Member Info for Lending

Good analysis Grottyface. This question of over compensation accounting has been of concern to me - Darktrace has similar issues with the Free Cash Flow Numbers as does Crowdstrike. The FCF numbers reported by Darktrace., too, seem to negate some of the compensation costs. So the FCF is apparently not what it should be - Revenue minus all cash costs to run the business. Need further analysis.

Bobacaca - seems your feelings were right about a large U trade - massive!

Yes Seaking1 - I agree interest rates are a major factor affecting company earnings, the relative attractiveness of stocks vs the alternatives as well as sentiment. Changes to rates seem to me to have a disproportionately greater effect on growth stocks than on their value cousins.

Well my 3month old limit order to buy at 270 (I remembered it to be 275) was actioned at 269.7. Crazy! No more purchases now is I’m over-allocated on speculative shares.

The SP fall is not specific to Darktrace. Most growth stocks have taken a beating because of the macro-economic situation, and are continuing to be hit, and the more so the more they depend on future earnings.

Take Darktrace, Crowdstrike, SentinelOne and Fortinet over the last 18mo since SentinelOne’s ipo. SentinelOne by far the least profitable, but growing fastest, has fallen the most, next Crowdstrike Darktrace about the same and Fortinet, highly profitable, has fallen the least.

In my opinion sentiment towards growth stocks will only change when the macro economic situation improves and punters are prepared to take more risk. At the moment there is a flight to safety from growth stocks -to either cash or established “value” stocks. Hence the opportunity if one is prepared to accept that risk.

I have based my optimism regarding Darktrace on its unique technology and the clear need for cyber security , but the jury is still out as to whether this will lead to long term competitive advantage vis-a-vis their competitors. My bets that it will are still on the table.

Good luck all who hold.

Or is it that we have a vested interest because we see the potential and value it higher? I would not be invested were this not to be the case. On cash, DT does have a positive free cash flow and the cash balance is growing, and at a heathy level, as far as I can glean from the last two annual reports and forward guidance. I do have some doubts about corporate governance matters, but, as far as I’m concerned, so far so good. Still early days so it needs close monitoring as the money to support the SP ands its progression is to be made mostly in future - as per definition of a growth stock. . Fingers crossed that we will continue to see good progress.

Nidec - I think that in these “desperate times” the sentimental Mr Market currently prefers the certainty of a bird in the hand rather rather than the uncertainty of the two in the bush. However, some of us still like the odds that the two birds in the bush are still reasonably healthy, and that it may be worth waiting before catching them as they can fatten on the bush’s bountiful berries. Pity if someone else grabs them before then. . All IMHO.

Berylfu - my only suggestion is to take heed of Warren Buffett’s two investment rules especially if this is for your pension rather than a gambling game that many wish to play. These rules are:

Rule 1 - Don’t lose. And a good place to start is not to take heed of anything said on this BB unless it reinforces or otherwise your own convictions based upon a through understanding and research.

Rule 2 - Remember Rule 1

I won’t make suggestions, but I can tell you the approach I took when I sold a property a couple years ago ( about 25% of my investments) - and It was indeed a difficult decision on how best to reinvest the proceeds at a time when the stock markets were already frothy.

Holding cash to me is not a viable long term proposition ( low interest rates and inflation); bonds were not an option (an expectation of increased inflation and rising interests rates which would cause the capital value to fall) ; so equities were the only realistic viable possibility. But because the market was overvalued in my estimation, I decided to play it safe and drip feed 4-5% of the available cash into the market every month. My approach has always been closer to the approach of the tortoise rather than the hare. This strategy has so far worked for me and these new investments are better than break even even though the markets have crashed.

I invested 50% into tracker funds, 15%into managed funds (those I understand and concur with the manager’s investment philosophy), 30% into established companies and 5% into speculative companies like DT that require detailed analysis and close monitoring. This is more or less the balance I already had. On DT I bought in close to IPO and later had a long term limit order for 285p that was unexpectedly exercised - and now I have one for 275p. How realistic a price of 275p is I don’t know but the market is crazy so who knows. Either way I would be content.

