Summary

• Palantir Technologies Inc build software that empowers organizations to effectively integrate their data, decisions, and operations at scale. It started business by builds software for the intelligence community in the United States to assist in counterterrorism investigations and operations. Later began working with commercial enterprises, who often faced fundamentally similar challenges in working with data.
• PLTR have built three principal software platforms, Palantir Gotham (“Gotham”), Palantir Foundry (“Foundry”), and Palantir Apollo (“Apollo”). Gotham and Foundry enable institutions to transform massive amounts of information into an integrated data asset that reflects their operations.
• PLTR’s customer acquisition strategy targets large-scale, hard-to-execute opportunities at large government and commercial institutions.
• PLTR generates revenue from the sale of subscriptions to access its software in hosted environment along with ongoing O&M services (“Palantir Cloud”), software subscriptions in customers’ environments with ongoing O&M services (“On-Premises Software”), and professional services.
• In 2022, the company experienced significant growth in sales, with total sales reaching $1,905.87 million. This marked an increase of $363.98 million or 23.6% compared to the sales figure of $1,541.89 million in 2021.
• The company's gross profit for 2022 amounted to $1,497.32 million, indicating a substantial difference of $294.83 million or 24.5% from the gross profit of $1,202.49 million in the previous year, 2021. 
• Additionally, the company's operating profit in 2022 showed a significant increase, totaling $-161.2 million. This marked a higher operating profit by $249.85 million compared to the operating profit of $-411.05 million in 2021.
• The net profit for the year 2022 was $-373.71 million, reflecting a decrease of $146.67 million or 28.2% compared to the net profit of $-520.38 million in 2021.
• Moreover, the diluted earnings per share (EPS) for 2022 were reported as $-0.18. This marked an increase of $0.09 or 33.3% compared to the diluted EPS of $-0.27 in 2021.

Brief Company Overview

Palantir Technologies Inc (PLTR) build software that empowers organizations to effectively integrate their data, decisions, and operations at scale. It started business by builds software for the intelligence community in the United States to assist in counterterrorism investigations and operations. Later began working with commercial enterprises, who often faced fundamentally similar challenges in working with data. PLTR have built three principal software platforms, Palantir Gotham (“Gotham”), Palantir Foundry (“Foundry”), and Palantir Apollo (“Apollo”). Gotham and Foundry enable institutions to transform massive amounts of information into an integrated data asset that reflects their operations. For over a decade, Gotham has surfaced insights for global defense agencies, the intelligence community, disaster relief organizations and beyond. And Foundry is becoming a central operating system not only for individual institutions but also for entire industries. Apollo is a cloud-agnostic, single control layer that coordinates ongoing delivery of new features, security updates, and platform configurations, helping to ensure the continuous operation of critical systems and allowing customers to run their software in virtually any environment. Recent crises and systemic shocks, such as the ongoing COVID-19 pandemic and the ongoing Russia-Ukraine conflict, have made clear to many of customers that accommodating the extended timelines ordinarily required to realize results from implementing new software solutions is not a viable option. As a result, customers are increasingly adopting software, which can be ready in days, over internal software development efforts, which may take months or years.

PLTR’s customer acquisition strategy targets large-scale, hard-to-execute opportunities at large government and commercial institutions. The high installation costs, high failure risks, complexity of data environments, and the long sales cycles associated with these opportunities raise the barriers to entry for competition. The larger, more complex, and more technologically demanding the problem, the more likely the success of the company. Additionally, the company's focus in the short term remains making its principal software platforms available to an increasingly broad swath of the potential market. When it comes to working with defense and intelligence agencies, PLTR’s software is used by individual organizations and is also used to enable the sharing of information and collaboration across agencies and countries.

As of September 2023, the company had a 52-week share price range of $5.92 to $20.24. The forwarding P/E ratio of the company is 64.94 times, the price-to-sales ratio (ttm) is 16.52 times, the profit margin is -2.35%, the operating margin is 1.89%, the return on assets (ttm) is -1.13%, the return on equity is -1.61%, and the diluted earnings per share (ttm) is $-0.02. The aggregate market value of the common stock held by non-affiliates of the registrant, based on the closing price of the shares of Class A common stock on June 30, 2022 as reported by the New York Stock Exchange on such date was approximately $16.6 billion. Shares of the registrant's common stock held by each executive officer and director and by each other person who may be deemed to be an affiliate of the registrant have been excluded from this computation. This calculation does not reflect a determination that certain persons are affiliates of the registrant for any other purpose. As of February 14, 2023, there were 1,997,726,022 shares of the registrants’ Class A common stock outstanding, 102,656,175 shares of the registrant’s Class B common stock outstanding, and 1,005,000 shares of the registrant’s Class F common stock outstanding.

