Government Acceleration:
Clear Shift In GTM Strategy:
Total Remaining Deal Value:
Commercial Client Count Is Steady:
Government Acceleration:
For many months now, bear of Palantir have posited forward the notion that the Palantir Governmental business is over and will experience a severe decline. Now whilst there was truth in the fact that this side of the business experienced lumpiness in regarding to contract revenues, it can now be successfully concluded that this lumpiness is due to poor contract cycles from the Government.
Other prior theories included the Government deceleration being down to poor product market fit, or even “smaller vendors competing with Palantir more aggressively”, as stated by Cathie Wood.
It seems exceptionally clear now that we were correct, and this lumpiness is solely down to poor contract timings. Furthermore, COO Sankar noted this more clearly within a recent commentary with analysts:
“We will not deprive customers with software – just because the paperwork is not there.”
It must be said that the Governmental business for Palantir is likely to experience further lumpy spending cycles in the future. Alex Karp actually noted that the company has experience months, quarters, and even years of stagnation when it comes to Government contract allocations in the past. However, importantly over the long term the CAGR is outstanding.
As succinctly stated by Sankar: “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 argument, according to Alex Karp, this will not be a sole “one-off” event for Palantir:
“The significant increase in contract value this quarter was principally driven by the expansion of our work with the United States military to support the deployment of artificial intelligence and machine learning capabilities to soldiers on the front lines.
We furthermore do not view the increase in contract value this quarter as an aberration but rather as a sign of a more fundamental shift in our business, from insurgent outsider to incumbent, particularly in the U.S. market.”
In other words, Alex Karp is reiterating the notion that this spending via the Government will not be a sole “one-off” event, however, instead represents the start of what Alex believes will be a fundamental shift in the spending from the USG on software solutions. In fact, to verify this claim even further, based on the recent contract announcements, it seems illogical to trivialise the spending associated with Government vendors.
What comes to mind is a recent Joint Warfighting Cloud Capability contract, in which is a multi-vendor, enterprise-wide platform for the acquisition of billions of dollars of commercial computing services:
“The new cloud computing deal, worth as much as $9 billion, is meant to connect the military’s most remote edge with its farthest headquarters while bridging classifications and other sensitivities.”
Taking a more philosophical stance, if one adopts the ideology that the recent dynamics in Ukraine and Russia have represented an inflection point in the necessity for software, then this becomes a much more appealing area for Palantir to operate in. In other words, what we have seen in Ukraine and Russia highlights clearly the exponentiality of software solutions. In the past, nations would win a war solely via the combination of wealth, and physical weaponry. However now, this dynamic has changed via the introduction of exponential software solutions.
In other words, exponential software solutions could represent the new nuclear armoury of the digitalised area.
Thus, if one adopts this view of software solutions representing the new nuclear armoury of the digitalised area, this opens up a range of potential spending sprees from Governmental agencies, on software solutions, such as Palantir.
Clear Shift In GTM Strategy:
Within the letter by Alex Karp, a fundamental business shift was seen in terms of GTM and TAM expansions:
“We have at this point essentially captured the market of commercial enterprises and industrial leaders that were first to begin leveraging software to reshape their businesses.
And the remainder are now following.
The shift has been made possible by a more sophisticated and coherent commercial offering, which can now be deployed to new customers within minutes.
In the past, the time and effort required to build relationships with and deliver our software to customers weighed on our ability to expand at a pace commensurate with demand in the market. We were iterating and experimenting with building a software platform, and our customers were iterating and experimenting with us.
It was perhaps a necessary interregnum. Our approach, however, to the acquisition and onboarding of new customers has changed significantly, a shift made possible by a far more systematic and mechanized sales operation.”
This whole GTM strategy is analogous to that of Facebook, whom similarly “monopolised” the top status and ranking fields, later allowing for widespread adoption nationally, and then globally. To explain, Palantir has started via the monopolisation of “commercial and industrial leaders that were first to being leveraging software to reshape their business”. In other words, Palantir has captured the “top” organisations.
However now, there seems to be a clear and apparent change in strategy from management. The focus now, evidently seems to be on capturing other organisations that are further down the “value chain”, namely smaller company’s and institutions.
