Introduction:
Commercial:
Governmental:
Consumption Based Pricing:
NDRR:
SBC:
Profitability:
Outlook:
Introduction:
Palantir earnings released within the past few days, revealing some positive progress, yet also concerning negative outlook for the future of the company. Today, I want to go over the most important principles I look at when computing success of the Palantir business model.
Whilst the quarter, and the year, specifically from a financial perspective has been steady – if somewhat disappointing – the underlying business is chugging along nicely. Whilst there is limited exponentiality present this year, and specifically for the final quarter, the underlying business is steady. I believe that to compute success of an early stage company, qualitative variables are often required in order to compute success. Whilst I am not trivialising financial metrics, fundamentally over a short period of time, often these fail to present the full picture.
I am personally looking to hold Palantir Technologies for the foreseeable future, likely a period of 10 years. Whilst this year and quarter was by no means a dramatic beat – in fact if anything perhaps on the contrary – the company is steadily moving along. Specifically for the intangible metrics of the company, I believe this year, these qualitative factors have fundamentally proven success. Notably, the work within Ukraine this year, has highlighted the superiority of their product successfully. We shall touch upon this later on.
Revenue Is Irrelevant:
Revenue for Palantir, must not be the sole metric looked at when judging their growth and fundamental improvements as a company. For Palantir, based upon their unique sales cycle, this means that revenue – despite an increase within client base – will not show up instantaneously.
Palantir has a sales cycle of:
- Acquire
- Expand
- Scale
During the acquire phase, this is when Palantir achieves initial contact with the organisation, and thus a pilot test continues. This initial phase can actually take upwards of one year, in accordance with commentary from management. However, there is reason to assume that this sales cycle is reducing within time taken. Regardless, the point is that Palantir clients do not show upfront revenue straight away. In fact, it can take multiple years before substantial revenue is achieved.
“The length of our sales cycle, from initial demonstration of our platforms to sale of our platforms and services, tends to be long and varies substantially from customer to customer. Our sales cycle often lasts six to nine months but can extend to a year or more for some customers. Because decisions to purchase our platforms involve significant financial commitments, potential customers generally evaluate our platforms at multiple levels within their organization, each of which often have specific requirements, and typically involve their senior management.”
Now, with knowledge of this, it is clear as to why judging revenue alone is not sufficient for an analysis of Palantir. The reason as to why is because, Palantir new customers do not instantly produce revenue, based upon their unique sales cycle.
Instead, judging customer growth is far more logical, for analysis of the company success.
Commercial:
Moreover on a quarterly basis the growth rate of the commercial customer count peaked this quarter, reaching 260 total commercial clients. This is substantially up from the prior quarter of 228, thus representing a 32 additional commercial customers for the quarter.
I would personally describe this as steady growth, however certainly not exponential.
In knowledge of the fact that Palantir have focused upon the ramping of their sales team, in conjunction with modularisation, this perhaps is indicates somewhat slowing growth for the company. Yet, as noted by an intelligent friend, businesses are like people – they have ups & downs.
When looking at the sales force and commentary from Alex Karp, it is clear that this is still within infancy stages. Alex Karp mentioned that; “a substantial U.S. commercial business, in particular, has emerged in essentially two years, with a fledgling sales force that is still in its infancy and only now taking shape.”
We firstly became aware of the commentary surrounding the sales force, and the increase within this area, back within Q122. Notably, management did reiterate the fact that the full ramping of this sales force is likely to take approximately 9 months. This is mainly due to the invasive nature of Palantir, and the advanced technicalities of the product. Idealistically, as mentioned within the prior few quarters; we should start realising the benefits of the sales force within increased customer count measures soon. Yet, I also understand the macroeconomic forces in play, in which may dissuade incentivisation from an organisational point of view in terms of interest within enterprise software. This macroeconomic force however, is solely a cyclical, short term wave.
