Investors should not be expecting ground-breaking results for this quarter, specifically with guidance at $475M revenue, reflecting solely 21% YoY growth. Clearly this is well below the long-term guidance of 30%.
- Customer Acquisitions:
- Net Dollar Retention Rate:
- US Commercial Revenue Growth:
- Contribution Margin:
Palantir Technologies is reported to reveal earnings for the Q322 on Monday, November 7th. It is necessary as investors that we come into earnings with a few main metrics, and principles to look for. Commonly with investments, specifically in the new age of social media, investors fail to approach earnings with the most vital metrics in mind. This can lead to panic and madness of crowds in many cases.
The bottom line is: it is vital to approach earnings season with an understanding of the most important principles to look for within set companies. This will aid decision making.
Regarding customer acquisitions, this is a leading indicator for future revenues. If Palantir achieves 40 new customers acquired within the quarter, this later translates into 100Ms of dollars in revenue over the following few years.
Just to give an example of how exponential this revenue contract growth can be for one client, let’s use this example within the USG:
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)
There is major evidence to state that Palantir partnerships grow considerably over time. For example, within the DOD there was a recent expansion of the partnership with the Air Force. There was previously a small contract with the Air Force from 2010-2013, which consisted of four contracts wirth $226K each. However, this scaled majorly within the past few years.
The data shows that in April 2020, Palantir signed a contract to license Gotham platform to the Air Force for six months, costing over $2M. Following the pilot program Palantir signed two contracts with the Air Force worth nearly $20M to provide the agency with COVID systems.
“By 2021, the partnership grew to a two-year, $91.5M contract in which PLTR was to provide a data platform for the Air Force to manage resources for its COVID-19 response and coordinate decisions for joint all-domain operations.”
In addition to the above, we know that Palantir is focusing on modularisation of their products increasingly more. Previously it was clear to see that organisations were weary of adoption of an invasive and holistic software product. Instead, what is more beneficial for organisations is adoption of a modularised piece of the product. This would drastically ease the friction associated with adoption for Palantir. Idealistically over time, after initial modularised adoption, organisations consume more over time, thus leading to increasing revenue continuously for Palantir.
To add, it has been obviously clearly that over the past few years Palantir has had a bottleneck within the sales force. Alex Karp mentioned within the Palantir Q&A that the companies sales force still equates to around 1% of the overall employee headcount.
In comparison, Snowflake have a sales and marketing team of 2,247 individuals. In fact, this is close to half of their overall employee headcount for Snowflake, which equates to 4,559 individuals.
Alex Karp mentioned on the earnings call that for Palantir, they currently only have 41 individuals within the company who are fully trained to sell the product. Whilst Palantir have pledged in the past to increase their overall sales team, this will take time. On average it takes around 9 months for an employee to become fully equipped to sell the Palantir software solution.
As investors, we should start to see the initial stages of the sales force ramp up equate into meaningful impacts on the business. Whilst I understand that this sales force ramp up takes time, there has been a considerable amount of time since Palantir first mentioned this notion of increasing the sales force. Thus, it does not seem unrealistic to assume that this ramp up should start equating into customer acquisitions either this quarter, or within the following quarters specifically.
I pose the question, if Palantir really does have supernatural product capabilities, why is customer acquisition not more impressive?
For Q322, it should be expected that Palantir acquires more than 40 new customers this quarter (at least).
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.
NDRR shows how much consumption of the product is occurring over time with existing clients. This is very important for Palantir, in order to keep the flywheel spinning.
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.
It is important to understand the split for NDRR figures. Within the US commercial sphere, past data indicates a NDRR of 150% within the US commercial sector. However, on an international basis, NDRR is 103% within the commercial sector.
This figure of 150% NDRR within the US commercial sector should give us optimism, especially considering the fact that the US is often a leading indicator of Palantir’s success within Europe, and elsewhere in the world.
US Commercial Revenue Growth:
The US revenue growth is a metric that has major importance based on the deep-rooted culture and structure of American society and business. Specifically, the fact that the US is a leading indication of adoption for Palantir technologies.
According to COO Sankar, Palantir has focused their efforts over the last 2 years on, “can we get it to work really well in one place” – which is the US. In other words, Palantir has focused their efforts into the US commercial growth, and then will expand the same strategy globally once this US strategy has been crystallised.
The importance of the US commercial space is due to the fact that the US has a unique ability to adopt new technologies the fastest, whilst also being agile and resilient within periods of change. Alex Karp has reiterated within multiple earnings calls his applause and optimism for the future of the US, specifically based on the notion that US companies historically have adopted new forms of technology faster than any other nation.
To put simply, the United States is, and has been, a leading indicator for technological adoption and innovation.
Thus, the United States is a leading indicator of Palantir’s success.
When looking from a macro, holistic perspective, it seems reasonable to assume that companies will be looking towards deflationary technologies in order to cut costs and save time. There are two main principles that lead me to this conclusion. In consideration of the higher costs of capital, and the higher cost of labour, this has led me to conclude that deflationary technologies are likely to thrive within the modern environment.
Cost pressures should make companies accelerate investments in automation and productivity-enhancing technologies. Many of these technologies are inherently deflationary.
While cyclical forces tend to deter investment in an uncertain macro environment, we believe structural changes in demographics, energy policy and security, and an aging capital base make technologies focused on cost reductions and productivity more valuable.
Importantly to note, these deflationary adoptions are longer term changes that will probably be experienced over a matter of 3 – 5 years. It could be argued that this notion of deflationary technological adoption is far too premature.
Regardless, the bottom line remains that deflationary technological adoption is going to occur eventually. It seems reasonable to mention that the US will be a nation that thrives and takes the lead with this introduction and rapid adoption of new deflationary technologies.
There is no doubt that the US commercial growth is exponential:
90% Q2 2021
10% Q3 2021
132% Q4 2021
136% Q1 2022
120% Q2 2022
Contribution margin is actually one of the most underrated metrics to look at for Palantir.
“Contribution margin, a measure of our efficiency in selling and delivering our software to customers, has improved as well. Our contribution margin in 2019 was 21%. In H1 2020, our contribution margin was 48%, rising from 17% in H1 2019. Most recently, in Q2 2020, our contribution margin was 55%.”
“We define contribution margin as revenue less our cost of revenue and sales and marketing expenses, excluding stock-based compensation, divided by revenue.”
In simple terms, contribution margin shows how efficient Palantir is within selling and delivering software to customers. Contribution margin indicates that Palantir is becoming better and more efficient at getting their software into the hands of customers.