By Jeremy C. Owens
Palantir Technologies Inc. was known for years as being the most secretive unicorn startup in Silicon Valley, but going public has turned the company from a shrinking violet to an exploding fountain of information.
Palantir /zigman2/quotes/221054928/composite PLTR -5.77% publicly filed for a direct listing on Aug. 25, and plenty has happened in the month since.
After all of that, The Wall Street Journal reported Sept. 24 that Palantir had informed investors that shares were expected to begin trading around $10 apiece, a price that would give the company a valuation of roughly $22 billion. The New York Stock Exchange estabished a reference price of $7.25 Tuesday evening, and shares are expected to begin trading on that exchange Wednesday under the ticker symbol PLTR.
Here is what you need to know about Palantir’s direct listing.
The core reason Palantir has been both secretive and controversial since its founding in 2003 is that it began with money from the Central Intelligence Agency to develop data-crunching software for the government. Palantir received original funding from In-Q-Tel, the CIA-funded nonprofit venture-capital arm, to develop its first major product, Gotham, which launched in 2008 to help government entities with surveillance and warfare planning, among other uses.
“Defense agencies in the United States then began using Gotham to investigate potential threats and to help protect soldiers from improvised explosive devices,” Palantir disclosed. “Today, the platform is widely used by government agencies in the United States and its allies.”
Palantir has moved beyond that business, however, and started serving corporate clients in 2016 with its second platform, Foundry. Palantir now says that a little more than half — 53% — of its customers come from the private sector instead of government, even as Palantir considers different divisions in the same government departments as separate customers.
While the majority of Palantir customers may be commercial businesses, that doesn’t mean the majority of its revenue comes from those contracts. Palantir had only 125 customers in the first half of this year that paid an average of $5.6 million each in 2019, but the top 20 customers spent an average of $24.8 million in spending in 2019. And its three largest customers — which Palantir does not name — account for up to a third of the company’s revenue and on average have been customers since well before Foundry was launched.
“Our top three customers together accounted for 33% and 28% of our revenue for the years ended December 31, 2018 and 2019, respectively, and 31% and 29% of our revenue for the six months ended June 30, 2019 and 2020, respectively,” the company disclosed. “Our top three customers by revenue, for the year ended December 31, 2019, have been with us for an average of 8 years as of December 31, 2019.”
Palantir said it had contracts with government entities for an additional $1.2 billion in business on its books, and an additional $2.6 billion in “indefinite delivery, indefinite quantity” contracts that are not counted because the funding has not yet been determined.
“Palantir is best known for its work with the U.S. government,” MKM Partners executive director Rohit Kulkarni wrote recently in an examination of Palantir. “This includes a contract with the Army to develop a new intelligence interpretation platform, worth an estimated $823mn. Palantir also worked with U.S. Customs and Border Protection to track immigrants at the border , and in 2018, was found to be secretly testing its predictive policing software in New Orleans .”
Palantir revealed in its SEC filings that revenue grew to $742.6 million in 2019 from $595.4 million in 2018, while losses stayed even at more than half a billion dollars a year — $579.6 million in 2019 and $580 million in 2018. In the first six months of this year, Palantir recorded a loss of $164.7 million on revenue of $481.2 million, after recording a loss of $280.5 million on sales of $322.7 million in the same period of 2019.
In their presentation to investors, Palantir executives stressed the revenue growth that it has experienced since moving into the commercial sector with Foundry.
“We did $743 million in revenue last year, but I’d like to go back to 2017, when we did just over $500 million in revenue and only grew at a rate of 11%. Nothing exceptional about that,” Kevin Kawasaki, Palantir’s head of business development, told investors. “What is exceptional is that we’ve accelerated the growth in revenue every year since. In 2020, we’ve grown 49% through the first half of the year and we’ve also grown our gross margins to 78%. So we’re growing 49% on an extremely large base with 78% gross margins. We don’t see anyone else doing this.”
The company predicts it will continue to post strong revenue growth in the coming months, though the percentage gain will decline. In its forecast, Palantir calls for revenue growth of 46% to 47% in the third quarter, 41% to 43% for the full year of 2020, and greater than 30% in 2021.
Even with that forecast, Kulkarni was not impressed with what he termed “very limited disclosure” from Palantir, especially when compared to information disclosed by other software-as-a-service, or SaaS, companies going public of late.
“Despite having a 15+ years operating history, we found Palantir’s S-1 filing fairly light on customer trends, SaaS metrics. Also, the company has disclosed only six trailing quarters worth of financials,” Kulkarni wrote.