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Quick S-1 Teardown: Palantir

The Palantir S-1 is a long and meaty read, and a pretty fascinating one considering the company was highly secretive, and occasionally controversial, for so many years.  It is also written in a very opinionated style: the newly Colorado-based company takes aim at Silicon Valley and is not exactly charitable to its competitors. Particularly compared … Continue reading Quick S-1 Teardown: Palantir

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The Palantir S-1 is a long and meaty read, and a pretty fascinating one considering the company was highly secretive, and occasionally controversial, for so many years.  It is also written in a very opinionated style: the newly Colorado-based company takes aim at Silicon Valley and is not exactly charitable to its competitors.

Particularly compared to a Snowflake that has had a meteoric rise since inception in 2012 (see our Snowflake teardown here), the Palantir S-1 also presents the picture of a company that, while unique, has had a long road since it was founded in 2003.  

It seems that the company went through an important transition in the last couple of years on the product and go to market front, perhaps in anticipation of an IPO. 

Ironically, in some ways, this evolution has made Palantir look more like the Silicon Valley companies it feels so different from.

Here are some quick thoughts and notes (from Avery Klemmer and myself)

HIGH LEVEL THOUGHTS

  • First direct listing of an enterprise software company.  
    • So far, only companies with easily understood products and broad user bases have gone public via direct listing – Spotify and Slack in particular (Asana coming up)
    • While it has generated a lot of buzz over the years, Palantir has a very different profile: an enterprise software company with few customers (125 in total) and very large contracts (their average revenue per customer in 2019 was $5.6m). 
    • Its financial profile is also a bit different from the software startups Wall Street tends to love.  Revenues are certainly high ($742.6m in 2019), in particular through a very strong story around land and expand (which Palantir calls “Acquire, Expand, Scale”).  Investors may not worry as much about its big loss ($579.6 million in 2019, or a net loss of $337.7 million when excluding stock-based compensation), considering many other IPO candidates exhibit the same characteristic (and Palantir’s loss seems to be coming down in 2020 so far).  But Palantir’s growth rate is nowhere near the explosiveness of companies like Datadog, Zoom or Snowflake.  2019 revenue represented a growth rate of 25% over 2018 (H1 2020 showed an acceleration, with a 49% growth rate over H1 2019). 
    • It will be very interesting to see how this plays out 
  • Not your usual cap table:
    • S-1s of enterprise software companies often show a capitalization table where various venture capital firms own large chunks of the company, with management owning the rest
    • Much less so in this case: Palantir’s ownership has stayed very much “in the family”, meaning essentially Peter Thiel’s galaxy.  Founders Fund (Peter Thiel’s fund) owns a chunk, as does 8VC, the venture firm run by Joe Lonsdale, who was a co-founder of Palantir.  Joe Lonsdale is also affiliated with another significant shareholder, Disruptive Technology Solutions (related to Disruptive Technology Advisors which acted as investment bankers for Palantir over the years). Worth noting that management has strong ownership (Alex Karp was also part of Peter Thiel’s galaxy early on, after they met at Stanford Law School)
    • Only real outsiders seem to be Japanese insurer Sompo (which recently invested, here) and UBS (as well as, reportdedly, a handful of smaller investors like Tiger Global).
    • The company will remain tightly controlled after the IPO, due to a multi-class ownership structure where holders of Class B, and even more so Class F, will call the shots 
  • Impressive product:
    • Perhaps our favorite part of the S-1 was to get a glimpse into what Palantir has actually built 
    • At least based on the description, the company has built *a lot* of product – basically sounds like an entire integrated system that covers infrastructure and analytics in a box, with a core platform and various modules sitting on top of it (our words, not theirs). 
    • The core platform provides strong ingestion capabilities (lots of connectors to data sources like SAP, AWS S3, and Azure Data Lake), versioning, orchestration, data lineage, security, compliance, ontology, search, etc. 
    • On top of the platform sits a long list of product (see below) for analytics and visualization
    • For any customer to build a system like this in-house, they would need to stitch together many third party solutions which would take a massive effort over a long period of time, and a sophisticated IT and data engineering team
    • Therefore, it’s not hard to see why the integrated Palantir platform would be attractive to big governmental institutions and big companies that may not have access to top developer talent to build their in-house data infrastructure.  In turn, only large companies or government institutions may be able to afford the high Palantir price tag.  Strong product market fit! 
    • Given the explosiveness of innovation in the data and AI/ML world over the last 10 years in particular, one can’t help wondering how much platform rebuilding the Palantir team had to do over the years, and/or how the platform compares to the various best in class solutions across all those different modules (or whether the key value of Palantir results in all parts working together in an integrated fashion).
  • Is Palantir a services company?
    • For the longest time, at least in data circles, Palantir was described as an army of consultants that would install “some” software at the customer and would spend months and months customizing it – more of a services company. 
    • The S-1 does make several references to lengthy implementation processes, for example: “Implementing our platforms can be a complex and lengthy process since we often configure our existing platforms for a customer’s unique environment”
    • However, it seems that Palantir made a considerable push to morph into a more standard services to software mix over the last couple of years, perhaps in anticipation of a potential public listing.  
    • The company’s gross margin now looks much more like a software company’s gross margin:  67% in 2019 (71% when excluding stock-based compensation) and 72%  in H1 2020 (or 78% when excluding stock-based compensation). 
    • “The improvements in our operating results have principally been driven by a significant decrease in the time and number of software engineers required to install, deploy, and manage our software platforms.”
  • Death of the forward-deployed engineer?
    • For years, a part of the Palantir mystique is that the company had “no sales people, only forward-deployed engineers”.  For anyone working with enterprise software startups, the example of Palantir would frequently come up in conversations with entrepreneurs, especially technical founders, as evidence that one could build a company without hiring annoying salespeople (!).
    • Palantir has now officially changed its stance, and embraced a more traditional distribution model: “We are investing in an account-based sales force to identify new customers and opportunities. We believe that our decision to grow our sales force in recent years has resulted in multiple new customers in 2019 that are in the Fortune 100 and include leading government agencies around the world. We will continue to expand headcount in our direct sales force.”
  • A cloud company?
    • For anyone following the data industry, it’s well known that government agencies and big companies in regulated industries (financial services for example) have been slow to embrace the cloud, particularly for sensitive data 
    • So it’s interesting to see that Palantir, in addition to on prem solutions, has built the ability to deploy in a number of different environments: “a public cloud, a private cloud, on-premises data centers, air-gapped networks in classified environments, edge computing environments, on laptops, and on specialized hardware.”
    • Palantir seems to anticipate a lot of cloud deployment in its future: “In December 2019, the Company entered into a new minimum annual commitment to purchase cloud hosting services of at least $1.49 billion over six contract years”

