Understanding Palantir's Net Dollar Retention
Net dollar retention, or NDR, is one of many metrics investors should look at when evaluating a company. Palantir has historically had NDR over 100%, and in this article I want to analyze why that is significant and how it influences the future of their business.
First, let's talk about what NDR is. Clari explains,
Net dollar retention (NDR), sometimes referred to as net revenue retention (NRR), measures how much your annual recurring revenue or monthly recurring revenue (MRR) has grown or shrunk over time by factoring in customer expansion as well as negative churn and downgrades. It offers a holistic picture of how well you keep, engage, and grow your existing customer base, as a gauge of your business’s overall health and viability.
The goal of NDR is to determine if a company is able to increase the existing cliental they have by either upselling, extending their contract, or minimizing the churn rate for clients leaving. If companies can offer more services to existing clients or meet certain performance obligations that trigger more dollars headed their way, then they have a very strong chance of continuing to keep those clients.
The more clients that are kept, the less churn (when clients decide to not renew their contract) occurs, and the more net-dollar retention continues to increase. Each dollar begins working harder from existing clients that are being factored into the overall revenue.
Why Does Palantir Have Strong NDR?
I suspect there are two core reasons Palantir has a relatively strong net dollar retention.
First, they work with the government. Government revenue has always been known to be a more "quality source of revenue" than from commercial clients. The reason for this is because government contracts are less likely to churn, the government usually has a set budget that does not change, and the performance obligations tend to lead to more revenue if executed correctly.
Commercial clients simply tend to churn more and the costs it takes to acquire the revenue can sometimes be a burden on actually closing deals. Palantir has received a myriad of contracts, working with agencies like the HHS, NHS, Space Systems Command, CDC, and plenty more across governmental agencies in various countries.
Second, Palantir has an incredibly sticky product. This was not always the case - it is well documented that in 2016, Palantir lost major contracts with companies like American Express, Coca Cola , Home Depot, etc.
It took them a while to really figure out how to bring Foundry to market in a way that met the needs of their clients but also was profitable for a software company. They ended up figuring it out, and as a result, have kept clients for years and integrated them into some of the stickiest software products they would ever use.
Foundry centralizes data silos within an organization - making a developer's job much easier when trying to build products that leverage big amounts of data. When you use a product that makes your life a lot easier and more efficient, it's just hard to go away from that product.
In fact, it leads to clients wanting to know more about how that product can influence their ability to save more money and maximize more efficiency, leading to more dollars to Palantir and increasing their NDR.
Mike Glass, Senior Director of Data, Analytics & Insights, Pacific Gas and Electric Company, said this about Palantir:
"Foundry is our central platform for data-driven decision making and situational intelligence. It serves as the operating system that will enable effective end-to-end asset and risk management."
Pierre Guillaume Wielezynski, Head of Digital Transformation Services at World Food Programme said,
"We have a saying internally that says, ‘nothing stands between WFP and a hungry child.’ That’s where we turn to the power of data. Because of the power of DOTS, we are going to have an organization that is more intelligent, that is faster, that is more responsive to the needs of the communities we serve."
The risk now lies in Palantir being able to on board more people on to it's platform. It's about selling. We know if they can get into the door, they have a strong chance of closing the deal and getting more dollars out of those clients for the long term.
Now, they need to get into more doors.