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Palantir Q1 Outlook: Crucial ER between Tailwinds And Headwinds
Palantir Q1 on 9th May. With the stock down 45% YoY, investors hope PLTR will exceed expectations. A misalignment between business performance and stock could create an opportunity for an investment
Palantir ( PLTR 0.00%↑ ) Q1 numbers will be out on 9th May. With the stock down 45% YoY, investors have high hopes that the company will exceed expectations.
Q1 analysts expectations:
$443mn Revenues (+27% YoY) in line with Guidance.
$0.03 Loss per share ($0.07 in 21Q1)
From my understanding, within Palantir's Q1 earnings report, there is likely to be both financial tailwinds and headwinds. For this reason, rather than providing estimations, I want to share details in regards to what the main factors are for Palantir's Q1 earnings:
By understanding the forces that generate numbers, we could more easily assess if the market reacts to earnings in a valid manner. A misalignment could create an opportunity for an investment.
Seasonality in contracts
Seasonality in contracts In general, the first part of the year tends to be weaker than Q3-Q4. This seasonality is due to the cyclicality in relation to clients spending their IT budgets. In order words, while revenues are recurring, contract achievement has seasonality in accordance with the time when contacts tend to be stipulated.
Seasonality mainly comes from:
Government Procurement Cycle (US Government Fiscal Year ends in September)
Commercial Budgeting (Fiscal Year typically ends in December)
Low activity in summer
Ukraine-Russia is a tailwind for $PLTR Government Revenues.
Palantir is built for hard times and war is a context in which Palantir strives. This is an occasion for Palantir to prove its value as the to-go partner when governments need an effective, mission-proven solution.
Currently, we know from COO Shyam's interview, that Palantir is helping to obtain satellite information (as mentioned in our previous article) and manage refugees within the current crisis.
Not only does war generates an immediate need for Palantir solutions, but also increases the governmental pressure to increase Defence spending. Furthermore, Biden recently proposed a $69bn increase in discretionary funding for the Department of Defence to $773bn (+9.8%). Likewise, German Chancellor Scholz proposed the creation of a special $100bn fund to be spent on military procurement and allocation of more than 2% of Germany’s GDP to Defence. It is reasonable to assume other EU countries will feel the pressure to increase their spending as well. As a Palantir has already proven its capability in helping to manage stressful situations - we could expect Palantir to capture a fraction of the spending increase.
In March, as the conflict intensified, Karp wrote a letter urging EU governments to invest in Defence software. That was a clear pitch underlying the importance of software in preserving peace in Europe. “We need an allied technology industry in Europe to step up and fight this battle alongside us to win”. Karp has been saying for years that the world is more dislocated than it seems, and the current situation highlights the validity of this claim.
As a result of the above, I expect the number of Government clients to slightly increase from the 90s, while revenue recognition should arrive in Q2-Q3 - since Palantir often offers pilot programs before closing contracts.
War also creates an indirect tailwind for $PLTR Foundry
Supply chains are still under pressure fuelled by China’s struggle in dealing with the COVID pandemic. This creates a perfect tailwind for Palantir, since Foundry can help companies pursue data-driven decisions in little time. During stressful periods, companies are more prone to pay for solutions which are able to alleviate their pain & therefore derive utility.
SPACs will generate paper losses
In 2020-21 Palantir invested more than $400mn in numerous SPACs as “strategic investments”. Despite the importance of this initiative for Foundry's long term development, in the short term, the value of these participations dropped significantly and will impact GAAP numbers.
For instance, Wejo ($WEJO) and Lilium ($LILM) dropped more than ~50% YTD. Hence, it is reasonable to assume that Palantir will suffer from some $100mn paper loss out of $230mn Marketable Securities as of 21Q4.
These losses impact the Income Statement in terms of Loss from Change in the value of Marketable Securities. However, there is no real cash outflow. In other words, SPAC losses will affect GAAP Earnings, but the Free Cash Flows will not be affected.
Shyam, during the Morgan Stanley interview, said that no further SPAC investments are expected, but he is still open to the idea of alternative strategic investments.
With the current meltdown in tech valuations and the cash availability on the balance sheet, more than $2bn Net Cash, many shareholders would appreciate that move.
Increased Salesforce and modularization should help reach more clients
Palantir is hiring aggressively, especially in the UK, where it reached ~650 employees. The UK now accounts for 20% of the total employees, but only 12% of Revenues. This is a clue & a leading indicator that Palantir is focusing on developing its business in the UK.
From LinkedIn, we know employees in Q1 should be approximately ~3200 (300 more than Q4). The increase is driven by 150 new salespeople hired. According to Karp's guidance, an additional 150 salespeople should be hired by the end of the year. Inevitably this will increase Sales & Marketing expenses creating pressure on margins.
Modularisation and consumption-based contracts.
Shyam and Karp indicated Palantir is working towards modularization of many Palantir solutions as the “monolithic” Foundry solutions seem hard to embrace for IT departments. Spending ~$5mn/y is not so easy to digest. On the contrary, a modular solution could be easily integrated into current workflows and if Palantir delivers their promises, clients would be incentivized to purchase more modules, and overtime will scale into the full stack Palantir Foundry solution.
In addition, Shyam highlighted that in Q1 they closed some consumption-based contracts. This could be a huge boost to Revenues going forward if we think Snowflake Revenues, 100% consumption-based, keep growing by more than 70%.
Recurring revenues offer stability, consumption-based offer scalability.
These contracts are probably from Japan as Palantir quietly launched Data Mesh, a consumption-based product aimed at increasing the efficiency of data architectures and workloads.
SBC should be still high (ouch)
New hiring should contribute to increasing SBC and the negative effect could be relevant for shareholders. The stock price is low, this means that more shares will be given to new employees, in order to reach the target $ package.
In my opinion, we will not see signs of “SBC normalization” until Q3-Q4 since Palantir is hiring aggressively.
Given the current Unrecognized SBC (from RSUs and Stock Options), there should be at least $100mn SBC, so at least 20% of the expected revenues.
Lower margins could create an opportunity
We can see Q1 is expected to be the combination of opposite forces. On the one hand, war should benefit contract acquisitions, on the other hand, hiring and SPACs should have a negative effect.
However, the most important metrics to focus on should be client acquisitions and deal value origination. Palantir incurs expenses when acquires a new client due to sales and marketing and pilot projects. Therefore, big losses coming from client acquisitions could be a sign the business is performing great.
Remember, the first year Palantir generally incurs into losses in the "acquiring" phase. After approximately a year customers start bringing positive contribution. After 5 years clients could bring ~100mn/year as the top three clients.
As numbers will be released, Palantir price could react negatively from the increase of operating costs due. However, if costs are related to a substantial increase in the number of clients, that would be a sign Palantir is executing strongly and benefits of the acquired clients could be been in the coming quarters. That, in my opinion, would create an asymmetry.
Wall Street tends to focus on short term numbers often overlooking the bigger picture. Be prepared!
Join me on Twitter: @arny_trezzi
View expresses are my own. Do not represent Financial Advice.
I own PLTR stocks.