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Darktrace
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=== The pursuit of growth will likely limit margin improvement === Adjusted EBITDA is calculated as EBITDA plus share-based compensation and associated employer tax charges less appliance depreciation incurred as part of cost of sales (i.e. depreciation of appliances deployed at customer sites). JP Morgan models adjusted EBITDA of ~$50m in 2022 with ~12% margin, at the high end of Darktrace’s guided range of 10-12%. Darktrace expects a steep dip in adjusted EBITDA margin in 2H22 following 24% margin in 1H22. This is driven by the following factors: * Ramp in T&E expenses; * Significant increase in facilities and office costs in 2H; * Return to normal cadence of salesforce hiring; JP Morgan expects Darktrace’s adjusted EBITDA margin to improve from 1H23 following the dip in 2H22; however, the pace of improvement is likely to be gradual as the company will continue to invest in sales and marketing to acquire new customers and in new product development as it seeks to build on its platform strategy with ‘Prevent’ and ‘Heal’ product suites. '''Figure 36: Adjusted EBITDA ($, m) and margin (%): 2019-24E<ref name=":7" />''' [[File:Figure 36.png]] '''Figure 37: Adjusted EBITDA margin (%): 1H20-2H24E<ref name=":7" />''' [[File:Figure 37.png]] Early success in the AI-driven threat detection and response market has helped Darktrace scale rapidly, delivering above-average growth (52% 2018-21 revenue CAGR); however, the eventual success of the company will be determined by how the company balances growth and profitability. Assessing this development through the lens of the ‘Rule of 40’ is a good indicator of the progress the company is making to sustain profitable growth. The Rule of 40 is the principle that the sum of revenue growth and profitability measure for successful business models should exceed 40%. JP Morgan uses the sum of revenue growth and free cash flow margin (FCF calculated as cash flow from operations less tangible and intangible capex) as a gauge of the success of Darktrace’s business model. With growing competition and commoditization in the AI-driven threat detection and response market, the sum of revenue growth and free cash flow margin is likely to dip and remain below 40% over the next couple of years, in JP Morgan's view (JP Morgan models 38%/35% in 2023/24, down from 58% in 2022). JP Morgan believes that this outcome will be reflected in Darktrace’s valuation compared to other cybersecurity peers that consistently beat the 40% benchmark. '''Figure 38: Revenue growth (%) + FCF growth (%)'''<ref name=":9" /> [[File:Figure 38.png]]
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