E2135 Debrief
Today we look at two enterprise AI software companies: Palantir & C3.ai
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In last week’s debrief, we talked about SaaS valuation and discussed Snowflake & Palantir in more detail. On Wednesday’s podcast we continued our discussion on IPOs and covered two SaaS companies: Palantir and C3.ai, and today we will provide an overview of each company and compare the two from a relative valuation perspective.
C3.AI
C3.ai Inc is an enterprise artificial intelligence company founded by tech industry veteran, Thomas Siebel. In 1984 Siebel joined Oracle as one of the first 20 employees. Later, he proposed the idea of creating enterprise software applications tailored for marketing, sales, and customer service functions - but Oracle declined so he left to start Siebel Systems in 1993. Siebel Systems grew to over 8,000 employees and annual revenues over $2 billion before merging with Siebel's former employer, Oracle, in January 2006. Siebel founded C3.ai in 20091.
Products
The company provides software-as-a-service applications that enable customers to rapidly develop, deploy, and operate large-scale Enterprise AI applications across public and private clouds. It provides solutions under four divisions...
the C3 AI Suite is an application development and runtime environment that allows customers to rapidly design, develop, and deploy Enterprise AI applications; and
C3 AI Applications is an industry-specific and application-specific solutions pre-built by C3.ai;
C3.ai Ex Machina is a no-code solution that makes it easy for business analysis to use advanced AI analytics without data science training. And,
C3 AI CRM is an AI-enabled, industry-specific, CRM solutions.
The concept of the company was best summarized by Siebel at a recent conference2 where he described the benefit to companies that adopt C3.ai...
It reduces the amount of code that needs to be developed by [a fortunte 500 enterprise] by an order of 1000... It reduces the cost and time to develop by an order of 100
Essentially, C3.ai enables companies to get enterprise AI software applications up and running at a fraction of the cost and time dramatically.
Revenue Analysis
Unlike Palantir, C3 does break out subscription vs services revenue - for FYE 4/30/2021 it was split 86%/14% respectively. This is relatively in line for what one would expect of a new, high touch enterprise software solution. From a valuation perspective, the market does not value the two sources of income the same as the former is scalable and has near zero marginal cost while the latter is not scalable and has real marginal and opportunity costs.
Palantir
Palantir was founded Peter Thiel, Nathan Gettings, Joe Lonsdale, Stephen Cohen and Alex Karp in 2003. Thiel is now famous, or infamous depending on your perspective, for amassing more than $5 billion in a Roth IRA.
Palantir was started with an initial focus on supporting the intelligence community. The company has two key enterprise software platforms - Palantir Gotham (“Gotham”) and Palantir Foundry (“Foundry”). Gotham initially started as a counter terrorist intelligence tool - essentially enabling advance data analytics and AI across disparate data sets. Foundry, the company's commercial product, enables companies to make sense of their sprawling data footprint. A third product, Apollo, was recently released as well. Appolo enables deployment of cloud services across edge and on-premise installations.
The company's software, initially used by the military for counter-terrorism, has been adapted to many use cases from finance to biotech. It is even being used to track COVID-19 outbreaks.
The challenge with Palantir is, and always has been, that the company provides little detail on its breakdown between services and software revenue, which makes it difficult to value. Nonetheless, the company continues to grow. In a recent earnings call3, Palantir COO Shyam Sankar describes the process of the company over the years…
It took about 8 years, I'd say, for Palantir to be the operating system of special operations. It took about 4 years to be the operating system of aviation. It took about 2 months to be the operating system of COVID research and collaboration, and it's taking about 2 days to be the operating system of day 0 companies... - Shyam Sankar
Products
Palantir Gotham - the company’s government intelligence product
Palantir Metropolis4 connects to commercial, proprietary and public data sets and discovers trends, relationships and anomalies, including predictive analytics. The use cases are quite broad and this is likely a very similar product to Gotham, though with more of a focus on financial datasets, as their primary customer for this product are financial institutions, though the individual use cases for the product spanned across departments. For example:
JPMorgan used Metropolis to monitor employee communications and alert the insider threat team when an employee showed any signs of potential disgruntlement: the insider alert team would further scrutinize the employee and possibly conduct physical surveillance after hours with bank security personnel. These capabilities are far more similar to Gotham's counterterrorism usecases.
Palantir Foundry - analyze the operation of the vaccination program.
Palantir Apollo - Palantir Apollo is a continuous delivery system that manages and deploys Palantir Gotham and Foundry. Apollo enables customers to fuse multiple public and private cloud networks. Theoretically, Apollo will help Palantir transition some of their revenue from consulting to SaaS.
Revenue Analysis
Palantir has significant revenue concentration and is highly reliant on the federal government as a customer.
>60% of revenue comes from the governent segment
Customer concentration is decreasing over time. Customer F (government) and Customer A (commercial) reprensented 11% and 10% of total revenue in 1H 2020. Neither customer accounted for more than 10% of total revenue in 1H 2021.
Revnue is highly concentrated in the united states government. Extrapolating the trends, we find that 61% of revenue is Government and 53% of revenue is US. Meaning, the US government as a whole likely represents >32% of revenue5.
C3.AI vs Palantir
Both companies provide artificial intelligence solutions via subscription based models. Both are aiming to be the ‘operating system’ of modern businesses. Both require extensive integration and implementation costs. Both require long sales cycles. Neither are growing at breakneck speed.
Is Ai a Product or Feature?
One argument against both companies is the fact that the artificial intelligence is really just a feature - rather a tool to make a given product better. Meaning, companies like Salesforce may be in a better position to utilize artificial intelligence in their existing offering, which currently acts as the ‘operating system’ for many businesses already.
On the other hand, one could make the case that Salesforce was built to be an ‘operating system’ for the way business runs today - meaning businesses are organizations of people and hierarchy. While Palantir and C3 are building an ‘operating system’ for the way business will run in the future - meaning businesses are organizations of data and process.
Palantir vs C3 - Relative Valuation
If you read last week’s newsletter, you’ll remember the following chart and table. I’ve provided them again, with the two companies we discussed today highlighted in green.
In case you are looking at the NTM Rev Growth vs NTM Rev Multiple chart and thinking “hey, C3.AI looks like a good deal”, let me point something out first… C3 reported disappointing earnings and guidance this week. Many analysts might not have revised their future revenue estimates, which would make the NTM revenue estimates in both the chart and the table skewed to the upside. Furthermore, the stock price fell after the earnings announcement, thus reducing the enterprise value. The combination of those two factors will make it appear that C3 is cheap. Don’t be fooled.
Canaccord Genuity 41st Annual Growth Conference, August 12, 2021
Palantir Technologies Inc. - Q2 2021 Earnings Call