Glancing at the revenue growth for the commercial segment on a y/y basis, a substantial 29% growth rate within revenue is apparent. This consists of FY21 commercial revenue at $645M, growing to $834M in revenue for the FY22. As shall be noted momentarily, the weakness – specifically for the commercial side – is seemingly for NON US commercial. Alex Karp noted within his commentary and throughout the year actually that; adoption outside of the US has been weak, mainly due to culture factors at the lack of incentive in regards to adoption of new innovative technologies.
The US Commercial Revenue Growth is frankly hyperbolic over the past few years, consisting of a rapid 67% growth rate from the FY21, to FY22.
As noted, the reason as to why it is vital to look at US Commercial in order to compute success of Palantir is based upon the following reason:
The US, throughout history is known for their atomically engrained culture of entrepreneurialism, and creativity. As someone from the UK – based in London – I am incredibly envious of the cultural spirit that is so deeply rooted within the subconscious minds of Americans. This is despite the fact that the US cultural wars are incredibly fierce – there STILL is a beaming light of innovation and optimism in regards to agility and technology.
Organisations within the US, are exceptionally good at becoming agile & reactive, when times become tough. This is why throughout history, the US has experienced a wave of radical innovations, in which fundamentally changed the course of the world. Some of these are good innovations, whereas some – namely the carcinogenic digital products – perhaps are not so beneficial.
The point being is that the US is a leading variable in regards to technological adoption and innovation. The US leads, and often other nations too follow behind.
Upon inspection of the data, since 2018, the US Commercial Revenue has compounded at a 72% annual growth rate, really representing non linear exponentiality.
CTO Sankar Commentary:
In accordance with CTO 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.
We can be confident within the fact that if Palantir US Commercial revenue is strong, this shall be experienced too elsewhere within the future.
Governmental:
On a yearly basis, US Governmental Growth rose 22%, from $678M to $826M. I would personally characterise this as steady, however also note the clear cyclicality within spending for the Governments. In other words, often revenue realisation is not instant. Instead, contracts can be assigned, and many quarters later – if not longer – revenue is realised for the company.
If you are investing within Palantir, it must be clearly note that; cyclical spending is problematic for the Governmental sector.
For example: the work Palantir has achieved within Ukraine. One must question as to if any of this revenue has been realised, and when this revenue realisation shall be seen. It is likely that for the foreseeable future, revenue realisation for this will take some time – perhaps even years.
As COO Sankar noted; “We will not deprive customers with software – just because the paper work is not there.”
Whilst revenue is an important metric to look at over the longer term, on a shorter term basis, revenue for Palantir is not a useful metric. As noted, this is mainly due to their business model cycle. However, there are other intangible factors that give me optimism in regards to future growth of the company within the Governmental sector. Namely, commentary by management, and events within Ukraine, which holistically show the technological superiority of their products.
To just flesh out these points slightly more. Management noted the following: “US has continuing resolutions” – there is just a different level of interest in what we provide.” As previously stated, revenue realisation can take time, yet the work with Palantir is still occurring – if not accelerating. Moreover, relating to international Government, Alex Karp stated: “International Government – likely to be very strong – Meta Constellation looks like the most cost effective way to defend your country in the world. We are already seeing countries on the boarder of adversaries showing a lot of interest in this product”.
Take together, these points give rigour to the thesis of Palantir, and the expected growth apparent for the Governmental business. It seems likely that these underlying intangible changes, are yet to show up within the commercial business. However, over time, they shall.
Another point I want to flesh out is specifically the events that have occurred within Ukraine, and the central involvement of Palantir. Clearly, in periods of chaos and disorder, innovation thrives. And, notably, Palantir Technologies has been the central pillar for this success for the Ukrainians, in a fight against the world’s 3rd largest military technologies. Whilst consensus pointed towards Russian dominance, this has not been the case. Instead, thanks to Western software – mainly Palantir – Ukraine has been truly transformed into a juggernaut. This is a non trivial feat.
