Darktrace’s value plummeted to record lows after two new shortsellers betting on its business emerged. UK cybersecurity firms are facing a new wave of criticism over their sales, marketing and accounting practices.
The company, which warned earlier this month that the number of new customers signing up for its artificial intelligence-driven security products was declining, said it was part of Quintessential Capital Management (QCM) and one of the world’s largest hedging firms, a London-based company. It caught the attention of Marshall Wace. Client assets are his $60 billion (£49 billion) fund.
Darktrace has been plagued by criticism, including the extradition of British billionaire Mike Lynch to the United States over fraud charges related to the $11 billion sale of his software company Autonomy to Hewlett-Packard in 2011. struggling to get out of the ghost of its controversial co-founder, who is battling with. Lynch denies all charges against him.
US hedge fund QCM has endorsed short positions, releasing a 69-page document on Tuesday criticizing Darktrace’s management and operations.
The company alleges Darktrace employed dubious aggressive marketing, sales and accounting practices to enhance the company’s value before raising billions of pounds in London nearly two years ago. .
“After careful analysis, we are highly skeptical about the adequacy of Darktrace’s financial statements and fear that sales, margins and growth rates may be overstated and approaching a sharp revision.” said QCM. “We would like to give investors the strongest possible warning that Darktrace shares are [is] Overrated and in potential for a major fix, or worse. ”
Darktrace’s shares slid more than 7% to a record low of 198p on Tuesday, well below the 250p at its April 2021 initial public offering, after short-seller positions went public on Monday. It was far from mind-bogglingly high. A few months after listing in London, it reached almost £10.00.
QCM claims questionable practices to ensure significant revenue growth, such as so-called “channel stuffing,” were employed to maintain its illustrious image of soaring client sales to investors.
Issues noted also include a significant increase in multi-year contract revenue recorded in the first year of the transaction. This helps inflate revenue, growth, and ultimately short-term profits.
While this is not an uncommon practice in many industries, and certainly not illegal, QCM claims that the ratio of deferred revenue to sales has decreased dramatically from 2018 to 2022.
As other skeptics have noted, QCM observes that Darktrace spends at a very high level on marketing expenses compared to its product R&D budget.
The New York-based company says that the marketing-focused sales approach taken by Darktrace has been previously likened to “snake oil” by some clients interviewed by Peelhunt analysts, and that clients first believes it may fail to renew after a three-year contract. agreement.
“We suspect that the majority of legitimate sales are generated by highly aggressive salespeople,” the company said. “Deals signed before his IPO for Darktrace expired may have surged, not renewed by disappointed customers, and sales momentum is about to dwindle.”
Earlier this month, Darktrace reported that it registered a quarter fewer new customers in the last three months of 2022 than in the previous year.
The company has lowered its full-year guidance for recurring revenue, recurring spending by existing customers and total revenue growth.
While the underlying viability of Darktrace’s business model is questionable, a slowdown is reflected in many of cybersecurity’s biggest players as macroeconomic conditions worsen.
The shares of US-based market leader CrowdStrike and its rival Sentinel One have fallen 43% and 67%, respectively, over the past 12 months.
The company said it is focused on acquiring larger clients and upselling existing clients, which will result in an average of 17% more revenue than customers who signed up in 2021. New customer accounts and contract renewals increased by 12%.
Darktrace is led by Poppy Gustafsson, who co-founded in 2013 at age 30. He is one of the company’s dozens of former Autonomy employees.
QCM Founder Gabriel Grego, who owns a 0.86% stake in Darktrace, said:
Marshall Weiss, who holds a 0.9% position in Darktrace and has shorted stakes in Burberry, The Hutt Group and owners of British Airways, declined to comment.
A Darktrace spokesperson said:
“We have rigorous controls throughout our business to ensure full compliance with IFRS accounting standards. We are proud of the business we have built and today serve over 8,100 customers worldwide. We protect against cyber disruption.”