Palantir Technologies Inc. (NYSE:PLTR) Q1 2024 Earnings Call Transcript

Palantir Technologies Inc. (NYSE:PLTR) Q1 2024 Earnings Call Transcript May 6, 2024

Palantir Technologies Inc. beats earnings expectations. Reported EPS is $0.08, expectations were $0.07728. Palantir Technologies Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Ana Soro: Good afternoon. I’m Ana Soro from Palantir’s Finance Team, and I’d like to welcome you to our First Quarter 2024 Earnings Call. We’ll be discussing the results announced in our press release issued after the market close and posted on our Investor Relations website. During the call, we will make statements regarding our business that may be considered forward-looking within applicable securities laws, including statements regarding our second quarter and fiscal 2024 results, management’s expectations for our future financial and operational performance, and other statements regarding our plans, prospects, and expectations. These statements are not promises or guarantees and are subject to risks and uncertainties, which could cause them to differ materially from actual results.

Information concerning those risks is available in our earnings press release distributed after the market close today and in our SEC filings. We undertake no obligation to update forward-looking statements except as required by law. Further, during the course of today’s call, we will refer to certain adjusted financial measures. These non-GAAP financial measures should be considered in addition to, not as a substitute for, or in isolation from GAAP measures. Additional information about these non-GAAP measures, including a reconciliation of non-GAAP to comparable GAAP measures, is included in our press release and investor presentation provided today. Our press release, investor presentation, and other earnings materials are available on our Investor Relations website at investors.palantir.com.

Over the course of the call, we will refer to various growth rates when discussing our business. These rates reflect year-over-year comparisons unless otherwise stated. Joining me on today’s call are Alex Karp, Chief Executive Officer; Shyam Sankar, Chief Technology Officer; Dave Glazer, Chief Financial Officer; and Ryan Taylor, Chief Revenue Officer and Chief Legal Officer. I’ll now turn it over to Ryan to start the call.

Ryan Taylor: We started the year exceedingly strong with revenue of $634 million, an increase of 21% year-over-year, driven by the momentum of AIP and our continued strong performance in US commercial. Our results also highlight the growing strength of our US government business and our enduring mission-critical work. The continued interest in AIP is loud and clear in the conversations I’m having across our customer base. We’ve shared our plans to capture the market with AIP and our results show that our strategy is not only succeeding, it is accelerating. While still early days, our focus is on building the foundations of a long-term business. We intend to relentlessly continue landing new customers and subsequently expanding those engagements as our products gain traction and have meaningful impact within enterprises.

Not only are we increasing the volume of new customers, but I’m pleased with our ability to grow these new customers as well. With regards to landing new customers, we’ve sustained our high volume of bootcamps with over 915 organizations participating to date to meet inbound demand. We are also seeing substantial deal cycle compression. As one example, a leading utility company signed a seven-figure deal just five days after completing a bootcamp. Another customer immediately signed a paid engagement after just one day of their multi-day bootcamp and then converted to a seven-figure deal three weeks later. We expect the favorable unit economics and higher throughput to continue to accelerate our business. US commercial is where we’re seeing the greatest transformation.

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Q&A Session

While Q1 is seasonally our slowest quarter, AIP adoption by new and existing customers helped drive notable growth in customer acquisition and revenue in our US commercial business. In Q1, we added 41 net new customers in US commercial. Our customer count increased 69% year-over-year and 19% quarter-over-quarter compared to 8% quarter-over-quarter growth in Q1 2023. Excluding strategic investments, our US commercial revenue soared by 68% year-over-year and 22% quarter-over-quarter. New customers span a variety of industries as AIP’s applications seem endless, from the largest independent bottling company in the US to a leading energy and infrastructure company and a multinational airline. In Q1, our US commercial business had customers from 56 of the 74 GICS industries.