S-1 NOTES

Background

  • Founded 2003 to power counterterrorism operations
  • Released first platform “Gotham” 2008 for US defense agencies
  • Released “Foundry” 2016 to address industry challenges
    • Currently powering a large aviation use case (100+ airlines, 9K aircraft)

Financial Results

  • Revenue (FY 2017, 2018, 2019): $515M, $595M, $743M
    • H1 2020 49% growth over H1 2019
  • Gross Margin (FY 2018, 2019): 72%, 67%
    • Increased support & cloud costs
  • S&M as a % of Revenue (FY 2018, 2019): 78%, 61%
    • Started investing in direct salesforce in 2018, only 3% of total headcount
  • R&D as a % of Revenue (FY 2018, 2019): 48%, 41%
  • G&A as a % of Revenue (FY 2018, 2019): 51%, 43%
  • Customers
    • *Note: each government agency counts as a separate customer
    • Revenue per customer = $5.6M 
    • Revenue per customer (top 20) = $24.8M
    • Top 20 customers = 67% of revenue
    • 53% of revenue was commercial (2019)
    • 60% international (2019)
    • Top 20 customers have lifetime of 6.6 years
  • Contribution margin (Q3 2019, Q4 2019, Q1 2020, Q2 2020): 15%, 33%, 41%, 55%
    • Improvements driven by investment in onboarding: customer start up time decreased 5X to avg. 14 days in Q2 2020
    • CM = loss from operations + R&D + G&A + stock-based compensation
  • Acquire / Expand / Scale
    • Acquire = short term pilots, operated at a loss
      • 2019 generated $65.4M contribution loss on $0.6M revenue; (109)% contribution margin
    • Expand = $100k+ ACV accounts with negative contribution margin
      • 2019 generated $75.8M contribution loss on $176.3M revenue; (43)% contribution margin
    • Scale= $100k+ ACV accounts with positive contribution margin
      • 2019 generated $311M contribution margin on $565.7M revenue; 55% contribution margin

