The Palantir S-1 finally dropped yesterday after TechCrunch spilled a bunch of its guts last Friday. You can read the filing here, if you are so inclined.
Today, however, instead of our usual overview, I have a different goal: We’re going to be a bit more specific.
It’s fun and easy to clown on Palantir’s ridiculous ownership structure, in which a few dudes have decided that, in perpetuity, they must remain co-Lords of the Ring. And, sure, the company is smaller in terms of revenue-scale than many expected (a bit more Hobbiton than Bree, really). And, yes, its net losses are somewhat staggering (post-Helm’s Deep Saruman?), reaching nearly 100% of revenue in 2018.
But things have gotten better in Palantir-land (Mordor?) in recent quarters, which we should note.
So, in light of the generally negative reviews of Palantir’s finances (similar to what is left of Moria?) that I’ve seen in the media and from investors both publicly and privately, here are the bullish bits about the impending direct listing.
The good stuff
In brief, falling net losses in absolute and percent-of-revenue terms paint the picture of a company that is past a high-burn period, allowing profitability to continue to improve; improving gross margins point to a company that is less service-focused and more software-driven over time; the company’s falling operating cash burn is encouraging, and new customer revenue appears sharply higher in 2020 than 2019.
Let’s examine each in order:
- Falling net losses in absolute terms: Palantir lost fractionally less money in 2019 than 2018, but it was a decline all the same. More recently, the first two quarters of 2020 have seen Palantir cut its net loss from $280.5 million in 2019 to $164.7 million. Even better, the company grew during the same period, which means that in percent-of-revenue terms, Palantir did even better.
- Falling net losses in percent-of-revenue terms: Palantir’s 2018 net loss as a percent-of-revenue came to a staggering 97%, a result that improved in 2019 to just 78%. But more recently things look much better, with Palantir losing just 34% of its revenue during the first two quarters of 2020. The company still lost oodles of money, but far less in revenue terms than it managed in preceding years.
- Improving gross margins: In 2018 Palantir had reported gross margins of 72%. In 2019 the same metric dipped to 67%, which is the opposite of the trend you’d want to see from any company approaching the public markets. But more recently, things have gotten better. After reporting gross margins of just 69% in H1 2019, Palantir managed 72% gross margins in H1 2020. That’s back to where it was in 2018, which is good.
- Falling cash burn (maybe): Palantir’s operations only consumed $39 million in 2018, a figure that shot up to $165.2 million in 2019. Then things get a bit wonky with changes to deferred revenue, but, in the end, Palantir’s operating cash burn fell from $340.3 million in H1 2019 to $226.3 million in H1 2020. Both numbers are pretty bad, but improving!
- Rising new customer revenue: Palantir has three revenue categories: acquire, expand and scale. Customers with less than $100,000 in the last year land in the “acquire” bucket, those with at least $100,000 and “negative contribution margin” during the same year are “expand customers.” Larger and contribution-positive customers are demarcated as “scale” customers. Most Palantir revenue come from customers in the second two categories. For example, in 2019 some $565.7 million was generated by “scale” customers out of $742.6 million in total revenue from the year. In 2019 just $600,000 in revenue came from “acquire” customers. This year the company noted that it generated $5.6 million from “new customers acquired during H1 2020,” though they have yet to be assigned a cohort. Given that they are newly acquired, a fair piece of that top line could land in the “acquire” section. Our read of the data is that Palantir is doing a better job landing new customers in 2020 than 2019, which is good.
If you are spending time before bed each night digging more deeply into the filing, you may find other positive nuggets. For example:
- After a flat quarter in Q1 2020, Palantir grew in its most recent period. That’s good. Not growing in Q1 was bad, and Q2 saw more than twice the net loss of the first quarter, but, hey, Palantir added about $22 million in revenue during the period. That’s good, or at least partially so.
Palantir reached a $1 billion revenue run rate in Q2 2020, annualizing its top line from the period. Perhaps it will finally put up the magic number over a 12-month period.
The good news is that Palantir will self-price once it gets out into the market. So we don’t have to worry about it underpricing ahead of trading.
What is it worth? Who knows! The market will tell us soon enough.