Will short report dent Darktrace’s share price?

With the shadow of Mike Lynch’s sale of Autonomy to HP still looming over his latest venture, Cambridge-based cybersecurity firm Darktrace has struck a defiant stance in response to a short seller report issued in January. Elsewhere, WANdisco shares were suspended after the company mistakenly inflated sales figures by millions of dollars.

- Darktrace commissions independent report in response to short seller report.

- Company shadowed by fraud proceedings against investor Mike Lynch.

- The WisdomTree Cybersecurity Fund has gained 16% year-to-date.

Senior executives at Cambridge-based cybersecurity firm Darktrace [DARK.L] have hit back at short-sellers including Quintessential Capital Management.

Quintessential alleged in January that Darktrace’s senior leadership retains unwelcome links to Autonomy, the software house that Mike Lynch, whose Invoke Capital funded Darktrace, sold to HP [HPE] for $11bn in 2011.

That sale led to an ongoing legal battle between HP and Lynch, with the former accusing the latter of fraud after writing the company’s value down by $8.8bn less than a year after the purchase.

Quintessential has made similar accusations against Darktrace, suggesting that the company is “led or very strongly influenced by many of the same individuals that participated in the Autonomy debacle” and that it inflated its IPO value using “simulated or anticipated sales to phantom end-users”.

However, Cathy Graham, chief financial officer (CFO) of Darktrace, has refuted the allegations, telling the Times that “what was being implied and inferred about us is not how we run this company”. Graham has also commissioned an independent report from EY, saying the company is “not afraid of transparency”.

Darktrace’s share price is down 10.6% in the past month and down 5.8% year-to-date.

Different business

It’s “an entirely different business”, Graham told The Times, explaining that regulatory changes since Autonomy’s sale would prevent the kind of activity addressed in HP’s lawsuit from occurring at Darktrace.

HP “substantially succeeded” in its case against Lynch, according to Robert Hildyard, the judge who presided over a January 2022 ruling, the result of a nine-month trial followed by a two-year wait. Following the verdict, in March Lynch asked a UK court to block his extradition to the US, arguing that he should be prosecuted in Britain.

Darktrace’s half-year 2023 results reported in early March showed a 35.8% year-over-year increase in revenue to $259.3m, slowing from a 52.3% increase the previous year. Similarly, adjusted EBITDA grew 32.8% to $59.69m, down from 124.6% growth the previous year.

Dark clouds

Fraud claims continue to dog the UK software industry.

Trading in WANdisco [WAND.L] shares is currently suspended as the company investigates possible fraudulent sales figures. CEO David Richards and CFO Erik Miller stepped down on 3 April with immediate effect. Though the changes are not directly connected to the investigation, “the objective to lift the suspension of the Company's shares and position the Company for long-term growth” was cited in the company’s press release announcing the resignations.

So far, the investigation has confirmed that recognised revenue for fiscal year 2022 was mistakenly reported as $24m rather than the $9.7m, and that the figure reported for bookings as $127m should have been $11.4m. According to WANdisco’s press release, “the irregularities are as a result of the actions of one senior sales employee”.

The events coincide with the closure of Tech Nation, the entrepreneur network that had provided support to UK tech start-ups for over a decade.

The London Stock Exchange held an event on 16 March to celebrate the network, whose support through the Future Fifty programme nurtured Darktrace, as well as food delivery app Deliveroo [ROO.L], during their early years.

Funds in focus: WisdomTree Cybersecurity Fund

Investors seeking exposure to Darktrace could look into the WisdomTree Cybersecurity Fund [WCBR.L], which holds the company with a weighting of 2.58% as of 6 April. The fund’s top holding, SentinelOne [S], has a 5.60% weighting.

WCBR is up 15.8% year-to-date and up 4.5% in the past month.

Analysts on the whole appear positive on Darktrace shares: a median 12-month price target among Refinitiv analysts of 426.10p represents an implied 74.9% upside for Darktrace stock over the next year.

Private banking company Berenberg told clients that “many of the [Quintessential] report’s conclusions are based on issues that have been taken out of context and are at minimum hard to validate.”

It may be worth noting that Berenberg’s head of European equities, Laura Janssens, is married to head of investor relations at Darktrace, Luk Janssens.