Darktrace shares drop 14% as worsening economy hits cyber sector

Cambridge-based AI security company reduces forecasts and loses £300 million in market value

Shares in Cambridge based cyber security firm Darktrace fell 14% yesterday after the company announced a reduction in forecast revenues for this year.

Darktrace said it expects its adjusted annual recurring revenue to increase by 29% to 31.5% in the year ending June, down from its previous estimate of 31% to 34%.

The reduced estimate comes after a tough second half of 2022 for the company, as worsening economic conditions saw belts tightened across many market sectors.

"The current macro-economic environment is creating challenges to winning new customers, with prospects more reluctant to run product trials and, in regions with historically higher conversion rates, those rates starting to decline," said chief financial officer Cathy Graham.

Darktrace sells its AI-enhanced security solutions to large enterprises. It is known as a market leader in its field, but its solutions come at a premium price.

The company, which floated on the London Stock Exchange in April 2021, saw its shares fall as low as to 250p, below their price at the IPO, before recovering slightly to 252p. Its value fell to £1.8 billion, down £300 million, a 14% drop.

Darktrace is not alone in experiencing tough times in the current financial circumstances, with many household names losing value by double-figure percentages over the period. The tech-heavy US Nasdaq index fell 29% over the course of 2022.

The company's value declined 38% over the last year, but Graham was upbeat about its prospects. In the face of a declining value of the dollar, which will make sales more profitable, Darktrace raised its underlying operating margin forecasts for this year to 16% - 18.5%, up from 15% to 18%.

"Despite expecting growth to remain slower for the rest of this financial year, it is a testament to our resilient business model that we can drive increases in our profitability forecasts over the same period," she added.

Analysts at Jefferies and Berenberg said the cybersecurity sector as a whole is experiencing similar problems with sales, and that Darktrace remains a key 'multi-year pick'. "In 2022, cyber stocks declined by 45%, despite sales lifting by circa 7% (including Darktrace). This underperformance is therefore largely explained by valuation compression," the analysts said.

Darktrace also announced the appointment of a new US-based chief revenue officer. Denise Walter was previously vice president for sales, enterprise and globals at VMware.