Net-Dollar Retention Rate:
GOV Business Issue:
ADJ Operating Margins:
Dilution:
Net-Dollar Retention Rate:
Net-dollar retention rate is a vital metric in terms of understanding the stickiness of a set product solution. Net dollar retention (NDR), measures how much your annual recurring revenue or monthly recurring revenue (MRR) has grown or shrunk over time.
Within the case of Snowflake, the organisation has a net-dollar retention rate of 178%, indicating their stickiness as a company.
Within the case of Palantir – the organisation has a net-dollar retention rate of 124% within Q1. This is in comparison to 131% for the FY2021. Interestingly, there is a fairly vital split to take into consideration when it comes to net-dollar retention rate, specifically within the commercial sphere. Within the US commercial sphere, the NDRR is 150%, however on an international basis only 103% commercial NDRR.
The importance of NDRR could not be more overemphasised as a metric to understand Palantir’s sticky business model.
In consideration of the fact that COO Shyam Sankar mentioned recently, within a call with analysts from Morgan Stanely, that Palantir have tested their thesis for the commercial growth specifically within the US to start, and then will move this concentration towards global commercial growth. Using this logic, one would assume over the coming months, Palantir’s NDRR will increase holistically, as the company implements their US commercial strategy on a global scale.
GOV Business Issue:
Palantir’s Governmental business has significantly halted during the FY21, and seems to be experiencing significant slowdowns in comparison to previous quarters. There are two evident sides to this debate that must be taken into consideration.
1)
Palantir bulls, point 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.
Within recent times the Palantir Defence Leader expressed his concern with the Governmental acquisition processes. There is so much friction associated within Governments and these acquisition processes can make it very hard for companies to “break-in” successfully. However, Palantir has an evident edge within this sphere, because often Palantir is competing with PowerPoints, or CIOs whom are showcasing a product they hope to build within the next few years. Doug mentioned how these CIOs, and PowerPoints showcasing a product never end up succeeding, and if they do, often the cost associated is 10X greater.
Read the report here: https://darntons.com/2022/05/08/exclusive-the-true-potential-of-palantir-revealed-defence-lead-officer-explains/
Doug mentioned how “soldiers wanted our platforms”, however the friction associated within Governments was immense.
Doug expressed his plea towards Governments, citing the fact that Governments must remove friction and therefore allow the best products to win. If this is not the case, Palantir’s talent will leave the company and end-up working with companies to build video games or advertising models. This is an interesting point in which many Palantir investors are not taking into consideration, namely the fact that the company could loose vital talent and personnel, if these talent individuals feel disheartened by the innate bureaucratic nature of Governments.
Overall, this should give a contextual understanding into the overall slow nature of capital allocation, and friction associated with Governmental contract designation.
2)
The alternative side of the debate is that Palantir is failing to successfully gain contracts from the Government based on the increased competitive environment present. 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.
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.
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.
ADJ Operating Margins:
Palantir adjusted operating margins were 26% within 20221 Q1, in comparison to previous quarters of 30%+ adjusted operating margins.
The adjusted operating margin refer to how much profit a company makes on a dollar of sales after paying for variable costs of production, including wages, and materials.
There are a few potential reasons as to why ADJ Operating Margins are decreasing, and will continue to decrease through-out FY22. Whilst stating this, it is vital to note the company has guidance still for 27% ADJ Operating Margins throughout FY22.
The reasons as to why ADJ Operating Margins are decreasing includes:
- Increased marketing expenses
- Gaining smaller sized contracts from smaller organisations
Interestingly, Palantir’s TDV finished at $3.5B, which is slightly down from the $3.8B last quarter. If one combines this TDV knowledge with the fact Palantir added a record 37 new commercial customers this quarter, this points towards the thesis that Palantir is now gaining more smaller sized customers, or is offering their product in cheaper, more modularised formats.
Therefore, taking these points together, one can conclude that Palantir is accelerating the move towards modularisation, is spending more on marketing in order to gain more customers, and this is reflecting within the ADJ Operating Margins slightly.
Importantly to note, due to the lack of data available, this thesis could be wrong and instead Palantir is experiencing a sudden breakdown within the fundamental features of the company – hence being reflected within ADJ Operating Margins.
Dilution:
Palantir experiences a range of stock-based-compensation expenses within recent times. This quarter however, as promised by CEO Alex Karp, the company experienced the start of their SBC normalisation process. This is a positive indication in terms of the future of Palantir from a stock perspective.
Whilst stock based compensation has some evident benefits, namely the ability to align employees with the vision of the company, in reality the issue of stock-based-compensation is problematic from an investment standpoint.
This quarter, total stock-based-compensation was 149,323M. This is in comparison to 2021 Q1, totalling 193,731M. Overall, per previous guidance by Palantir, this stock-based-compensation will return towards figure that are more acceptable among software companies.
For comparison, other organisations such as Google & Snowflake experience SBC, however within the case of Palantir – this has been excessive within previous times.
In comparison to Snowflake, their SBC expenses for the twelve months ending January 31, 2022, was 0.605B ($605M), a 100.73% increase year-over-year. This is in comparison to twelve months ended 2021 January 31, in which Snowflake SBC totalled $301M. The point being – all software companies use SBC as a method of incentivisation. However, within the case of Palantir – this has been majorly high in previous times – and still is. It is a necessary indication that Palantir is seeing a normalisation period come into fruition. Dilution via SBC is problematic because, the company issues new shares that result in a decrease in existing stockholders ownership of that set company. It is a positive indication that SBC is starting to decrease for Palantir shareholders.
