Unpacking Palantirs Public Debut: CEO Alex Karp
This is squawk pod I'm CNBC producer Katie Kramer today on our podcast. unpacking Pailin, tear the high profile highly secretive software company has operated quietly for seventeen years and it's finally on the public markets. And -ticipant I I think for maybe the past ten years CEO Elon on why it it took. So long my lawyers will shoot me what I can tell you is we are very very focused on building software a longtime before other people building and how he expects to become profitable with a small, but mighty and mighty controversial of customers. Well, how can you have the Super Valuable Company? They're only a hundred and twenty-five customers to which I respond. Yeah. But one, hundred, twenty, five most. Interesting institutions in the world I would ask people who are watching this to make a list of the institutions they admire in the world, and then roughly figure out if they're using pounder that interview plus the politics behind listing journalist Joanne Lipman fits a company that is very, very closely aligned with the trump administration. There's a huge question here about what happens if trump does not win the presidency it's Thursday October first October twenty twenty the year is still twenty twenty squawk pot begins right now. Good morning and welcome the squawk box right here on CNBC. I'm Andrew Ross Sorkin along with Joe Kernan Becky off today. Today on the PODCAST volunteer goes public analytics company that is usually described as secretive debuted yesterday the direct listening selling new shares on the New York Stock Exchange covered live on CNBC how tears for trading why secretive well here is named after magical orb and Lord of the Rings. But in seventeen year history, it hadn't made much public volunteer received early funding from the venture arm of the CIA and provide software products designed to crunch numbers. One of these programs is called Gotham and it's for government clients. Who Need to organize an understand massive amounts of data. So surveillance predictive policing, possibly rooting out potential terrorism threats, Pailin tear works with US Army Navy Department of Homeland Security and it's working with health and human services to help track the spread of Corona virus case data that we just recorded. We can immediately narrow into emerging hotspot counties, notable backers of talent tear include investor, and Co founder Peter Thiel who has gotten attention for his conservative politics and support of president trump in the two thousand, sixteen campaign. Evening. I'm Peter Thiel I'm not a politician, but neither is donald trump as well as his work technology companies. He was facebook's first big investor other pollen tear backers include wall streeters like Hanlon and Stanley Druckenmiller when talent tear filed paperwork with the SEC to pursue publising listing earlier this year it's called the swan event is finally got a sense of the books turns out pollen tear had never turned a profit and. A, huge chunk of its revenue came from its three biggest clients which are anonymous in the first six months of twenty twenty. It's revenue of nearly half a billion dollars a big jump from the year before this was addressed by pollen tear CEO, Alex Carp investor roadshow, which true to carbs personality, and true to the weirdness of twenty twenty was virtual and started on cross country skis. Welcome to Powell, tears investor day. We're very proud to have you here. Carp is an Orthodox for a CEO. He has amazing curly hair. He uses the modifier super allot super cool and speaking to potential investors. He made the pitch for the importance of Pailin tears purpose. This way of looking at the world war literally savior situation and in many cases Save Your Life Allen to has moved beyond. Just government clients fifty-three percent of its customers are in the private sector big name businesses who use a software program called foundry include Airbus Merck Ferrari and United Airlines but it's work for governments here and others around the world stuck to its reputation allentown faced criticism from privacy groups and for its work with the US Customs and border. Patrol. Tracking immigrants at the border. But Carp in the company not backed off in. That s one filing the leader of this highly valuable tech uniform said, Pailin tears work is different in his view software missions to keep safe may have become controversial but companies built on advertising dollars are commonplace and carp took aim at big tech culture directly writing quote our company was founded in Silicon Valley. But we seem to share fewer and fewer of the technology sectors, values and commitments. Helen tear moved its corporate headquarters to Denver and its shares headed to Wall Street. If you think, we are going to change our internal culture drastically if you think we're going to work with regimes that are not allied with the US enter abusing human rights if you think. that. That the future is going to be a super rosie place where the past ways of supplying software are going to work because enterprises and governments do not need to be reformed you should not invest in pounder. Andrew. Ross Sorkin has interviewed Alex Carpet number of times. This conversation was reported Wednesday yesterday right after the first trade for here on the New York. Stock Exchange. We've had lots of conversations over the years. This has been probably