As we’re landing new customers, we’re also seeing those customers expanding their work with us. Across my conversations with customers, I’ve seen the recurring theme of them asking me how they can do more faster with enterprise transformations driven by AIP. We’re showing them how they can move their AI strategy beyond chat. Existing customers such as Lowe’s, Cleveland Clinic, and General Mills, among others, are realizing the extensive possibilities of AIP within their own enterprises and increasing their scope accordingly. Lowe’s accelerated its engagement from a starting point of no AI to utilizing production-level AI for over 1,000 customer service agents, resulting in a 75% reduction in overdue tasks. As one of its directors noted, “We achieved this in just four months and onboarded 1,000 users within three weeks of rollout”.

Cleveland Clinic committed to a 10-year expansion deal to deploy more broadly across its hospitals. General Mills expanded the scope of its work further last quarter as its Senior Director noted, “We’re saving on average about $14 million annually, and it’s really only deployed to part of our network as we speak”. We’re seeing rapid expansions within key customer accounts. For example, a Fortune 500 industrials company signed a three-year expansion deal, which increased the annual revenue run-rate of our work with them nearly five-fold compared to our initial engagement with them in 2022. A Fortune 100 retail company started a pilot in Q2 2023, expanded to a use-case conversion in August, then expanded its work to a $12 million ACV enterprise engagement last quarter.

These are just a few examples. More and more customers are expanding their work with us due to AIP and the incredible traction our software has within their organizations. Turning to our US government business, our revenue continued to accelerate last quarter, increasing 8% quarter-over-quarter versus 3% quarter-over-quarter in Q4, with our products every day having critical impact on current world events. We see continued demand for Mission Manager and positive reception to First Breakfast. Last quarter, we were honored the US Army awarded Palantir over $178 million to be the sole prime contractor to build a next-generation targeting node under the TITAN program. This marks the first time that a software company has won a prime contract for a hardware system and exemplifies Palantir’s position as the software prime, opening the door to vast new opportunities.

It is with immense reverence that we approach building and maturing our revolutionary capabilities for our warfighters. In our international government business, we are continuing to ramp up the critical work for delivery of the UK NHS Federated Data Platform as well as providing defense capabilities to allied partners around the world. Looking at our business and its impact broadly, I’m invigorated about the year ahead. We have never had more conviction about AIP and the power of our software, as well as our continued efforts supporting the most critical missions around the globe. I’ll now turn it over to Shyam.

Shyam Sankar: Thanks, Ryan. The clear signal from AIP bootcamps is that AI is for builders. So many anecdotes and quotes from customers all reinforcing the same point. They are getting more done in a day or two in AIP than in a quarter or two without. We have pioneered the approach to getting beyond chat and unlocking the value of LLMs in the enterprise, taking inherently unstructured inputs that are flying around the enterprise, be it emails, slacks, PDFs, images, comments, audio, and turning them into structured actions and outputs. Taking an email from a customer requesting a different product mix and turning it into an actual inventory allocation in the ERP system of record. Taking a health claims denial and programmatically generating the documentation and supporting evidence from the clinical records and contracts.

Automating P&C insurance claims processing and even in government using vision models to narrow candidate products driving food-borne outbreaks at CDC. And we have started rolling out Build with AIP, a series of developer and builder-oriented tutorials and reference implementations that enable builders to ramp quickly on the primitives and power of AIP in practical examples that unlock every employee at every customer. Our growth is being driven by the incredible dynamism of the US commercial market and we believe the US government will follow. With this momentum, we have launched Builder Bootcamps in the US government. The US Army recently issued a memo identifying two Palantir systems, AIDP and Army Vantage as amongst the five total platforms approved for builders.

The US Army’s Artificial Intelligence Integration Center, AI2C at Carnegie Mellon leverages these platforms for half of their active projects and recently built an application for the 18th Airborne Corps with OSDK. Our DoD customer recently hosted a Hackathon showing the value of the open Joint All Domain Command and Control or JADC2 SDK that we have been pioneering. One participant commented: nominating targets with GAIA Assist turns a six-hour workflow into 10 seconds. We continue to invest in Mission Manager and we’ll be extending it to the Edge with our EdgeX infrastructure in US government. Now, customers can use their cloud instance as an integrated development environment for Edge platforms, essentially build, test, and continuously deploy and manage multi-vendor big 10 edge ecosystems.

