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Darktrace
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=== R&D intensity needs to pick up to create a sustainable moat === Non-T&E R&D expenses grew as % of revenue from 6% in 2020 to 8% in 1H22 (although this metric declined from 12% in 2H21). This was partly aided in 1H22 due to capitalization of share-based compensation and related tax charges associated with development projects that met the capitalization criteria. One criticism of the Darktrace model has been the low R&D spend, both absolute and as % of revenue, compared to US cybersecurity peers. According to Darktrace, this is due to low R&D employee costs (given the company’s R&D function is primarily based in Cambridge, UK) and relatively lower development expenses needed for maintaining the self-learning cyber AI platform. The argument is that, unlike other cybersecurity companies that rely on historical threat signatures, Darktrace does not need to constantly update its platform to account for new detected threat signatures; accordingly, the company’s R&D dollars are primarily spent on new product development and research. While there is substance to this argument, JP Morgan believes that new product development and platform enhancements will be increasingly important in an environment where technical and product differentiation vs. the competition narrows. This may necessitate higher R&D investment (as % of revenue), going forward, if Darktrace is to maintain its edge over competition. JP Morgan believes R&D expenses as % of revenue should tick up in 2H22 following the Cybersprint acquisition.
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