A Few Thoughts on Planet Q2

Own the business, not the stock

Judging from some of the Twitter takes, Planet should be shut down, management imprisoned, and shareholders’ capital returned. It’s funny how a few quarters can create wild swings in emotion. But, I mean, that is a wild overreaction — though I suppose not an unexpected one when different time horizons come to a head.

Owning a business is hard. Owning a business whose quoted value declines every day is harder. Owning a business whose quoted value declines every day and you are powerless to do anything about it is even harder. But that’s an inescapable reality of the game we play as public market investors.

Business values will decline at some point — often to unreasonable levels. Your actions (or more accurately, inaction) during such times are what separate true long-term owners from those in it to make a quick buck.

Any investment thesis in Planet should be based on the duration of revenue growth, not the pace of revenue growth. Sustained growth over long periods of time can only occur if a company possesses a moat. Planet’s moat is a daily scan of the entire Earth, which persists despite lacking execution in recent quarters.

Am I disappointed by Planet reducing its annual outlook for two consecutive quarters? Of course. Have I lost confidence in the long-term opportunity ahead? Far from it.

Personally, I’m only interested in owning companies for the long-term. This means I must have faith in management’s ability to withstand challenges and get things done, even if they take longer than expected. Truly owning a business means facing the inevitable hiccups and price swings with relative equanimity.

So, I will refrain from shouting about the share price and try to assess the business dispassionately, as an owner might. Of course, I’m sure this will prompt many of you to scream, “Bias!”

Correct. My bias will be on full display. But there is no objectivity in the land of investing. Everything we do is a subjective take on the future. There is always a reason to sell — the more valuable question is why should you hold?

Doing nothing is what makes money in this game.

The Financials

Let’s start with the basics. Revenue growth was tepid but met management’s expectations for the quarter. Forward guidance was terrible. Why? Management pointed to a few factors, including (1) elongated government sales cycles, (2) the compounding effect this has given the time it takes for contracts to ramp up, and (3) a slowdown in commercial business due to macro uncertainty.

To be clear, these factors should not have driven a slowdown of the magnitude Planet is currently experiencing — at a certain point, the responsibility simply rests on a lack of execution — but they are logical explanations. The company is prioritizing larger contracts, which skew towards the government. As contract size goes up, sales cycles extend; government contracts also take longer to close than their commercial counterparts.

With that said, Will Marshall makes an important point, and one that is all-too-often forgotten: building a new market requires constant learning and in general, takes time.

What I would just highlight is that we are market-making here… We are bringing in a new capability to them. And they've never done this before. And we don't understand that process fully. As we understand it, we're adapting, and that's why we're doing some of those changes to our go-to-market approach.

I just want to emphasize that even civil government, some of which have used satellite data before, they're changing their motion here from buying satellites and building satellites to buying data. And in many cases, it's just a totally unique and new data product. And so they haven't done this before. So both we and they are learning through this.

So it's more about a few bigger deals taking a bit longer and slipping out of the quarter, and we did have that in Q2 — although I'd point out one of the biggest ones that we had that slipped out of the quarter subsequently closed in the few weeks afterwards. So it's still happening, but we are learning and understanding and then adapting to those processes.

I can respect that explanation. At the end of the day, Maxar has dominated the industry for over two decades. Planet is bringing a fundamentally different offering to market and a new business model attached to that. It’s only natural that governments move slowly to adopt at scale — it’s the nature of the beast. Sure, this hurts in the near-term, but it’s not unexpected — building a new market is hard. But it’s also more profitable in the long run.

Notably, the pipeline continues to grow despite closing times extending. For the first time, Marshall shared that there are 70 qualified deals in the pipeline with seven or eight-figure annual contract values. These should support growth well beyond the next two quarters.

On the cost front, I can understand the complexities and inefficiencies associated with rapidly scaling an organization. We’ve seen this in plenty of other companies recently, and Planet is no exception. The headcount reduction taken during the quarter is a step in the right direction and will force teams to prioritize and execute with less fat (at least, one can hope).

Importantly, Ashley Johnson reiterated the company’s commitment to adjusted (hmm) profitability by Q4 of next year no matter what. Expenses continue to move in the right direction, and Johnson clarified that the RIF lowered run-rate expenses entering FY 2025 by $35 million compared to the start of year plan. That’s a noteworthy chunk of cost taken out; provided they can reaccelerate growth next year, the profitability target can be met.

All that said, it will still require extraordinary execution; operating margins were still —81% in the quarter. I would not be surprised if Planet conducts another round of layoffs in the future to further realign its cost structure, which is unquestionably out of whack with the current growth profile.

In the meantime, they have plenty of cushion with $368 million of cash on the balance sheet and no debt. At the same level of cash depletion as the last twelve months, Planet has enough to last four more years. They are in no danger of having to rely on the kindness of strangers anytime soon.

Pelican & Tanager

The lack of news on Pelican has been a source of consternation among shareholders and analysts alike. I, too, am curious, but Marshall’s comments on its progression actually indicate a strength of Planet’s business model: the ability to flex capex to meet customer demand.

We are pacing the buildout of our next-generation satellite fleets to optimize our resources and support our one-year payback targets for the satellites.

Sell the product before you build it, not after, is great practice for a data business. It may not seem like it today, when revenue growth is sluggish, but returns on capital are what drive a business over the long run. Planet is building Pelican’s book of business before it launches, so it can earn from day one.

The first Pelican tech demo is slated to launch by end of year. It will collect data on the performance of the satellite bus (to be shared by Pelican and Tanager) and test the operational systems underpinning the constellations. If the demonstration is successful, we will start to see deployment next year. I imagine quite a few of those eight-figure pipeline deals are Pelican-related and will start to close next year.