It covers everything from streaming pipelines, OSDK-backed applications, native Gotham applications, and third-party apps. We are excited with our team of Rockstar partners to deliver on the US Army’s TITAN program. This marks the first time a software company has won a hardware contract, firmly establishing the role of the software prime. We believe the core of this software, Target Workbench will be critical in every cockpit, every vehicle, and every ship. Finally, I’d, I’d like to acknowledge the eye-watering work of our service members and our allies in meeting the moment defending against the massive Iranian attack on Israel. The Gotham investments in JADC2 performed excellently, and we are building even more even faster. I’ll turn it over to Dave to take us through the numbers.

Dave Glazer: Thanks, Shyam. Q1 was a strong start to the year. Revenue growth accelerated to 21% year-over-year in the first quarter, driven by momentum in AIP and our US commercial business and a reacceleration in our US government business. We delivered our sixth consecutive quarter of GAAP profitability, generating a record $106 million of GAAP net income in the first quarter. We also delivered our fifth consecutive quarter of GAAP operating profit, generating a record $81 million of GAAP operating income in the quarter. Adjusted operating margin expanded to 36% in the first quarter, continuing to highlight the strong unit economics of our business. The revenue and profitability outperformance drove a 3-point sequential increase to our Rule of 40 score from 54 in the fourth quarter of 2023 to 57 in the first quarter of 2024.

This was the third consecutive quarter of an expanding Rule of 40 score. Turning to our global top-line results. We generated $634 million in revenue in the first quarter, up 21% year-over-year and 4% sequentially, exceeding the high-end of our prior guidance. Excluding the impact of revenue from strategic commercial contracts, first quarter revenue grew 24% year-over-year and 4% sequentially. Customer count grew 42% year-over-year and 11% sequentially to 554 customers. Revenue from our largest customers continues to expand. First quarter trailing 12-month revenue from our top-20 customers increased 9% year-over-year to $55 million per customer. Now moving to our commercial segment. First quarter commercial revenue grew 27% year-over-year and 5% sequentially to $299 million.

Excluding the impact from strategic commercial contracts, first quarter commercial revenue grew 36% year-over-year and 4% sequentially. We had a very strong quarter of commercial bookings. First quarter commercial TCV booked was $505 million, representing 187% growth year-over-year. Our US commercial business continues to see unprecedented demand driven by momentum from AIP. First quarter US commercial revenue grew 40% year-over-year and 14% sequentially to $150 million, surpassing international commercial revenue for the first time. Excluding revenue from strategic commercial contracts, first quarter US commercial revenue grew 68% year-over-year and 22% sequentially. AIP is driving both new customer conversions and existing customer expansions in US.

In the first quarter, we booked $286 million of US commercial TCV, representing 131% growth year-over-year. Total remaining deal value in our US commercial business grew 74% year-over-year and 14% sequentially. Our US commercial customer count grew to 262 customers, reflecting 69% growth year-over-year and 19% growth sequentially. We generated $149 million in international commercial revenue in the first quarter, representing 16% growth year-over-year, but a 3% sequential decline as a result of continued headwinds in Europe and the revenue catch-up in Q4 that we noted last quarter. We continue to capitalize on targeted growth opportunities in Asia, the Middle East, and beyond. Revenue from strategic commercial contracts was $24 million in the quarter.

We anticipate second quarter 2024 revenue from these customers to decline to between $7 million to $9 million compared to $19 million in the second quarter of 2023. We continue to anticipate 2024 revenue from these customers to be approximately 2% of full year revenue. Shifting to our government segment. First quarter government revenue grew 16% year-over-year and 3% sequentially to $335 million. First quarter US government revenue grew 12% year-over-year and 8% sequentially to $257 million. As Ryan noted, we’re excited to be the sole prime contractor under the TITAN program and we’ll continue pursuing other defense opportunities. We believe we’re well-positioned to see growth in our US government business over the course of 2024. First quarter international government revenue grew 33% year-over-year and declined 9% sequentially to $79 million as a result of the revenue catch-up in Q4 that we noted last quarter and continued headwinds in Europe.

