Palantir Q2 Earnings Call
Q2 Investor presentation here:
https://investors.palantir.com/files/Palantir%20Q2%202021%20…
Earnings Call transcript here: (I think it’s free?)
https://seekingalpha.com/article/4448650-palantir-technologi…
I sat on the call and started trying to transcribe full sentences, realised quickly it wasn’t going to work as these guys are FAST talkers and were spitting out a lot of numbers, so I just took really short notes, but the full transcript is already on SA and should be on TMF soon if you care to read the whole thing.
They kicked off the presentation with the Meta-Constellation project, where the idea is to connect Palantir’s Edge-AI to a global network of satellites (they had already talked about AI at the Edge by using their software on sensors, drones, etc). This enables them to do a number of things, from tracking signs of fires from above in order to speed up first response, to military applications (of course) - tracking naval fleets, submarine movements, etc.
They were showing a video explaining the whole thing, looked like the plot of a sci-fi/Marvel movie.
Quote: “Overnight, we orchestrated a Meta-Constellation of 237 satellites by working with an array of commercial space companies. These companies have been deploying constellations at the hyperspectral, radar, and e-led sensors into Orbit. And we’re putting all of that power directly into the hands of the frontlines, empowering the edge. It’s one of the largest collaborative sensor constellations ever to see operational news.”
Overall, a few things that stuck with me from the call:
- Reinforced the idea they truly seem to believe they are the best software company in the world.
- “Vision remains unchanged: Palantir wants to be the default operating system for the enterprise and the industry, and the implementation is only accelerating.”
- Management described Palantir as an “Artist colony, not a factory.” “Extraordinarily flat hierarchy”.
- Palantir expect to continue aggressively hiring sales people in the 2nd half of the year. Good.
- Paid off all debt. Palantir is currently debt free. Good good.
- Expect to continue investing heavily in product innovation, partnerships to drive growth. Excellent.
- “It took about 8 years for Palantir to be the OS of Special Operations, 4 years to be the OS of aviation, 2 months to be the OS for COVID research, 2 days to be the OS of Day Zero companies”. Time for implementation is accelerating, is what this means.
- Palantir are really committed to Foundry for Builders - partnerships with startups, having those emerging companies who might be the winners of tomorrow start using Foundry from Day 1. A big chunk of their Total Contract Value is coming from these deals (Celularity, Roivant, Wejo, etc).
- A quote: “Building software for the future, in the present.”
On to the Q&A:
Q: Satisfied with number of new customers?
A: Numbers are strong, customer count accelerating especially in the commercial space, on track to more than double commercial customer base by end of year.
Also happy with deal volume growth.
Q: On the Day Zero companies they’re working with:
A: “Companies we think we will be working with for a very long time. We think using our product will help them win.”
Less than 1% of revenue came from this program in Q2 - long term strategy.
Q: Increase of insider selling?
A: Sales were scheduled, options granted 10 years ago that expire December this year, if they don’t get exercised employee would lose them. (most of this seems to be centered on the CEO Alex Karp)
Q: On forward looking macro and micro trends that might deliver alpha over time.
(condensed, but was something like) If I told an analyst 4 months ago that COVID was not going away, I would have been laughed at. I know this because I did tell them this and I was laughed at over and over again. Humpty Dumpty had a great fall. The world changed and it isn’t going back. We built software for the world we are in now and the world we will continue to be in. We saw that coming. We anticipated the future needs, supply chain will never be the same, but isn’t just about today’s shortages. The old world, it’s fixated on the accuracy of the forecast. The new world is all about how well you manage the error in your forecast. Error is the signal, the error is the opportunity to win. Every industry has been transformed. The reality is that shock will be more frequent. It’s isn’t a one-off. It’s the new norm. Years of investing in mindless inefficiency has resulted in enormous fragility. We are the resilient operating system for future champions.
Q: How will Palantir continue to attract great talent?
Artist colony, not a factory. Don’t come to Palantir if you want a predictable career. Looking for extraordinary people who by definition will be uneven and spiky. How do we maximize their potential? What gamma radiation do you need to turn this Bruce Banner into the Incredible Hulk?
Q: Commercial business QoQ - talk a little more about the drivers to direct sales, a little more color about what’s driving this.
A: It’s an effect of investment in direct sales. Ramping well, really big logos in the quarter, Avis, John Deere, government sector as well, a few wins like the FAA. Impact of direct sales starting to take hold here.
Q: Please talk a little more about the Total Contract Value coming from strategic partnerships. Looking for better understanding of the strategy here.
A: $543 Million of the $925 Million of TCV are from this program. Longer duration in time to revenue recognition. Portion of TCV outside of this program is also very strong at $382M, 33% sequentially. Long term vision here - Karp described how we’re building software for the future in the present. Foundry is for the people who have the ambition to transform industry.
Q: 20 new commercial customers - how many from strategic partnerships program?
Also, how have they increased the modularity of their software?
A: 7 of the 20 came from strategic investment program.
Definitely continuing to invest in modularity - Were able to implement compliant anti money laundering workflows in 2 days, for a EU bank, would be impossible if the software was not modular.
Having reviewed their presentation, here’s a revised and extended version of the highlights for Q2, as some other details from their report surfaced:
PALANTIR Q2 Highlights:
- Revenue of $376M (+49.1% yoy, guidance was 43%)
- Non-GAAP EPS was $0.04, beating estimates by $0.01
- Q2 Adjusted Operating Margin 31% (guidance was 23%)
- Adjusted gross margin improved to 82% yoy (was 80% last year)
- Contribution margin improved to 58% (was 55% last year)
* Commercial revenue grew 28% yoy (last quarter it was 19% yoy) - 90% Growth in Commercial revenue in the US yoy (vs 72% yoy last quarter)
- Added 20 net new customers - so they have 169 total customers (up 13% from last quarter)
* Q2 Total Contract Value booked ($925M) grew 175% yoy - Landed 62 deals of $1M or more
21 deals worth $10M or more (vs 6 last quarter)
30 deals worth $5M or more (vs 15 last quarter) - Commercial customers increased 32% qoq
- Remaining Commercial deal value $2.1Bn, 122% yoy
- Avg Revenue from Top 20 customers grew from $36M in Q1 to $39M this quarter
- In H1 2021, total deal value increased 63% to $3.4 Billion
* Q2 2021, 60 additional sales hires
* Q2 2021, active commercial pilots up by 26% since end of April (pipeline acceleration) - Government revenue grew 66% yoy in Q2 2021 (new/renewed deals with US Army, Air Force, Coast Guard, HHS, and CDC)
Q3 Guidance: (seems to include a lot of sandbagging)
Revenue $385 Million
Adj Operating Margin 22%
Full Year Guidance:
- Adjusted FCF in excess of $300M (was in excess of $150M)
- Continue to expect Annual Revenue Growth of 30% or greater for 2021 through 2025
So, seems to me Palantir have a nice war chest, are debt free, aggressively expanding their sales team, accelerating time to implement within their clients, and accelerating the growth of the Enterprise side of their business, adding new commercial customers while renewing and adding new contracts on the Government side as well. It seems like they will end this year with revenue in the neighbourhood of $1.5Bn. Also, they are partnering with and investing in several startups who will be using their software products from the start, and possibly lead to more tech innovation.
Seems most of the bear case hangs on the Stock Based Compensation, which is still pretty heavy and will not be going away any time soon.
At the time of writing this, stock price is up ~10% on the back of the report.
I’d love to get some input on this one from other board members, especially from the most experienced investors on the board. Seeking Alpha have a lot of articles about PLTR, but I don’t really trust any of them.
Long PLTR, ~11%
- Luis