Recent Developments

• In Q1 2023, PLTR achieved remarkable success by closing a substantial number of deals, with 64 transactions in total. These deals represent the culmination of contracts valued at a minimum of $1 million each. It is noteworthy that 22 of these deals had a minimum contract value of at least $5 million. Additionally, an impressive 8 out of the 64 deals reached a threshold of at least $10 million.¹
• In May 2023, the company announced a multi-year contract with United States Special Operations Command (SOCOM) worth up to $463 million to support their AI-enabled mission command platform.²
• In Q2 2023, PLTR continued its strong performance by successfully closing a total of 66 deals. These deals encompassed a wide range of contracts, with each having a minimum contract value of $1 million. An impressive 30 out of the 66 deals during this period exceeded a substantial threshold of at least $5 million in contract value. Furthermore, an outstanding 18 of these 66 deals were valued at a minimum of $10 million each.³

Recent Financing Activities

• In October 2014, the Company entered into an unsecured revolving credit facility, which has been subsequently secured by substantially all of the Company’s assets and amended from time to time. The March 2022 Amendment provided for, among other things, an extension of the revolving loan facility maturity date to March 31, 2027 and an increase of $100.0 million to the lenders’ revolving commitments for total revolving commitments of $500.0 million.
• The July 2022 Amendment provided for, among other things, a new incremental delayed draw term loan (“DDTL”) commitment in an aggregate principal amount of up to $450.0 million, upon the terms and conditions set forth in the 2014 Credit Facility, as amended, with new and existing lenders. The DDTL commitment is available to draw upon through July 1, 2023 and any drawn amounts will mature on March 31, 2027.

Financial Performance Highlights

Q2 2023 Highlights

In the second quarter of 2023, the company reported sales of $533.38 million, marking an increase of $60.38 million or 12% compared to the second quarter of 2022, which had sales of $473 million. This growth in sales reflects the company's improving revenue performance. The net profit for the second quarter of 2023 was $28.18 million, representing an increase of $70.18 million when compared to the net profit of -$42 million in the second quarter of 2022. This indicates a turnaround in profitability, with the company now reporting positive net earnings. Furthermore, the company's diluted earnings per share (EPS) for the second quarter of 2023 increased to $0.01, signifying a positive change of $0.02 or 200% compared to the diluted EPS of -$0.01 in the second quarter of 2022.

Annual Performance Highlights

In 2022, the company experienced significant growth in sales, with total sales reaching $1,905.87 million. This marked an increase of $363.98 million or 23.6% compared to the sales figure of $1,541.89 million in 2021. The company's gross profit for 2022 amounted to $1,497.32 million, indicating a substantial difference of $294.83 million or 24.5% from the gross profit of $1,202.49 million in the previous year, 2021.  Additionally, the company's operating profit in 2022 showed a significant increase, totaling $-161.2 million. This marked a higher operating profit by $249.85 million compared to the operating profit of $-411.05 million in 2021. The positive shift in operating profit indicates the company's efforts to reduce losses and improve its financial performance. The net profit for the year 2022 was $-373.71 million, reflecting a decrease of $146.67 million or 28.2% compared to the net profit of $-520.38 million in 2021. Moreover, the diluted earnings per share (EPS) for 2022 were reported as $-0.18. This marked an increase of $0.09 or 33.3% compared to the diluted EPS of $-0.27 in 2021. The change in diluted EPS indicates a relative improvement in reducing net loss.

Revenue increased primarily from customers in the United States. Revenue growth slowed compared to the prior year as a result of increased delays in the completion of the U.S. government budgeting process when compared to their budgeting process in the prior year. Of the increase, $151.1 million was from government customers existing as of December 31, 2021. Generally, increases in revenue from existing customers are a result of expanded use of our products and services within their organizations. Revenue from commercial customers increased by $189.6 million, or 29%, for the year ended December 31, 2022 compared to 2021. Of the increase, $96.8 million was from new customers as of December 31, 2021, of which $27.0 million was revenue from customers with which we had entered into concurrent Investment Agreements.

Gross margin for the year ended December 31, 2022 increased by 1% compared to 2021. Gross margin increased as a result of revenue growth outpacing costs of revenue. The primary cause of this growth rate variation was the decrease in stock-based compensation expense and related expenses in cost of revenue relative to total expense growth as compared to the prior year.

Operating Activities: Net cash provided by operating activities was $223.7 million and $333.9 million for the year ended December 31, 2022 and 2021, respectively. The decrease was primarily driven by timing of payments to vendors and timing of the receipt of payments from customers.

Investing Activities: Net cash used in investing activities was $45.4 million and $397.9 million for the year ended December 31, 2022 and 2021, respectively. The decrease in cash used in investing activities was primarily due to a reduction of purchases of alternative investments and marketable securities, as well as increases from cash acquired from business combinations and sales or redemption of certain marketable securities.