First quarter TCV booked was $904 million, up 128% year-over-year. Net dollar retention was 111%, an increase of 300 basis points from last quarter. The increase was driven both by expansions at existing customers and new customers acquired in Q1 of last year. As net dollar retention does not include revenue from new customers that were acquired in the past 12 months, it does not yet fully capture the acceleration in velocity in our US commercial business over the past year. We ended the first quarter with $4.1 billion in total remaining deal value, an increase of 22% year-over-year and 6% sequentially, and $1.3 billion in Remaining Performance Obligations, an increase of 39% year-over-year and 5% sequentially. As a reminder, RPO is primarily comprised of our commercial business as it does not take into account contracts with an initial term of less than 12 months and contractual obligations that fall beyond termination for convenience clauses, both of which are common in most of our government business.

Turning to margin and expense. Adjusted gross margin, which excludes stock-based compensation expense, was 83% for the quarter. Adjusted income from operations, which excluded stock-based compensation expense and related employer payroll taxes, was $226 million, representing an adjusted operating margin of 36% and marking the sixth consecutive quarter of expanding adjusted operating margins. Q1 adjusted expense was $408 million, up 2% sequentially and 2% year-over-year. Turning to the balance of the year. Given our conviction in the US business, coupled with our margin expansion, we intend to boost investment in resources in the US, including an AIP in specific defense opportunities. While we expect the expenses to ramp starting in Q2 through the back half of the year, we remain focused on calibrating expense growth below revenue growth for the full year in order to continue delivering on our goals of sustained GAAP profitability and GAAP operating income.

In the first quarter, we generated GAAP operating income of $81 million, representing a 13% margin, our fifth consecutive quarter of GAAP operating income and fourth consecutive quarter of expanding GAAP operating margins. We generated first quarter GAAP net income of $106 million, representing a 17% margin, our sixth consecutive quarter of GAAP profitability. First quarter adjusted earnings per share was $0.08 and GAAP earnings per share was $0.04. Additionally, our combined revenue growth and adjusted operating margin accelerated to 57% in the first quarter, a 3 point increase to our Rule of 40 score from the prior quarter. We will continue to strive to maintain this exceptional balance of top and bottom-line performance. Turning to our cash flow.

In the first quarter, we generated $130 million in cash from operations and $149 million in adjusted free-cash flow, representing margin of 20% and 23%, respectively. In Q1, we also repurchased approximately 0.5 million shares as part of our share repurchase program. As of the end-of-the quarter, we have approximately $990 million remaining of the original authorization. We ended the quarter with $3.9 billion in cash, cash equivalents and short-term US treasury securities. We retain access to additional liquidity of up to $500 million through our revolving credit facility, which remains entirely undrawn. Now turning to our outlook. For Q2 2024, we expect revenue of between $649 million and $653 million and adjusted income from operations of between $209 million and $213 million.

For full year 2024, we are raising our revenue guidance to between $2.677 billion and $2.689 billion. We are raising our US commercial revenue guidance to in excess of $661 million, representing a growth rate of at least 45%. We are raising our adjusted income from operations guidance to between $868 million and $880 million. We continue to expect adjusted free-cash flow of between $800 million and $1 billion, and we continue to expect GAAP operating income and net income in each quarter of this year. With that, I’ll turn it over to Alex for a few remarks and then Ana will kick-off the Q&A.

Alex Karp: Welcome to our Q1 earnings. I think it is fair to say we crushed Q1 in the US. We are on fire. You see this in our Rule of 7 — Rule of 40 being 57% you see it in — the 68% growth in US commercial if you do apples to apples, falling on 70% growth last quarter, or 71% if you do apples to apples, taking out SPAC revenue. You see it in the deal growth in the US, growing from 70 to 136 in a year. You see it in the general enthusiasm around our products, especially in commercial, but also in government, which has begun to re-accelerate. You see it in general in our customer growth in US com, which grew 69%. And again, we are growing these numbers while maintaining a Rule of 40 score of 57%, which basically means we’re doing the impossible.