1) What is Palantir IL-6?
2) Government Prime:
3) Piper Sandler On Palantir Government Business:
What is Palantir IL-6?
Palantir Technologies Inc. (NYSE: PLTR) announced that its federal cloud service offering has received a DoD Impact Level 6 (IL6) PA from the Defense Information Systems Agency (DISA).
With the debut of Palantir Federal Cloud Service (PFCS) in 2019, the company first gained FedRAMP and IL5, and now, with this accreditation, it expands its cloud offering to include a new Secret Region. As one of just three firms obtaining an IL6 Provisional Authorization from DISA for their cloud offerings, Palantir joins Microsoft and Amazon Web Services (AWS).
IL6 is designated for the processing and storage of data with a classification level up to SECRET. Information that must be processed and kept at IL6 for a cloud deployment can only be processed in a DoD private/community cloud or a Federal government community cloud.
It is the highest level and Palantir joins AWS and Microsoft as the only three companies at that tier.
Palantir alluded to their ambition to achieve IL-6 in their Q4 2020 presentation. At the time they were at level IL-5 alongside a few other companies. Most other software providers (Oracle, SAP, Salesforce, Snowflake or Google) achieved levels IL-2 or IL-4.
Now the Department of Defense and Mission Partners can now make use of Palantir Federal Cloud Service IL6 to address the problems of next-generation warfighting.
“At Palantir, we design systems that address the unique constraints and mission goals for our partners,” said Mitchell Skiles, Senior Architect, Federal, Palantir Technologies. “This accreditation is a testament to that. The expansion will address growing scale consideration and offer robust data protection as the Department adopts new digital capabilities, and critically, will provide easier access to the people who rely upon software every day for their most essential missions.”
The recent initiation of IL6 for Palantir has led to more speculation regarding the possibility of the company becoming a software prime for the US Government.
A prime contractor is a company who enters into a direct contract with the government. Since they have complete control in the movement of the government project, the prime contractors are responsible for tracking the progress of the project, monitoring project costs, and managing subcontractors.
A software prime describes companies that have frequent roles as contractors who in turn subcontract to other companies within Governments.
There are currently 4 main Prime Government US Contractors. These Prime Contractors are all hardware companies, namely:
- Lockheed Martin Corp
- Raytheon Technologies Corp
- General Dynamics Corp
However, there is no software prime. Palantir Technologies may be the first.
Shyam Sankar stated in an exclusive call month ago, 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.
Fundamentally if Palantir were to become the first Government Prime Software contractor, this would revolutionise the way contracts are delt, potentially leading to more solid and consistent revenue streams within the Governmental sector.
Piper Sandler On Palantir Government Business:
The new IL-6 security clearance gives Palantir investors more optimism regarding the future of the Governmental business. Piper Sanlder mentioned their optimistic outlook regarding the Palantir Government business.
Palantir has been depending relationships with Governmental customers since inception, over 10 years ago. These relationships have developed deeply, and Palantir is now the cornerstone software solutions within the US Government specifically. Below is a list of all of Palantir’s Governmental contracts thus far, and should highlight the stickiness of the software solution.
- Health & Human Services
- Department of Homeland Security
- Veteran Affairs
- Department of Energy
- Department Of Justice
Whilst many analysts of Wall Street believe that Palantir is going to suffer further deceleration within the following quarters based on “poor-product-market-fit” within Governments, this argument seems inherently flawed.
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”. The investment firm state how, Palantir has gained more traction with agencies beyond defence, such as VA and DOE, which will provide ongoing upside.
To add to this, in consideration of the fact that Palantir has recently launched their product update, Gotham Europa, this shows Palantir’s ambitious attitude to integrate their software more aggressively across European nations.
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.
Sandler estimate that of the 44% of revenue Palantir gains from the US Government, it is estimated that at least half of this is generated from the DOD. “It also demonstrated the effectiveness of its data platforms to agencies such as the FDA, NIH, and Air Force in 2020, which could provide it opportunities to grow in future years as it maintains these platforms and expands its partnerships with them.”
“We analyzed PLTR U.S Goverment contracts in an effort to understand traction among various agencies. We found that a substantial portion of U.S. government revenue is undefined (subcontracted through contracts with other companies) or classified (likely a large portion of DOD business); this undefined revenue was 63% in 2021. PLTR expanded the number of contracts with top level departments to nine in 2021, up from six in 2019, according to the data, suggesting a broadening of traction across various government departments.”
The main takeaways Piper Sandler found were that:
1) likely over half of PLTR’s U.S. government revenue comes from the Department of Defense,
2) PLTR saw significant tailwinds and was able to expand its business with some U.S. agencies during the COVID-19 pandemic, and
3) PLTR has had long-lasting relationships with its largest U.S. government customers
“PLTR has been awarded contracts by DOD agencies for licenses to its Gotham platform; providing a data platform to coordinate decisions, resources, and joint operations; testing end-to-end approaches to AI for defense use cases; and examining data and developing algorithms”.