When it comes to the competitive advantages that the company has garnered via this unique work within Ukraine, this shall translate into future products, both for the commercial and Governmental business. Specifically, and interestingly to look at is Artificial Intelligence within the consumer facing context.
Alex Karp noted that, whilst consensus and focus is upon AI within the consumer facing context – namely GPT – AI on the battlefield has arrived already. And, evidence points towards Palantir’s deeply engrained work within this space.
Ale Karp: “Whilst there is an increasing focus on digitalisation of the consumer internet, the most important aspect of AI is actually on the battlefield. In the last 5 years, Palantir has built the core infrastructure needed to power and train AI algorithms.”
Alex Karp noted the fact that all nations, specifically based upon the events within Eastern Europe, are now looking into AI. Furthermore, in terms of the private context, these platforms take multiple years to build, prior to even utilising artificial intelligence. AI can not solely be built without an underling platform.
Important questions must be asked: namely, how does one ensure security, and transparency issues are met? The fundamental takeaway, according to Alex Karp, was the fact that Palantir is the precursor for AI.
Interestingly, whilst Silicon Valley has touted the lack of importance surrounding collaboration with the USG, it is apparent through coverage of Palantir that the organisation is garnering a serious – and undisputable – competitive lead, within the context of AI and software. This is primarily due to, as noted, the battle testing of their software within the hardest situations from a military perspective.
The lessons learned from a military context means that Palantir can leverage these insights into the commercial segment. Once again, a method of really deepening competitiveness and the robustness of their software.
Very few, if any other software organisation, has this ability to garner serious competitive moats within the context.
Consumption Based Pricing:
Smaller Deals Equating To Larger Future Revenues:
CEO: “In Q4 we saw a number of small customers, later convert into large customers. This was mainly within commercial”.
One major concern for Palantir investors over the past few years is the fact that the product is far too invasive, and thus adds a huge level of friction in regards to organisational adoption. Many criticisms stem from this notion that Palantir is failing to capture a large portion of smaller clients, base upon their All You Can Eat type product.
Whereas, this seems to be turning a corner now, and instead the organisation seems to be getting their foot in the door, specifically for smaller clients. The reason as to why this is positive is based upon the notion that whilst revenues initially start small for Palantir, over time they can grow substantially.
One case study I often refer to in regards to revenue exponentially growing over time, is regarding Palantir integration within the Air Force.
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 worth $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.”
Within this case, Palantir partnership originally started at $226K in value (2010 – 2013), however rose dramatically upwards to over $91.5M in value within 2021. This indicates not solely the utility of the platform, but also the ability for initial customers to grow into large contracts within a multiple year timeframe.
The takeaway is that, Palantir must initially aid the adoption of the product – specifically for smaller organisations.
Importantly, the company noted that during Q4, they closed 55 deals of at least $1M dollars. In addition, 11 of these deals equated to over $5M, and 5 of which equated to a value of at least $10M.
Thus, this shows how Palantir is gaining smaller deals, and is easing the friction associated with adoption via smaller initial contracts. This is likely to equate to substantial revenue within the future.
One noticeable takeaway from analysts was as followed: “Prospective clients still find the platform expensive and are looking for initial use cases that can prove a strong ROI.” Thus, this explains how potential customers find the expensive nature of Palantir to be perhaps somewhat of a disincentive. If Palantir can aid the integration of the platform via smaller initial contracts and deals, this is an idealistic way for getting the product within the hands of customers whom later will spend dramatically on the product.
This quarter, there were 39 new deals which equated to a sum within the range of $1M to $5M. This indicates Palantir’s attempt at garnering more market share with smaller initial contract expenses. In comparison to the prior quarter, Palantir deals within the $1M to $5M range, equated to a total of 27. Perhaps, this reveals an increased focus on smaller deals, in order to allow for further integration of the product, and thus increased stickiness.