This seems to be a similar strategy to that of Facebook during their inception phases. The notion of “starting small and monopolising” was popularised by Peter Thiel and has shown to be a strategy of success. Facebook, originally started via the monopolisation of Harvard, later slowly monopolising other “highly respected” colleges in the US. The reasons as to why this is beneficial is not solely due to the easing of friction associated with initial adoption, however also and more relevantly due to Facebook gaining “quality” customers on their platform,
Evidently, if “high status” students at the top universities are using a certain platform, this will incentive adoption for other students in the campus, and eventually around the world. Thus, this was likely a fundamental factor that contributed to Facebook’s early success.
The same is true for Palantir.
Palantir have started via the monopolisation of “high quality” clients. However now, after domination in this area, will move down the value chain to smaller organisations in an attempt to democratise the platform further.
On a slightly unrelated tangent, there is also clearly a change in terms of the “acquisition and onboarding of new customers“.
“Our approach, however, to the acquisition and onboarding of new customers has changed significantly.” – KARP.
I believe that this shift represents a change regarding Palantir’s pricing model, namely the shift towards “consumption-based pricing”, with an emphasis on lowering the barrier to entry.
“Most IT people prefer a small bite in consumption. You can argue whether that’s the right model, but instead of fighting them, it’s probably better to figure out a way to get our product more in their hands. So, that’s kind of the known part. What we’ve been working on recently, which is less known is what we’re really working on. We believe that people are paying a lot now for consumption and compute.” – Alex Karp, Palantir CEO.
In other words, a consumption–based pricing model is a service provision and payment scheme in which the customer pays according to the resources used. This is in comparison to the previous pricing model that was based on “all-you-can-eat”, namely providing everything all at once for organisations.
As reported clearly back in early Q1,
“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.”
Interestingly, C3AI’s CEO recently introduced consumption-based-pricing models too. He mentioned in a quote:
“I’m pleased to announce that C3 AI is transitioning from a subscription model to a consumption-based pricing model, bringing us in line with what is becoming the standard among enterprise SaaS companies,” said CEO Thomas M. Siebel. “We have implemented a new pricing model, a new sales model, a new partner model, and new applications to accelerate sales cycles, accelerate product adoption, increase market share, and increase revenue growth and profitability in the medium and long-term.”
Mr Siebel also mentioned that, “The economic downturn is real. Our customers are scrutinizing big deals as never before, which also makes this a smart time to launch consumption pricing.”
The bottom line is, one you couple the notion that Palantir is changing the way in which customers are acquired and onboarded, this represents a seismic shift in the way in which Palantir is now catering to the adoption of new customers and thus the increase of their TAM. This consumption-based pricing model perhaps will have short term impacts, regarding smaller revenues to start, however eventually over time will lead to the ease associated with adoption of the Palantir solution.
Total Remaining Deal Value:
Total remaining deal value has been stagnant over the past few quarters:
- Q1 22: $3.5B
- Q2 22: $3.5B
- Q3 22: $4.1B
TRDV is defined as the following:
Total remaining deal value is the total remaining value of contracts that have been awarded by our government and commercial customers and includes existing contractual obligations and unexercised contract options available to those customers.
Total remaining deal value presumes the exercise of all contract options and no termination of contracts; however, the majority of our contracts are subject to termination provisions, including for convenience, and there can be no guarantee that contracts are not terminated or that contract options will be exercised.
Included in the $4.1 billion of total remaining deal value is the following activity as of September 30, 2022:
1) $755 million of maximum potential revenue from commercial contracts with corresponding
approved investment agreements, less
2) $99 million of revenue recognized from such commercial contracts during the nine months ended September 30, 2022
In consideration of the superiority of the Palantir software solution, leading to cost declines, improved efficiencies and overall, the production of alpha, this gives Palantir a unique dynamic, namely stickiness. For example, when looking at the recent cases studies from London FoundryCon, it is clear to see that Palantir produces unimaginable benefits for organisations.
Palantir does not just solely produce productivity enhancing technologies, however, also generates alpha for organisations.
Listed below is a recollection of some notable events from FoundryCon:
- Tyson Food CTO:
“”We’ve had about 20 different projects. We’ve created over $200 million in value savings… That’s really hard to beat.”
- John Rickermann MD of Jacob:
“…we dropped 20% at this particular site…That’s direct money for us…because we have 300 sites. You can do the math.”