Tanager is awaiting delivery of the spectrometer (the sensor) from NASA JPL and is otherwise ready to launch the first operational satellite next year.

Sinergise

It’s well worth our time to spend a quick moment on the Sinergise acquisition, which I briefly touched on in my last post.

Leveraging Sentinel Hub, Sinergise's self-serve platform, which already serves thousands of users, we will shift towards supporting small deals through a lower touch channel.

This is important. Sales to date have required a more active involvement, limiting the productivity of salespeople. Scaling an organization requires the ability for customers to serve themselves and extract value without salespeople showing them how to do so. Until this is easy, Planet will not hit exit velocity.

They could scarcely hide their excitement about this acquisition, and I expect a lot more details at the Investor Day next month.

(New) Customers

They ran through the usual list of new contracts, from which a major takeaway is the increasing value of Planet’s data for wide-scale regulatory monitoring — an area virtually guaranteed to grow significantly over the next decade.

The UK Rural Payments Agency now joins the Welsh government, the Dutch Paying Agency, Bolivia’s Institute for National Agrarian Reform, and a host of others in using Planet’s capabilities to monitor public lands and/or sustainable farming initiatives. Civil government contracts like these were called out as a major source of pipeline growth.

Importantly, these contracts exemplify use cases best served by the wide-area monitoring capabilities unique to Planet. The dimensions of competition differ from traditional satellite data uses and are an indication of the disruption afoot.

Incoming regulation is also poised to benefit Planet. The new European Union Deforestation Regulation (EUDR) mandates companies linked to the production of seven commodities — cattle, cocoa, coffee, oil palm, rubber, soya, or wood — prove they are “deforestation-free.”

How do they do that? Verifiable data is a good starting point. Planet’s capabilities are perfectly suited for this use, and the company can pursue two angles to profit from this regulation. One, serving the commercial customers who must monitor their own operations. And two, serving the regulators who must verify the companies’ satisfaction of the obligation. The regulation is set to be take effect beginning in December 2024.

Net dollar retention rate is, in my opinion, the most important metric. How well are they executing on the customer feedback loop? This is an essential question, particularly for new data businesses. The metric ticked up quarter-over-quarter, but it’s tough to get a quality read given Planet’s strange reporting mechanism (the metric starts at 100% on January 1 and builds throughout the year).

I’ll be looking for acceleration in the back half of the year, though management did note that elongated sales cycles are not limited to new contracts; they also impact renewals/expansions. Specifically, a large government renewal is expected to stretch into Q1, contributing to a lowered target of 115% for the year compared to 120% earlier. It makes sense, but it doesn’t mean I like it.

AI

AI has been the buzzword for quite some time now — maybe over a year? Planet actually brings something meaningful to the space (no pun intended). Kevin Weil sums up the idea quite cogently:

We believe proprietary data is where the real value is in the AI race. We have 50 petabytes of satellite data to train our own and partners’ AI and machine learning models that can be used for cases like building damage assessment, vessel detection, preventative mitigation of deforestation, and more.

This quarter, Planet moved beyond words to sign its first deal specific to AI exploration:

Planet has a deep proprietary archive of Earth data that grows by terabytes every day, a treasure trove for generative AI models to extract insights and create value. We've seen significant interest in this recently, and I'm pleased to report that last quarter, we signed our first deal in this area, a six-figure, three-month pilot to explore the potential to unleash the value of Planet's daily data with large language models.

It is day one for this aspect of the business — as it remains day one in the application of AI more broadly. Of course, AI continues to be elemental in many of Planet’s existing solutions, including the building damage assessment partnership with Microsoft, used thus far in Ukraine, Turkey, Syria, and most recently the Maui wildfires.

The main takeaway? Look for AI to continue to play an outsized role in unlocking the value of Planet’s data.

The Thousand Foot View

Was the quarter good? No. Was guidance good? No. Is the company’s competitive differentiation intact? Yes. Is the long-term opportunity intact? Absolutely.

Consider also: Planet’s current difficulties may actually strengthen its moat over the long-term. This is not a consumer offering with no switching costs; once Planet’s data is ingrained in these government programs and solutions, it will likely be difficult to pull out.

A few quarters is a very short period of time for a business with a vision like Planet. The calls from the rafters to remove Will Marshall as CEO and/or sell the company are, in a word, insane.

Planet went public to scale the business. It has been public for less than two years and has made substantial progress towards building a market that previously did not exist; these things take time to come to fruition. If you’re not willing to be patient, you’re certainly involved in the wrong company.

Does that mean we must be happy with the results? No. I’m definitely not. My account is bleeding, for sure. But it really doesn’t matter unless you need that money today. And if you need that money today, it definitely should not be invested in the stock market, let alone an unprofitable entity. There is nothing fundamentally wrong with the company, but it is experiencing the difficulties of scaling, as well as the fickleness of public markets.

The present appears bleak today: slow growth, reduced guidance, no profits. But the inherent problem (and opportunity) with investing is looking to the future. You can’t invest in the present.

As Stanley Druckenmiller says, “It doesn't matter what a company's earning, what they have earned — you have to visualize the situation 18 months from now — that's where the price will be." (Forgive me, Planet is earning nothing, but you get my point.)

New regulation is coming down the pipe that virtually demands use of the company’s data. Pelican is set to begin deploying next year. The large government contracts should be signed at some point — likely next year. And they continue to draw a line in the sand for profitability in Q4 of next year.

Where will Planet be in 18 months? My bet is in a much better place.