The most important factor to note is that, whilst revenue initially is limited and small, over time this grows substantially into larger contracts. Thus, consumption based pricing models ease the friction associated with adoption, as the barrier to purchase is lowered greatly.
NDRR:
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.
For Palantir, the NDRR is slowly decreasing over time. The company ended the quarter with a sole NDRR of 115%. This is substantially down from prior quarters, as seen here:
SBC:
“Equity overall, we want to ensure that we align our employees and our shareholders. We plan to keep that alignment”.
David Glazer
David noted that, “SBC is coming down, and has been for the past 6 quarters.”
As noted on Twitter within a conversation with Palantir Vision, I believe that over the past few quarters, Palantir has become increasingly shareholder orientated. This is primarily due to a few main principles: firstly, the use of SBC decline, in conjunction with the reoccurring commentary from management in terms of the value of retail investors.
Palantir is not shy of stock-based-compensation. In fact, the company experienced abrupt levels of SBC solely after their DPO – namely in 2020 Q3. SBC expenses reached upwards of $847M within one quarter alone.
This SBC expense was a one off prearranged agreement, and since has normalised – albeit – still at high levels.
Whilst SBC in excess is a concern for shareholders, there is a silver lining apparent when nuance is applied towards this debate. On one hand, SBC increases the number of shares outstanding, thus diluting current shareholders. This can vastly damage return rates.
However, alternatively, SBC is a method for attracting the most important employees in the world, therefore increasing the probability that success shall occur for Palantir in the future.
A company at the most granular level is solely the collection of individuals towards a set goal. Via this interpretation of a company, it becomes increasingly clear that the way in which humans are incentivised, organised, and structured, is foundational when it comes to success.
For technology and software, there is an exponential trend apparent regarding talent and employees. What can be seen is the following: namely, the top 1% of talent within a set organisation, producing non linear returns in regards to output and productivity. This trend is not apparent in other industries – for example physical labour. However in technology, the top 1% talent globally, literally is responsible for the majority of the value creation.
With understanding of this atomic view of a company, in conjunction with the fact that the top 1% of talent for technology literally produces all of the value, this explains the necessity for SBC.
Whilst I do not want to ridicule the danger of SBC upon returns, there is truth in the fact that in order to attract the best talent, there is a necessity for SBC.
The best talent for companies is an intangible factor that I believe can act as a leading variable in order to predict the future outcome of an investment.
Profitability:
The company reached GAAP net income of $31 million in Q4, the first ever quarter of GAAP profitability, albeit on the back of the acquisition of the Palantir Japan joint venture which contributed $44 million to the bottom line. Management expects the business to be GAAP profitable in FY23.
Whilst this seems to be a method of “manufactured” profitability, I personally am not complaining. This solely, if anything, removes Palantir out from the basket of “unprofitable technology”, and thus from an outsiders point of view, radiates a higher level of perceived value for the company. Wall Street specifically shall favour investments within “profitable” companies.
Conclusion:
To conclude, over the past year, Palantir has been “chugging” along as a business successfully. However, without question, the company has failed to “outperform”, or grow exponentially. In fact, the growth – from a financial front – has been fairly disappointing. However, what keeps my interest peaked within ownership of this business is the fact that the company has truly deep intangible qualities, in which I believe are leading variables when it comes to the future success of the company.
As reiterated within the past, when investigating early stage companies, it is not sufficient to solely look at financials within a vacuum. Instead, there is a necessity for the combination of intangible factors, plus financial figures too, therefore aiding one within the gauging of success.
From an intangible perspective, Palantir has performed fairly spectacularly this year, and therefore I would conclude that the underlying business currents are moving nicely, in which I believe shall translate into future revenue.
For example, how does one gauge the utility of Palantir within Ukraine? Personally, this I believe is incredibly important, as it highlights the fact that Palantir truly is the most important software company within the world – with superior technologies. Often, many investors fail to compute these important metrics, yet I believe these metrics are incredibly important.
