Recent news has leaked regarding Palantir’s total contract deal sizes for the most of September alone.
The user mentioned that Palantir in the month of September alone has achieved 10+ new contracts within the Governmental sector alone, with a deal size of upwards of $612M.
Note that this is solely within the Government, and there is an unknown number of deals being signed within the commercial space for the month.
Dr Alex Karp mentioned coherently within an array of earnings calls that Palantir will not experience further deceleration within the Governments, however in fact – there is potential for higher upside. Congress were operating under a CR, or continuing resolution, as a temporary measure to fund Government activities for a limited amount of time. Overall, and per the words of CEO Alex Karp, it seems evident to assume that this delay within spending, due to the innate bureaucratic nature of Governments has resulted in a major delay within spending and contract allocation.
Within recent times, the Department of the Air Forces have been very vocal in terms of issues caused by the use of continuing resolutions to fund the federal Government. Interestingly, and to ease concerns of Palantir investors, Air Force Secretary made the case that a CR in the upcoming 2023 fiscal year would have a majorly “negative effect”.
Kendall explained how operating over a CR keeps spending levels frozen from the previous year’s level in which limits the DOD’s ability to adjust for impacts of inflation and other increases within budgets.
“The thing that’s unique about this year is that inflation is occurring and is somewhat unpredictable, and a CR locks you into a previous year’s level of funding when prices are increasing. So you need to get to a point where you can make some adjustments because of that,” Kendall said.
The Space Force is projected to gain a 36% increase over 2022 within budgets for 2023. Any more CRs would majorly delay these funds, in which can deter the growth of the service, indirectly also creating volatility in terms of contracts for companies like Palantir.
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.
To add to this, Palantir as the first software prime for Governments was an interesting comment by the COO within a recent call with Morgan Stanley analysts. 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 GOV, 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 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, Palantir investors did see a light acceleration this quarter within the Governmental sector – with the addition of 3 new Governmental customers.
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.
Doug mentioned how “soldiers wanted our platforms”, however the friction associated within Governments was immense.
Practically speaking, sometimes Governments still attempt to build solutions in-house first. This was in full knowledge that the Governments solutions fail 93% of time. Unfortunately, Governments would just “change the name” of the project, and continue the progression. Doug specifically stated how there are small political pockets in who still want to build bespoke software solutions in-house. This has been an evident issue investors are aware of within Palantir.
This overall refer to the volatile nature present within Governments.
Piper Sandler says, “Palantir should continue to see growth in its U.S. government business as it broadens its footprint across agencies and as its largest customer (Defense) is expected to grow further”. Piper Sandler mentions how, there are detailed contracts in which are pointing towards expanding US Governmental USG traction. To add, Piper Sandler recently have analysed all of the known USG contracts, and noticed broadening traction among Governmental agencies, beyond Defense and into agencies like the Department of Veteran Affrairs, and Department of Energy. The firm expect this to drive “10-20% annual USG growth for the next few years”.
Piper Sandler interestingly mention that, COVID was a major catalyst for Palantir, and this is going to have “long-term benefits”. This is in opposition to other investment firms whom state that Palantir experienced “one-off” benefits related to COVID, and now these benefits will no longer be recognised. In addition to this the investment firm mentioned how, due to the COVID catalyst, this has majorly benefitted Palantir across the Government.
“PLTR has maintained relationships and contracts with the Army, Navy, U.S. Special Operations Command, CDC, ICE, and FBI for at least 10 consecutive years each. We believe these long-lasting partnerships demonstrate both the usefulness of PLTR’s platform and high switching costs once embedded.”
Piper Sandler mentions how, Palantir should continue to see strong growth in its U.S. government business as the requested discretionary budgets for the Department of Defense are expected to increase 5% in FY2022 and another 4% in FY2023.
Importantly to note, Darntons found that high DOD exposure could be very positive for Palantir. This is because, DODs requested discretionary budgets are expected to increase 5% in FY2022, and then a further 4% in FY2023.
Piper Sandler also believe that, the on-going war currently could be a major catalyst for the DOD to improve technologies for the future. Interestingly, Piper examined the budgets in depth and found that, there is a heavy emphasis on AI, LM, IT and software programs.
In addition to this, Sandler mention how the amounts for these requested items will continue to increase in FY22 (+27% y/y), and FY2023 (+12% y/y). Piper proclaimed that, new requests in FY2022 that weren’t included in FY2021 include ~$212M for AI and ML research and ~$83M for the Tactical Intel Targeting Access Node (TITAN) program, which PLTR has been selected to compete for.
Palantir has a range of long lasting relationships with the Governmental agencies.
• Navy: 2008 – Present (14 years)
• Army: 2009 – Present (13 years)
• U.S. Special Operations Command (USSOCOM): 2009 – Present (13 years)
• Centers for Disease Control and Prevention (CDC): 2010 – Present (12 years)
• U.S. Immigration and Customs Enforcement (ICE): 2011 – Present (11 years)
• Federal Bureau of Investigation (FBI): 2012 – Present (10 years)
• Department of Justice (DOJ), Other: 2012 – Present (10 years)
• Securities and Exchange Commission (SEC): 2016 – Present (6 years)
• Food and Drug Administration (FDA): 2017 – Present (5 years)
• Internal Revenue Service (IRS): 2018 – Present (4 years)
• National Institutes of Health (NIH): 2018 – Present (4 years)
• Air Force: 2020 – Present (2+ years)
Palantir investors question the logical reasoning behind the notion that Palantir will suddenly loose customers within the Governmental sphere after relationships spanning upwards of 10+ years. In fact, many argue that Palantir becomes more sticky, and harder to switch away from as time prevails.
