Thibault Renard
Introduction
I wrote a more detailed analysis on Planet (NYSE:PL) in February, two months after it went public via SPAC. I outlined my investment thesis, which largely rests on use case expansion as the company turns raw imagery data into more consumable insights and predictive analytics. New use cases should attract new customers, as well as encourage existing ones to spend more. With 95%+ incremental margins, revenue growth will naturally drive profitability.
While Planet remains in the early stages of execution, its fiscal Q1 earnings (April end) were in line with the initial analysis. In this article, I’ll give a brief recap of the FQ1 results and outline a few items I’ll be watching when the company reports on Monday (Sept. 12).
Q1 Recap
While a recap of FQ1 earnings may be a somewhat stale analysis at this point, it is necessary to preface what I will be looking for in FQ2. Overall, I viewed FQ1 earnings favorably despite missing profit expectations quite substantially.
Revenues in the quarter totaled $40.1 million, +26% Y/Y and +8% Q/Q. About 40% of the increase was attributable to existing customers growing spend, with the balance driven by customer growth. Planet added 56 customers in the period, bringing the total to 826, +23% Y/Y and +7% Q/Q.
Gross margin increased 370 basis points Q/Q to 41.1%, evidencing the company’s ability to scale profitably with additional customers.
Much of the earnings discussion was centered on the EOCL award from the National Reconnaissance Office. For its part, Planet refrained from discussing upside opportunities, instead focusing on the guaranteed portion. The contract is worth $146 million over five years, of which $89 million will be recognized in the first two years.
With the enhanced revenue visibility from EOCL, management tightened full-year guidance, raising the midpoint by $2 million to $182 million. While a small adjustment, better up than down!
Net dollar retention rate was 105% compared to 95% in the year prior period. Planet calculates this metric based on the value of customer contracts at the beginning of the fiscal year, so I’d expect this number to improve significantly over the year (as it previously has), particularly with the recent EOCL award.
On the call, Will Marshall specifically pointed to increasing momentum in the agriculture business (~23% of FY 2021 revenue). I view this as quite an important development in the wake of the VanderSat acquisition as it provides some level of confirmation about the market growth for advanced analytics. If Planet can develop similar software – built on top of its unique data – to address the needs of other industries, such as insurance, supply chain monitoring, and finance, the opportunity set is enhanced significantly.
On the bottom line, expenses ballooned as Planet invested in sales and software headcount. While it’s tough to gauge the return on these investments ahead of time, I am comfortable with the increased spend (for now) as long as revenue growth continues to accelerate. The company has plenty of cash reserves to fund growth in the near-term.
Importantly, the company noted it is on track to meet its hiring needs for the year, a prerequisite for customer growth.
At a high level, the quarter’s results were good – not great – with plenty of embedded near-term potential through the EOCL award and momentum in agriculture.
Q2 Focus
My focus will primarily lie with four variables in the FQ2 report:
- Revenue growth;
- Gross margin;
- New customers; and
- Net dollar retention rate.
A continued acceleration of revenue growth is essential to the investment thesis. Otherwise, where are the company’s investments going? With the addition of EOCL contract revenues, I don’t view this as a major area of concern in the quarter, but it is perhaps the most important consideration.
On the margin side, a sequential increase in gross margin seems natural if the company can hit revenue targets. However, the company guided for non-GAAP gross margins to be in the same range as FQ1, so a sequential increase could be viewed positively by the market.
If my thesis proves to be correct over the long term, new customers will drive a sustained acceleration in revenue. I would like to see evidence of new sales reps beginning to ramp, reflected by a high number of new customers in the quarter.
I interpret net dollar retention rate as a metric for determining how well a company adds value to existing customers in new ways. With Planet still exploring the potential embedded in its vast (and expanding) data library, it is essential the company can find ways to add value. As such, I’d like to see a sequential increase in the net dollar retention rate. I don’t view this as a significant burden given the EOCL award’s impact on the US government’s contract value.
Lastly, I would welcome some affirmation that the company continues to be on pace to meet its hiring needs.
Conclusion
Planet remains in the early stages of execution and expects to significantly accelerate growth in the near-to-mid-term. Planet’s third report as a public company (second with consensus estimates) has the potential to be a significant factor in the market’s appetite for the stock.
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