
Current tax (credit)/expense:
Current period 936 3,454
Foreign taxation 764 1,612
Adjustments for prior period (816)
Total current tax expense 884 5,066
Origination and reversal of temporary differences (5,713) (1,210)
Deferred tax recognised (13,033) -
Adjustments in respect of prior periods (61) -
Total tax (credit)/ charge (17,923) 3,856
The relationship between the expected tax expense based on the UK effective
tax rate of the Group at 20.5% (2022: 19%), and the tax expense recognised in
the consolidated statement of comprehensive income can be reconciled as
follows:
FY 2023 FY 2022
$'000 $'000
Profit for year before taxation 41,035 5,313
Tax rate 20.5% 19%
Tax on profit on ordinary activities at standard CT rate 20.5% FY 2022 - 19%) 8,412 1,010
Effects of:
Effect of tax rates in foreign jurisdictions 1,683 831
Fixed Asset Differences - Super deduction net of Ineligible depreciation (1,202) (1,740)
Non-deductible expenses 3,744 6,955
Overseas taxes deducted at source 607 817
Tax cost on research and development tax credit 560 186
(Over)/under provided in prior years (877) 1,403
Deferred tax recognised (13,033) -
Current year utilisation of deferred tax not previously recognised (17,817) (5,606)
Total tax (credit)/charge for the year (17,923) 3,856
Deferred Tax Assets and Liabilities
The tax rate applied considers 25% for UK and 27% for US as these are the tax
rates expected to be applicable by the time the loss will be unwound.
The unrecognised deferred tax asset is comprised of:
30 June 2023 30 June 2022
Gross amounts Unrecognised DTA* Gross amounts Unrecognised DTA*
$'000 $'000 $'000 $'000
Fixed Asset timing differences - - (2,151) (538)
Short term temporary differences 3,401 850 17,222 4,306
Losses carried forward 202,952 50,738 206,498 51,665
Share based payments 101,669 26,687 147,293 37,775
Total 308,022 78,275 368,862 93,208
Given the uncertainty of the tax deduction in excess of the IFRS2 charge
recognised for share-based payments, demonstrated by the high volatility of
Darktrace share price since IPO, the related deferred tax asset has not been
recognised at 30 June 2023 and in prior year.
Recognised deferred tax asset and deferred tax liabilities
30 June 2023 30 June 2022
$'000 $'000
Fixed asset timing differences (2,272) (76)
Short term temporary differences 4,859 1,573
Losses carried forward 19,271 2,032
Intangible assets arising on business combination (2,009) (2,488)
Total 19,849 1,041
FY 2023 FY 2022
Recognised deferred tax $'000 $'000
Opening 1,041 544
(Charged)/Credited through the income statement:
Deferred tax asset recognised on acquisition - 1,950
Deferred tax liability recognised on acquisition - (2,655)
Deferred tax asset movement 19,276 1,034
Deferred tax liability movement (468) 168
)
Closing 19,849 1,041
29 Post balance sheet events
Assignment of previous London office lease
On 4 August 2023 the assignment of the lease for the previous London office
has been completed. This will result in the de-recognition of the related
right-of-use asset of $2.7 million and the de-recognition of the lease
liability of $3.9 million as at the date of assignment.
RCF Extension
On 31 August 2023 the RCF agreement with Silicon Valley Bank (now HSBC
Innovation Bank) has been extended to have an expiry date of 30 November 2023.
All other terms and conditions (see note 20) remain unchanged. The company is
currently considering the proposals from a number of financial institutions to
increase the amount of the facility before the end of the agreement with HSBC
Innovation Bank.
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