Data analytics and surveillance firm Palantir has lifted the lid on its finances after announcing it is finally going public with a direct listing on the New York Stock Exchange — opening its filing with an unusual letter from CEO Alexander Karp that emphasised the company’s support for defence and the public sector.
The controversial software company, co-founded by Facebook investor Peter Thiel, pictured below, made its filing with the US Securities and Exchange Commission (SEC) public on Tuesday. It is pursuing a direct listing rather than a traditional bank-backed IPO, a route also used by tech start-ups Slack and Spotify for their listings.
Palantir works closely with the security and defence communities, providing data clean-up and analytics services to Government and military organisations to aid their counter-terrorism efforts. It also offers a similar service to commercial clients around.
(Gotham, its first product, was launched for analysts at defense and intelligence agencies who were mapping relationships by hand. It was designed to “identify patterns hidden deep within datasets, ranging from signals intelligence sources to reports from confidential informants” and is widely used in war theatres by the US).
It has received criticism for its work with a number of US Government agencies, including the CIA and Immigration and Customs Enforcement (ICE), for whom it provided digital profiling tools used in deportations.
Details of its finances have remained largely opaque. Its SEC filing (Palantir aims to list under the symbol “PLTR” with common stock trading anticipated to begin on September 24) provided a rare window into the firm’s outlook.
1: Palantir Makes Heavy Losses
While the growth-at-all-costs model of most Silicon Valley startups is hardly unusual — likewise for their sustained losses — Palantir’s wealth of public sector contracts has been thought by some observers to be hauling it close to profitability.
Not so. Palantir revealed it has never made a profit since it was founded in 2003. Though it saw revenue grow 25% in 2019, to $742.6 million, its losses remained broadly static, coming in at a hefty $579.6 million in 2019 (2018: $580 million).
“We expect our operating expenses to increase, and we may not become profitable in the future,” the company warned in its SEC filing. (Its listing will be an interesting barometer of investor interest in loss-making tech companies following the high-profile failure of WeWork’s IPO last year and Slack’s stagnation).
As of July 31, 2020, Palantir had an aggregate of “$200.0 million of indebtedness outstanding under our secured credit facility” it added.
2: Two Clients Account for 21% of 2020 Revenue
Government contracts accounted for 54% of Palantir’s revenue in the first half of 2020, according to the filing, bringing in $257 million, a 76% year-on-year uptick.
The company has worked with 125 public and private sector clients this year, with the former including the US Army, Navy, Air Force, Agriculture Department and the Securities and Exchange Commission itself.
One unnamed public sector client was responsible for 11% of H1 revenue, Palantir reports, while a major (also unnamed) private sector business accounted for 10% of income. As of June 30, 2020, the deal value of the contracts awarded by government agencies in the United States and allied countries was $1.2 billion.
3: No to China, Yes to “Western Liberal Democracy”
Palantir software is deployed across 36 industries in more than 150 countries, but not China. It says it is selective about the Governments it works with, and will only engage with those “whose positions or actions we consider inconsistent with our mission to support Western liberal democracy and its strategic allies.”
“Our leadership believes that working with the Chinese communist party is inconsistent with our culture and mission”, Palantir noted in its filing.
“We do not consider any sales opportunities with the Chinese communist party, do not host our platforms in China, and impose limitations on access to our platforms in China in order to protect our intellectual property, to promote respect for and defend privacy and civil liberties protections, and to promote data security.”
4: Silicon Valley? We’re Not Like You
CEO Alexander Karp used the filing as an opportunity to stick the boot in to Silicon Valley’s big boys for their use of customer data. In his CEO’s letter, he wrote that though Palantir was founded in Silicon Valley, “we seem to share fewer and fewer of the technology sector’s values and commitments.”
Defending his company’s business model, Karp wrote: “From the start, we have repeatedly turned down opportunities to sell, collect, or mine data. Other technology companies, including some of the largest in the world, have built their entire businesses on doing just that. Software projects with our nation’s defense and intelligence agencies, whose missions are to keep us safe, have become controversial, while companies built on advertising dollars are commonplace.
Karp, dubbed a “deviant philosopher” in a compelling 2013 profile, added: “Americans will remain tolerant of the idiosyncrasies and excesses of the Valley only to the extent that technology companies are building something substantial that serves the public interest. The corporate form itself — that is, the privilege to engage in private enterprise — is a product of the state and would not exist without it.
“Our software is used to target terrorists and to keep soldiers safe. If we are going to ask someone to put themselves in harm’s way, we believe that we have a duty to give them what they need to do their job. We have chosen sides…”
5: Risks: We’ve Seen a Few
Like all startups, Palantir both relies on and is troubled by the cloud hyperscalers, noting that it relies on the “technology, infrastructure, and software applications, including software-as-a-service offerings, of certain third parties, such as AWS and Microsoft Azure” in order to host or operate some or all of certain key platform features or functions of our business, including our cloud-based services”
Yes these same actors (not explicitly named) are implicit threats: “Some of our larger competitors have substantially broader and more diverse product and service offerings and may be able to leverage their relationships with distribution partners and customers to… incorporate functionality into existing products to gain business in a manner that discourages customers from purchasing our platforms…”
Implementation complexity is also a challenge, despite CEO Karp’s introductory letter, in which he notes that “the enterprise software industry’s focus on custom software tools and applications is misplaced… Our partners require… generalizable platforms for modeling the world and making decisions. And that is what we have built.”
Despite this pitch, implementations are typically customised and challenging. Those reading on would find that spelled out in the SEC’s mandatory risks section: “Our platforms and services are complex and are deployed in a wide variety of network environments. Implementing our platforms can be a complex and lengthy process since we often configure our existing platforms for a customer’s unique environment.”
(Palantir says it has cut the time required to install and start working with its software “five-fold since Q2 2019 to an average of 14 days in Q2 2020”.)
6: A Renewed Focus on Commercial Customers
Strong public sector relationships aside, Palantir is keen to diversify its customer base, saying it may “increasingly focus on… [opportunities in] banking, financial services, healthcare, pharmaceutical, manufacturing, telecommunication, automotive, airlines and aerospace, consumer packaged goods, insurance, retail, transportation, shipping and logistics, and energy industries”
Investors, however, should not expect any dividends.
“We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not anticipate declaring or paying any dividends to holders of our capital stock in the foreseeable future. Stockholders must rely on sales of their Class A common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment.”