Capital Resources

  • Accumulated deficit as of June 30 2019 = $4B

Tech

  • Ontology management — let customers create a domain-specific taxonomy for their world from “objects” “properties” and relationships that tie them together
  • Dat correctness & freshness — users must be able to see full context around a given decision
  • Time series analysis on real time sensor data  — developed a compression format that improves read performance 2-5X and uses 60% of disk space relative to open source alternatives
    • Serving data for 1.3B time series, avg. of 8.8M new points written every second
  • Model deployment — enable teams to plug in their own models, see clear metadata
  • Gotham enables agencies to identify patterns deep within data sets
    • Graph: WYSIWYG drag & drop interface to explore & interact with entities
    • Gaia: plan, execute, and report on live map
    • Dossier: live, collaborative document editor
    • Stencil: structured form-entry tool
    • Video: for viewing streaming and historical video
    • Table: top down query & analysis tool
    • Ava: AI system to scan billions of data points & send out alerts
    • Forward: built to make Gotham reliable in unreliable network environments 
    • Mobile: mobile app for field
  • Foundry: data integration and analysis tool
    • Monocle: manage data lineage through GUI
    • Contour: top down exploration of big data (billions of records)
    • Object Explorer: search objects rather than rows
    • Fusion: spreadsheet interface
    • Workshop: low code application builder on top of data sets
    • Vertex: virtualization engine for “What if” analyses
    • Code authoring: data engineering tool for transforms 
    • Quiver: multidimensional charting
    • AI/ML: create or apply models to data sets
    • Code workbooks: advanced analytics & data science for pipeline building 
    • Reports: publish dynamic work 

Source: http://mattturck.com/palantir/

Private Equity

Alternative Investments/AI: European Investors Believe AI Is A “Compelling Opportunity”

Exchange traded fund (ETF) sponsor WisdomTree commissioned a survey by Coredata Research of professional investors across Europe on thematic investing. The survey found that a vast majority of these investors considered artificial intelligence as the most compelling long-term thematic investment opportunity.

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Alternative Investments/AI: European Investors Believe AI Is A “Compelling Opportunity”

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Professional European investors believe the potential of AI is transformative.

Exchange traded fund (ETF) sponsor WisdomTree commissioned a survey by Coredata Research of professional investors across Europe on thematic investing. The survey found that a vast majority of these investors considered artificial intelligence as the most compelling long-term thematic investment opportunity. (INTERNATIONAL INVESTMENT)

Artificial intelligence and thematic investing

According to the survey, more than 70% of European professional investors consider AI as a highly compelling long-term thematic investment opportunity.

The believe that AI can transform industries, services, labour, and consumption. However, the technology is still only in its formative stages of adoption and application.

Other popular themes

The second most popular theme, about 60%, according to the survey, was Biotech. This is understandable because of the race to develop a coronavirus vaccine and accompanying research.

Cyber security, at 47%, was the third most fancied thematic investing option. It was triggered by the seemingly overnight transition to remote and home working as a result of the virus. Cyber security has suddenly assumed critical importance given the vast numbers of people working from home and outside the usually secure environment provided by the office technology and network.

Professional European investors also favored cloud computing.

Thematic investing earned solid returns during the pandemic

Ravi Azad, head of UK and Nordics, WisdomTree said: “Our research points to the growing popularity of thematic investing, which has benefitted from strong returns during the coronavirus pandemic. While AI, biotech and cyber security present compelling long-term opportunities, cloud computing has had a strong year as organisations have transitioned to the cloud quicker than experts anticipated. Once seen as a fad, thematics are becoming important building blocks in portfolio construction due to their long-term growth potential”.

Related Story:    A Big Fundraise, And An Acquisition, In Cybersecurity                                              

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Source: https://dailyalts.com/european-investors-believe-ai-is-a-compelling-opportunity/

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Private Equity

FinTech: Western Union Acquires 15% Of Saudi Fintech stc pay For $200M

Western Union (NYSE: WU) has taken a 15% stake in stc pay for $200 million, valuing the Saudi fintech at $1.3 billion. Western Union is the world’s largest remittance company, while stc pay is a fully owned subsidiary of Saudi Arabia’s stc Group.

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FinTech: Western Union Acquires 15% Of Saudi Fintech stc pay For $200M

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stc pay becomes the first Saudi unicorn and first fintech unicorn in the Middle East.

Western Union (NYSE: WU) has taken a 15% stake in stc pay for $200 million, valuing the Saudi fintech at $1.3 billion. Western Union is the world’s largest remittance company. stc pay is a 100% subsidiary of Saudi Arabia’s stc Group. (Arab News)

Western Union will initially pay $133.3 million to acquire a 10% stake in the Saudi fintech. It will acquire another 5% for $66.67 million if stc pay obtains a digital banking license.

stc pay

stc pay is the first fintech company in the Kingdom to receive a license from the Saudi Arabian Monetary Authority (SAMA).

It is also the largest digital wallet in the MENA region with more than 4.5 million users.

It has been established in accordance with the objectives of Saudi VISION 2030. Those are to support the growth of the national economy, to enhance financial inclusion, and reduce dependence on cash.