No investment is risk free, so, in my opinion, one first needs to decide where you want to be on the risk spectrum. Are you going to go for that one big bold bet and hope to make a fortune over night, or are you going to spread your bets and play the long . And then are you going to base you decisions on a belief system (technical analysis) initiated by Dow (of Dow-Jones fame) around 1900, or are you going to base them on the fundamentals of the businesses in which you invest. I am very much in the latter school on both counts.

Either way, play it safe while you learn.

SW77 - I wonder whether the reason you were not getting the prices you wanted was that you were buying 15k shares when the market size for DT is for 5k ( see the fundamentals) . My understanding is that the MMs (“O” trades) are not obliged to offer to sell or buy shares at a price within the bid-offer spread they post - or even trade at all - if the number being bought/sold exceeded the market size. I only mention this as I have experienced this in the past.

CR888 - OK now that the IPO distortions are out of the way, the renumeration policy going forward is in line with the “Code” and doesn’t look too unreasonable to me ( pg 56 of 2022 Annual Report).

Bonus for CEO up to 150% of annual salary (66% in cash and 33% in shares vested for 2 yrs with mixture of financial and ESG metrics). Share incentives at 250% of salary based upon relative share performance compared with the FTSE350 and ARR and CAGR over 3 years period and vested for 5yrs).

So they need to achieve performance measures for both bonus and share incentives and then hold for 2 and 5 yrs respectively before being allowed to sell awarded shares.

Whether all this encourages them to do any better is debatable. When I played competitive sport I was highly motivated to win - I’m not sue a pot of pride money would have added to that motivation.

The more I read about what the CEO has said and is saying, I think she will fight to stay independent. She appears to be having a ball.

CR888 . Good question.

My understanding is the shares are vested with no other strings attached, so it is only a a matter of the vesting time frame. I haven’t noticed whether they are also now going down the options route. I’ll look into it but hopefully the vesting timeframe is 5yrs or so to tie the incentive to long-term SH interests. The “Code” also advises on this timeframe.

Bonuses, as I understand it, are mainly associated with ARR and churn rate thresholds which is only one part of the things that interest us - cost being the other big one. How mush “stretch” is built into these targets is difficult to judge, but in FY22 they were easily met.

The IPO prospectus and the two annual reports are a fountain of information on these aspects but they are heavy reading. But it is interesting to see just how much time and effort is spent rewarding themselves. - as pages are devoted to the matter. I do wonder to what extent this is a distraction from focussing on the main essentials of the business from our point of view.

On Executive Renumeration the LSE guidance on Corporate Government states:

“Levels of remuneration should be sufficient to attract, retain and motivate management of the quality required to run the company successfully. A company should avoid paying more than is necessary and a significant proportion of executive directors’ remuneration should be linked to performance. “

So what does “avoid paying more” mean? The CEO was paid £11.9m in 2022 ( fixed 0.5m, bonus 0.7m and 10.7m in long term incentives). This alone was 10x the net earnings for the year.

The question I have is would the CEO leave if the incentives were say half amount? Does another £5m make any difference to motivation. I think not and I am of the school of thought that executive Renumeration overall has got completely out of hand to the detriment of the owners - especially when a company is not generating enough profit to pay for it. But I do admit I am old school in my thinking.

What do others think?

Have a nice weekend.

I think it best to wait for the next quarterly update from Darktrace before making a prediction on which would be the better bet. Revenue growth for DT was 45% FY22 and the last announced expectation for FY23 is 30- 33%. Crowdstrike had a growth rate of about 65% and now 30% or so - so the growth rates are converging. The question to my mind is - is it the market softening or is it something to do with the offerings? Interesting to see what SentinelOne comes up with as their revenues were growing at a rate of 120%.