- Ian Haycock, Group CDO and CITO of Swiss Re Corporate Solution:
“First single use case to produce 9-digit USD impact — and now over 1/3 of the company is an active Foundry user”
- Yves Yemsi COO of Lilium:
“The time to analyze … we reduced by a factor of 6x. We could fly more often. We could learn faster”
The reason as to why Palantir is a supernatural product is based on the production of alpha, thus totally revolutionising the game for organisations. We are entering into a new paradigm in which the necessity for software solutions will be paramount for all organisations. In the near future, there will be a clear differentiating factor between organisations that leverage alpha generating software, in comparison to those that do not.
The productivity multiplier via productivity enhancing software solutions is not trivial.
According to our research, during the next eight years AI software could boost the productivity of the average knowledge worker by nearly 140%, adding approximately $50,000 in value per worker, or $56 trillion globally, as shown below. We expect the value of a knowledge worker empowered with AI to increase ~15% at an annual rate, compared to the 2.7% consensus expectation for annualized wage growth through 2030.
We have estimated the value of the productivity gains based on the “automatability” ––or productivity multiplier––of various labor tasks relative to the wages associated with several job categories, discounted to account for lower international wages, detailed in the US Bureau of Labor Statistics, as shown below.
All of this is to reiterate the notion that, organisations once adopting Palantir, fundamentally are tied to the software solution solely based on the productivity enhancing technological edge Foundry provides.
Thus, it seems highly plausible to state that TRDV is a viable metric to look at in order to give us some insights into the future revenue generation for Palantir. I anticipate that Palantir will capture all, if not the majority of the outstanding TRDV.
Commercial Client Count Is Steady:
This may sound controversial; however, I am personally not overly “concerned” with Palantir’s commercial client count. Whilst at first glance it can seem concerning that revenues decelerated on a quarterly basis so staggeringly, I believe that commercial client count is a more reliable figure to take into consideration.
The clients Palantir acquires now, will translate into meaningful revenue in 1-2 years.
Thus, as Palantir is in the obvious growth phase of the company, there is more utility in looking at client count, in comparison to revenues. This can provide more reliability as to the future outlook for the company.
Now whilst commercial client count was not anything outstanding, the client count on a quarterly basis was “steady”.
On a commercial basis standpoint, over the past 3 quarters the client count is shown here:
- Q1 22: 184
- Q2 22: 203
- Q3 22: 228
Thus, from Q2 to Q3, this represents a steady 12% increase in client acquisitions in the commercial space. This is in comparison to a sole 10% increase from Q1 to Q2. Evidently this is not a staggeringly large increase in customer acquisitions, however this is a positive to understand, especially in light of the “perceived deceleration” in the commercial space.
Revenue seemingly decelerated in the commercial space fairly significantly. However, there seems to be a plausible explanation for this.
Back in March of this year, COO Sankar firstly announced to analysts that Palantir was closing the first of their new “consumption-based” pricing models.
“Most IT people prefer a small bite in consumption. You can argue whether that’s the right model, but instead of fighting them, it’s probably better to figure out a way to get our product more in their hands. So, that’s kind of the known part. What we’ve been working on recently, which is less known is what we’re really working on. We believe that people are paying a lot now for consumption and compute.” – Alex Karp, Palantir CEO.‘
In other words, a consumption–based pricing model is a service provision and payment scheme in which the customer pays according to the resources used. This is in comparison to the previous pricing model that was based on “all-you-can-eat”, namely providing everything all at once for organisations.
Among a range of benefits, the consumption-based pricing model now provides lower revenues initially. However, over time, via this consumption-based pricing model, COO Sankar noted that this enables Palantir and partners to translate these deals into ecosystems, as both parties grow in conjunction.
Thus, whilst consumption-based pricing means lower revenues now, over time this will culminate into large revenue generation.
Based on this knowledge, it seems far more plausible to note that client count precedes revenue growth when analysing Palantir.
The only issue with this thesis is that surely if Palantir adopted the consumption-based-pricing model, this should lead to increased customer acquisitions quarterly. Now whilst there was a slight increase in US commercial customer additions, I would not recognise this uptick as anything substantial.
Patients is required for disruptive technologies.