First unicorn in Saudi Arabia and first fintech unicorn in the Middle East

HRH Prince Mohammed bin Khalid Abdullah Al Faisal Chairman of stc Group, said the decision by Western Union to make such a significant Foreign Direct Investment in its fintech subsidiary was highly encouraging.

“For us at stc Group it reflects our position as a digital enabler and an ICT regional champion as we celebrate the creation of the first Saudi unicorn and the first fintech unicorn in the Middle East,” he added.

“stc pay has rapidly developed a leading regional digital payments service over the past two years and has been a highly successful digital partnership for Western Union,” said Hikmet Ersek, CEO and President, Western Union. “Looking forward, we believe stc pay is well-positioned for continued expansion in digital payments.”

Use of funds

stc pay will use funds to boost its capital resources and to fund its plans for long-term expansion.

The Saudi fintech also intends to launch more products for its customers.

In July this year, stc pay and Visa (NYSE: V), the world’s leader in digital payments, entered into a strategic partnership. They would launch customer-centric financial services and digital payment solutions to stc pay customers.

Related Story: Saudi Fintech Geidea Launches Beta Testing of End-to-End Solutions for SMEs

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Source: https://dailyalts.com/western-union-acquires-15-of-saudi-fintech-stc-pay/

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Private Equity

European insurers gear up to do deals

A tough period during the pandemic is prompting restructuring and sales, including a number of private equity-backed transactions

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European insurers have weathered the crucible of the coronavirus pandemic and are ready to do some deals.

Last week a Canadian and Danish insurance consortium agreed to buy the UK’s RSA Insurance Group for £7.2bn. And on Friday, 20 November, Zurich Insurance Group said it is in talks to acquire MetLife’s US property and casualty insurance business.

The RSA deal, which pushed up the share prices of some insurance stocks when the proposal was announced on 5 November, portends further mergers and acquisitions, industry participants say.

That is because the pandemic forced insurers of all stripes to take a hard look at their businesses as losses from claims piled up, bringing weaknesses into sharp relief. Some are recognizing the need for scale to cement profitability, while others are pruning units where they can’t make enough money to compete. Bankers say more deals are brewing.

Another factor that could ignite a shopping spree: the regulatory environment. The European Insurance and Occupational Pensions Authority in April urged the industry to temporarily suspend dividends and share buybacks. As a result, cash has accumulated on some companies’ balance sheets, which dilutes return on equity and is feeding the need to seek combinations.

Insurers’ share prices reflect a tough year littered with losses related to Covid-19 and the continuing impact of low interest rates on their investment portfolios.

The Euro Stoxx Insurance Index is down 15% this year, lagging behind the broad Euro Stoxx 600 stock-market index, which is down 6%. Lloyd’s of London, the UK insurance and reinsurance market, said in September it expects to pay out up to £5bn, in coronavirus-related claims this year.

Some insurers reason the larger they are, the better. “The RSA deal shows the importance of having scale to drive profitability for the sector,” said Tryfonas Spyrou, an insurance analyst at Berenberg. Large insurers can operate in multiple markets, negotiate better pricing with suppliers and have access to more data, which allows better pricing of risks, he said.

Consolidation has been happening in the US as well.

Insurance giant Allstate in July agreed to acquire rival National General Holdings for about $4bn in cash, though discussions began before the crisis.

Private equity firm KKR the same month said it would buy retirement and life-insurance company Global Atlantic Financial Group for more than $4.4bn.

Italian insurer Assicurazioni Generali SpA last week said it has up to €2.5bn, to spend on “acquisitions that are fully aligned to our clear strategic priorities.” The insurer in June took a 24% stake in an Italian insurance company backed by Berkshire Hathaway that had been told by Italian regulators to boost its capital.

UK-based insurer Aviva has been trying to sell its operations in France, according to people familiar with the matter. A spokesperson declined to comment on a potential sale and pointed to previous statements by the company that it would focus on its businesses in the UK, Ireland and Canada, and that it was in the early stages of developing its strategy for its continental European business.

Dutch insurer Aegon NV in August said it would review the more than 20 countries in which it operates and concentrate on countries and business lines where it could create the most value.

Belgian insurer Ageas NV in recent months has increased its stake in its joint ventures, and recently said it has €700m to €800m in cash.

Some insurers are operating warily. Giulio Terzariol, German insurer Allianz SE’s chief financial officer, said earlier this month that if buybacks aren’t permitted in 2021, the insurer would look at deploying capital. But he said the company wouldn’t buy “suboptimal assets” for fear of regretting it for the next 10 years.

—Ben Dummett contributed to this article.

Write to Julie Steinberg at julie.steinberg@wsj.com

From The Wall Street Journal

Source: https://www.penews.com/articles/european-insurers-gear-up-to-do-deals-20201123

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