As far as I am aware, only 4 of the 9 directors have shares in the company. These are the two two employees (CEO and CFO), the Invoke nominee (Colomar) and the Chair who bought a few on the open market. Colomar has been the bigger seller.

The other employees, and other Invoke shareholders collectively hold a lot more as do the the rest of the original shareholders.

Sales by the like of Summit and KKR will temporarily affect the supply/demand balance but that is to be expected as that is how they operate. Sales by the Executive Management Team (directors or not) send all the wrong signals.

G - not patronising or text book definitions but personal experience attending Board meetings and the regulatory requirements imposed on BODs in various countries.

The NYSE and Nasdaq listing rules, for instance, require that independent directors comprise a majority of the board. This is unfortunately not the case with Darktrace and I think this is unhealthy from my point of view as a co-owner.

High level Strategy is one key role of any BOD, but the governance roles like appointing management, auditing and setting renumeration policies are equally, or more important, from any owners perspective in my view.

So on the Board we have 4 independent non-execs, 3 non-independent non-execs and 2 execs. I would prefer it if independent non-execs were in the majority. The three non-independent non=execs have their own agendas which do not necessarily coincide our interests. But at least the balance is better now that Egan was removed.

Getafgrip - I think we see the roles, responsibility and accountability of the BOD and Management Team a tad differently.

To me the purpose of the two bodies is separate and distinct - with little to no overlap. The shareholders appoint (or agree or otherwise) the BODs who intern appoint the exec managers.. The role of the BOD is largely an oversight and fiduciary one to look after the interests of the shareholders - so should have a majority of non-execs which Darktrace has - - and the managers run the business. For this reason, and in my view, the CSO and CTO and other management roles are purely managerial although they may make proposals or recommendations to the BOD for their consideration from time to time. Those Execs on the BOD have two hats - a difficult path to tread in my view.

Personally I’m not convinced how well the fiduciary responsibilities are exercised as there is a lot of - you scratch my back ……. -.between directors on various Boards. Hence, perhaps, the ramping of exec renumeration..

Don’t worry. USD 1m profit made in FY22 and only USD47m - or ca10% of revenue - spent on share based charges and 4% dilution in the number of shares. It is their company after all isn’t it? All other shareholders are but a distraction. We all need to wake up (or so said B Graham many years ago).

Managers (Eagan is no longer a director I think) selling, for whatever reason, is always bad news. As it leads to more questions than answers.

Thanks Oldgold22 - it seems to me we are on a similar frequency.

On FCF, I have taken a cursory look at DTs FY22 numbers;. To me they are confusing as D T is running a parallel set of numbers _ the one lot apparently following accounting rules and the other lot - the adjusted figures - not. Basically what they are saying , as I understand it, is that share based incentive charges should not be included as costs and that the operating and net profit should accordingly be adjusted and higher.

So, if I am right in my understanding, the FCF figures of DT do not include the cost of the share based investments ($47m). So normally the FCF is understood to be the cash left over after all costs are accounted for and this money belongs to the owners ( Buffett’s “owner’s funds”) - but the BoD, as representatives of the shareholders, will decide to pay this to the shareholders in dividends, or share buy backs, or use it to grow the business. What BT is saying, if my understanding is correct, the owners should be using their money to pay directly for the large share based incentive charges from their funds.

I hope I have interpreted it incorrectly. Presenting two different metrics, one following accounting rules, and the other invented, is anyway confusing but, perhaps, it is designed to do just that. As I say, I hope I am wrong, but I will look into it.

The difference in the presentation of the results with,say, Creanswick who play with a straight bat, and DT, is like chalk and cheese. I still think Darktrace has fantastic potential, but doubts about certain aspects of management are creeping in to my considerations.

How positive? DT’s cash being used to buy the shares which would otherwise be converted into free cash which is our money according to Buffet).