The biggest takeaways from Palantir’s recent ER:
Palantir As A Potential Software Prime Is Vital To Understand.
GOV Business Deceleration Explained.
Usage Based Pricing.
SPACs.
Net-Dollar Retention Rate.
Palantir As A Potential Software Prime Is Vital To Understand.
US Federal Advisory Board was a point mentioned by COO Sankar within Palantir’s recent ER. Palantir stated that, “the Federal Advisory Board is comprised of national security experts with first-hand experience facing America’s most urgent threats.” Furthermore, “their perspectives on today’s defence, intelligence, and homeland security challenges enable Palantir to continue to meet the evolving and complex needs of our U.S. Government partners.”
To add to this, Palantir as the first software prime for Governments has been an on-going commentary now for the past few months by Palantirs’ management team. A software prime describes companies that have frequent roles as contractors who in turn subcontract to other companies within Governments. There are currently 4-5 hardware primes for the US Government, and within the FY2020, these companies together received 54% of all of DOD’s contract obligations for the year.
If Palantir were to become a software prime for the US GOV, not only would this validify concerns related to Palantir product capabilities, however it would also indicate towards a possibility for more consistent and larger revenue streams from the US GOV.
COO Sankar mentioned within a recent Palantir call with analysts from Morgan Stanley, that Palantir as a Prime contractor will be similar to “what Tesla did to the car”.
GOV Business Deceleration Explained.
Palantir’s COO stated within the ER that, “Government acceleration is already occurring.” This could be seen within the latest report by the software company after they gained an additional 3 customers from Governmental roots. This is in comparison to Palantir’s stagnant Governmental customer count through-out the full year of 2021. ARK Invest, Cathie Wood, indicated her concern regarding the Palantir customer count from the Governmental sphere, and concluded that this stagnation was due to increased competitive environments, and an inability for Palantir to gain sole-sourced contracts.
A sole sourced contract refers to when there is only one vendor capable of providing an item or service, and therefore it is not possible to obtain competitive bids. ARK concluded that Palantir has experienced more competition within the Government sphere, resulting in an inability for sole-sourced contract wins.
Palantir bulls pointed towards the Federal Budget delay to explain the deceleration within Palantir’s Governmental business: “Congress were operating under a CR, or continuing resolution, as a temporary measure to fund Government activities for a limited amount of time. This posed the Chiefs of the Air Force and Space Force to disclose their frustration and devastation for the matter, in relation to the inability to perform missions and to grow new capabilities.“
Overall, and per the words of CEO Alex Karp, it seems evident to assume that this delay within spending is due to the innate bureaucratic nature of Governments, and therefore has resulted in a major delay within spending and contract allocation. This interestingly does highlight a vital area of weakness for Palantir, specifically because the company is reliant on Governments for a significant portion of their overall revenue.
Whilst from a figurative standpoint the Government deceleration may seem concerning, taking a holistic view, the Government business poses an interesting paradigm. This is because, whilst the commercial world is all competitive, the Government is fundamentally cooperative – leading to immense network effects. This is because, network effects within one agency are mirrored across all Governmental agencies, leading to major network effect creation. Whilst Palantir does not store or own the data, the company does learn from the methods in which the data is meshed together, and therefore their algorithms and software becomes smarter over time.
COO Sankar mentioned within the earnings call that the Government upside is large. This lumpiness comes down to contract timing and events occurring. “We will not deprive customers with software – just because the paper work is not there.” The COO concluded that there would be meaningful upside within Governments in the next few quarters.
Interestingly, within recent times Shyam Sankar stated in an exclusive call last month, that the Government business growth rate within 2018 was extraordinary. However, to explain the recent deceleration, there is often a drag that existing resolutions create as they prevent new starts from occurring. “Things that are new, they are delayed” said the COO. Sankar concluded, within the call with analysts from Morgan Stanley, that there are often complicated dynamics with budgets. This therefore can create volatility for upside, as projects can get caught up in blitz to get money out the door.
When looking at the future of the Governmental business, there seems to be a larger potential TAM to exploit.
Apollo and Gotham are becoming fundamental towards Governmental deployment. The future for Gotham looks interesting because, Palantir COO Sankar has mentioned within recent times, that there will be innovations within integration of the entire suite from “space-to-mud”. Palantir Gotham will become a single-pain of data to run operations on. This has become fundamental towards Palantir’s aid within the current conflict in Ukraine.
Usage Based Pricing
There is an on-going pricing model evolution for Palantir. Historically there were only two ways to think about licencing something like Foundry.
1) Enterprise licence – “all you can eat solution.”
2) Licence by use case – “aspiration only with two-to-three use cases.”
Palantir is now focusing on consumption based pricing. This allows folks to start with no commit.
Instead, companies can start with issues they want to start focusing on, and over time slowly start to consume more. This therefore allows for a lower barrier to entry, however also potential for the customer to move towards Palantir full stack eventually.
Overall, for Palantir this means that the company has a much lower level of friction associated with integration of the Palantir software solution. This should lead to more acceleration and customer growth within the next few quaters.
Interestingly, in consideration of Palantir’s majorly invasive software solution OS, investors have speculated over the commercial interest for thinner software products – such as Snowflake. Whilst it is clear that Palantir has a much more beneficial software offering, perhaps organisations are yet to reach the vital inflection point in which the necessity for a holistic solution is recognised.
Whilst Snowflake only offer 1-2 individualistic products, Palantir on the other hand offer a holistic OS with 400 different tools, features and custom applications within.
Doug, the Palantir Defence Lead had some negative comments on individualistic product offerings recently:
Doug Philippone, Palantir Global Defence Lead: I don’t like the term data-lake. “It always turns into a data-swamp”. Doug expressed his major concern over a data-lake. 5 years ago organisations were excited for data-lake functionalities. The problem however, “you loose security, you loose pedigree, the data is not alive anymore.” A core fundamental of Palantir – keeping the lineage of the data to understand where the data has come from.
Read the whole report here: https://darntons.com/2022/05/08/exclusive-the-true-potential-of-palantir-revealed-defence-lead-officer-explains/
SPACs
Revenue from SPAC contracts has peaked within Q1 2022. This means that, per Palantir’s comments, there will be no new additional customers from this program as the program is wound down.
Whilst this point has validity, COO Sankar did point towards a possibility for other strategic investment programs within the following years. This was briefly mentioned last month after Sankar attended a conference call with analysts from Morgan Stanley.
Net-Dollar Retention Rate
Palantir mentioned that their net-dollar retention rate was 124% in Q1 2022. Net-dollar retention rate measures how much your recurring revenue has grown or shrunk over time.
For comparison, individualistic software solution providers, such as Snowflake has a much higher net-dollar retention rate of 170%+.
To compare Palantirs’ net-dollar retention rate to previous quarters, it can be seen that within Q4 2021 Palantir had a net-dollar retention rate of 113% within the commercial segment. Within the US commercial space, the retention rate was 150%, and on an international level the commercial net dollar retention rate was 103%.
Interestingly, in Q4 2021, the Government sphere had a much higher net-dollar retention rate totalling to 146% overall, and on an international basis 161%.
It is vital to see net-dollar retention rate increase over time to ensure that Palantir investors can gain validity in terms of the capabilities and stickiness of the software product.