Financing Activities: Net cash provided by financing activities was $86.0 million and $306.7 million for the year ended December 31, 2022 and 2021, respectively. The decrease in cash provided by financing activities was driven by a decrease in proceeds from the exercise of common stock options, partially offset by the principal repayments on borrowings of $200.0 million made during the year ended December 31, 2021.

Business Overview

PLTR has built three principal software platforms: Gotham, Foundry, and Apollo. This software platforms provide the critical infrastructure needed to integrate its customers’ data and operations and run their software in virtually any environment. The vertically integrated nature of Gotham and Foundry allows users of varying technical abilities to collaborate effectively in the platforms. Data engineers can integrate new data sources, analysts can clean and transform data, data scientists can write models, business users can conduct daily workflows, and senior leaders can make critical decisions. The two platforms can either be used separately or bundled together as a single ecosystem. Data, analyses, decisions, and the metadata around each are secured with fine-grained access controls that propagate from source data to shared analyses. Each platform is comprised of user-facing applications that are targeted to the specific industries and sectors in which they are used. Despite their differences, Gotham and Foundry both serve as central operating systems for customers. Where they vary in specific functionality, they align in approach. Both platforms, backed by Apollo, can be deployed in almost any environment. Similarly, customers can now use Apollo to enable continuous deployment, configuration management, and central software operations management across almost any environment for their own software products.

Gotham

Gotham enables users to identify patterns hidden deep within datasets, ranging from signals intelligence sources to reports from confidential informants. It also facilitates the hand-off between analysts and operational users, helping operators plan and execute real-world responses to threats that have been identified within the platform. Gotham is now used broadly across government functions. PLTR also offers Gotham to commercial customers, including to those in the financial services industry in connection with fraud investigations.

Foundry

Foundry transforms the ways organizations operate by creating a central operating system for their data. Individual users can integrate and analyze the data they need in one place. The speed with which users can experiment and test new ideas is what makes the software stick. Data projects often fail because the steps and methods used to build data pipelines are difficult to understand and recreate. PLTR built Foundry’s backend to solve the root of this problem. The platform’s graphical interface does the rest, allowing users to track and trace their pipelines so they know what the rows and columns in their tables represent and why they are there. All of the company’s commercial customers now use it, as do several of its government customers.

Apollo

PLTR originally built Apollo to enable the continuous delivery of software wherever its customers are: in the cloud, on-premises, or even more rugged environments. Today, Apollo enables the rapid, secure delivery of software and updates across the business. In 2021, the company began offering Apollo as a commercial solution to allow customers to securely deploy their own software in virtually any environment. Apollo provides a single control layer to coordinate ongoing delivery of new features, security updates, and platform configurations.

Revenue Stream

PLTR generates revenue from the sale of subscriptions to access its software in hosted environment along with ongoing O&M services (“Palantir Cloud”), software subscriptions in customers’ environments with ongoing O&M services (“On-Premises Software”), and professional services.

Palantir Cloud

Palantir Cloud subscriptions grant customers the right to access the software functionality in a hosted environment controlled by Palantir and are sold together with stand-ready O&M services, as further described below. PLTR provide continuous access to the hosted software throughout the contract term. Revenue associated with Palantir Cloud subscriptions is generally recognized over the contract term on a ratable basis, which is consistent with the transfer of control of the Palantir services to the customer.

On-Premises Software

Sales of PLTR’s software subscriptions grant customers the right to use functional intellectual property, either on their internal hardware infrastructure or on their own cloud instance, over the contractual term and are also sold together with stand-ready O&M services. O&M services include critical updates and support and maintenance services required to operate the software and, as such, are necessary for the software to maintain its intended utility over the contractual term. Because of this requirement, the software subscriptions and O&M services, which together refer to as PLTR’s On-Premises Software, are highly interdependent and interrelated and represent a single distinct performance obligation within the context of the contract. Revenue is generally recognized over the contract term on a ratable basis.

Professional Services

PLTR’s professional services support the customers’ use of the software and include, as needed, on-demand user support, user-interface configuration, training, and ongoing ontology and data modeling support. Professional services contracts typically include the provision of on-demand professional services for the duration of the contractual term. These services are typically coterminous with a Palantir Cloud or On-Premises Software subscriptions. Professional services are on-demand, whereby it performs services throughout the contract period; therefore, the revenue is recognized over the contractual term.

The government sector contributed a total of $1,071 million making up approximately 56.22% of Palantir's total revenue, while the commercial sector generated $834 million accounting for the remaining 43.78%.

