Darktrace's margin guidance cut not a big deal, says Berenberg

Berenberg said Darktrace's shares trade at an enterprise value-to-sales ratio of 4.1x, as it kept its 600p target price for the stock, which was down nearly 4% at 354.8p by 1107 BST.

Results for the year to June 2023 were bang in line with forecasts after a detailed pre-close trading update in July. However, the company said that, in order to be more competitive with peers in regards to talent, it has now decided to pay salespeople 100% of their commission upfront, compared with the earlier model of 50% upfront and 50% 12 months later.

"In moving to 100% paid upfront, Darktrace will now capitalise substantially all sales commissions and amortise this across the three years of the contract life," Berenberg explained in a research note. "The company notes that this will generally move more commission cost recognition to later periods, better aligning with revenue recognition but also inflating EBITDA margins."

As such, as it moves to changes its definition of adjusted EBITDA to treat amortisation as cash costs, EBITDA margins for the year to June 2024 will be in the range of 17-19%, down from earlier guidance of "around 22%".

The news, which was clearly taken poorly by the market on Wednesday, should have a limited impact on the long-term financial profile of the company, Berenberg said.

"We believe the combined impact of these changes on adjusted EBIT will be broadly neutral through the current forecast period, with our post-changes adjusted EBIT actually increasing c1-5% over the forecast period today. There should not be a material impact on the long-term profile of the business or indeed on the IPO steady-state guidance for a 25% adjusted EBIT margin."