Other Business Information

The timing of customer billing and payment relative to the start of the service period varies from contract to contract; however, the Company bills many of its customers in advance of the provision of services under its contracts, resulting in contract liabilities consisting of either deferred revenue or customer deposits (“contract liabilities”). Deferred revenue represents billings under no cancelable contracts before the related product or service is transferred to the customer. Customer deposits consist of amounts billed and/or paid in advance of the start of the contractual term or for anticipated revenue generating activities for the portion of a contract term that is subject to cancellation by customers. Many of the Company’s arrangements include terms that allow the customer to terminate the contract for convenience and receive a pro-rata refund of the amount of the customer deposit for the period of time remaining in the contract term after the applicable termination notice period expires. In these arrangements, the Company concluded there are no enforceable rights and obligations after such notice period and therefore the consideration received or due from the customer that is subject to termination for convenience is recorded as customer deposits. The payment terms and conditions vary by contract; however, the Company’s terms generally require payment within 30 to 60 days from the invoice date. In instances where the timing of revenue recognition differs from the timing of payment, the Company elected to apply the practical expedient in accordance with ASC 606 to not adjust contract consideration for the effects of a significant financing component as the Company expects, at contract inception, that the period between when promised goods and services are transferred to the customer and when the customer pays for those goods and services will be one year or less. As such, the Company determined its contracts do not generally contain a significant financing component.

Company History

Palantir Technologies, a company founded in 2003 by Peter Thiel, has remained a mysterious but intriguing presence in the tech industry. Named after the "seeing stone" from Tolkien's legendary tales, this company has carved a unique path within the tech world. Contrary to the traditional Silicon Valley tech firm, Palantir has established a distinctive business model that sets it apart in the market.

Unique Business Model and Products

One of the most distinctive aspects of Palantir's operation is its unique business model. The company specializes in data analysis software used by both commercial and governmental institutions in the Western world. This software serves two primary purposes: Gotham and Foundry. Gotham is employed by government and local law enforcement for defense and intelligence purposes, while Foundry assists private enterprises in organizing and interpreting data.

What sets Palantir apart is its personalized approach. Engineers are dispatched to clients to oversee the product's implementation, making it somewhat akin to a consulting firm. This approach grants clients complete control over their data, allowing them to determine its usage. Palantir has developed a reputation for discretion, working primarily with governmental agencies, major corporations, and financial firms, including the US Army, CIA, FBI, and many more.

The Journey to Going Public

In 2020, Palantir made a significant move by deciding to go public on the New York Stock Exchange (NYSE). This decision was a departure from their history of maintaining a low profile. The company's decision to go public did, however, shed some light on their financials. In 2019, Palantir reported revenues of $743 million, marking a 25% year-over-year increase. Yet, they also reported a net loss of $580 million. This financial outlook raised questions among analysts. Despite being in business for 17 years and having secured substantial government contracts, the company's profitability remained uncertain.

Funding History and Valuation Challenges

Understanding Palantir's valuation and financial history can be a challenging endeavor. As of early 2014, the company was valued at $9 billion, with Forbes noting that it was "among Silicon Valley's most valuable private technology companies." In January 2015, the company's valuation reached $15 billion after an undisclosed funding round, securing $50 million in November 2014. This valuation further increased to $20 billion by late 2015 as the company closed an $880 million round of funding. Despite these valuations, Palantir's profitability remained a question mark.

The company has attracted diverse private funders, including Ken Langone, Stanley Druckenmiller, and In-Q-Tel, the CIA's venture capital arm. Notably, Peter Thiel, Palantir's co-founder and chairman, has been a significant shareholder in the company. 

Challenges and Controversies

Palantir's clientele, numbering only 125 clients, poses a challenge. Heavy dependence on US governmental contracts and the controversies surrounding some of these contracts have made the company riskier. Controversial contracts, such as those with the US Immigration and Customs Enforcement (I.C.E.), have sparked criticism and protests from human rights activists.⁴ Moreover, co-founder Peter Thiel's right-wing and controversial views have stirred additional controversy.

The Future of Palantir

The unique technology provided by Palantir is viewed as irreplaceable by most of its clients. The COVID-19 pandemic has underscored the importance of big data for governments and private enterprises. However, the company faces the crucial task of expanding its corporate client base for commercial applications and increasing its profitability. Attracting more corporate clients and maintaining its technological edge will determine Palantir's future success.

References

1. ^ https://www.fool.com/earnings/call-transcripts/2023/05/09/palantir-technologies-pltr-q1-2023-earnings-call-t/
2. ^ https://www.businesswire.com/news/home/20210528005069/en/Palantir-Awarded-111m-Contract-to-Provide-Mission-Command-Platform-for-the-United-States-Special-Operations-Command
3. ^ https://www.fool.com/investing/2023/09/27/as-artificial-intelligence-ai-demand-heats-up-pala/
4. ^ https://www.bscapitalmarkets.com/the-history-behind-silicon-valley-most-mysterious-tech-company.html