one of the most highly anticipated offerings or listings in a very long time. Almost every year that we would talk in Davos I would invariably ask you are you going to go public? Are you gonNA list and invariably you wouldn't. So let's start with why now? Well, first of all, thank you for having me and I and I really would like to thank all the pound tyrians who stuck with us and built this company and our investors you're stuck with us and you know over the years we've been skeptical about listing and for lots of reasons, we really needed to build our products. With enough protection so that we would be ready to launch them into the public space. And we built we built out PG government and foundry product and and built a way to maintain them so that we wouldn't have to scale the number of people and. You know we've reached a base where where our company's very significant and we believe being in the public space will help us with our clients and help us grow and quite frankly I believe the people apparently who built this company over seventeen years. Deserved a access to liquidity. So we we decided this would be great time for us and so far. It's been a really interesting process and and our clients are embracing it. So it's a really good time for us and I'm very, very grateful. Outlets. The single biggest question that investors ask about this company is seventeen years in while you know may have an operating profit, the company unto itself is still not profitable. So so walk us through what the path to profitability looks like. Well, you know we build these products years before people build them, and that takes money and what you see in the cove it pandemic crisis is we had built this way of going to market with foundry, which would allow us to literally supply an enterprise with a completely new stack of products within six hours and maintain them. And what you saw when we did that is we grew the company forty, nine, percent, forty, nine percent off of a seven, forty, three base and the divergence between expenses and in growth is dramatic. And we're just going to be very very focused on on an invigorating, our software offering. But when you're growing forty-nine percent off of a seven forty base. I think that's a pretty strong indication of what the future could hold and we're super proud of that and I think you're seeing that people are taking a look at our financials and our our company is often been used viewed as complex and. Needing explanation both moral and financial but it turns out our financials are quite simple and you look at this dramatic growth with flat lining expenses and I think that gives investors comfort and it certainly makes me feel as. Co Founder and CEO that we made the right decision to invest heavily over well over a decade in building software, the way other people don't to build it and you see the results do you think the profitability is at twenty twenty, two, proposition twenty, twenty, three proposition can I put you on that? Well, you you can push me but of course, my lawyers will shoot me I can tell you what I can tell you is we are very very focused on building software a time before other people building, supplying it and I think that are year I. First Half of the year growth will be reflective of the future and if I'm right. That will answer all of your interesting questions and we'll be interviewing. You'll be interviewing me again maybe not a Davos but virtually, and we'll see how we do. Confident confident we'll do well. Alex, one of the other questions people ask is how to comp your company meaning what are the comparable should this be considered a technology company as SAS company or should this could be considered a much more traditional consulting company? Can you speak to that? Well I think what the investors are seeing is they're asking the question at this point they used to ask is this is this a company that built software for the government and how do they build it? Of course we always sold this as a license. Then they saw our margins of the first half of the year round eighty percent. So I think the real debate now is. Move significantly away from is this software services because although people think we're very smart, we're not smart enough to get eighty percent margins off of a services company. The question then is, how do you comp it and honestly I think that's something investors will have to figure out. We're not focused on that we're focused on we are going to be the most important software company in the world. And people will figure out what valued over a long period of time and we're very comfortable with investors toying around it could be like this. It could be like that. We are going to deliver the best software. With the morals most efficient way of delivering it investors will decide what's that. What's that were is worth to them and I think you'll find a number of years that will be a consensus. Palette. Here is a truly special software company that is arguably the most important software company in the world. Alex has everybody knows You have contracts with various government agencies, obviously and some of the bluest of the blue chip companies in America today, but it's a concentrated list of about one hundred and twenty-five companies. About Twenty eight percent of the revenue actually comes from three of those clients unto themselves. Two thirds of the revenue comes from the top twenty. How much of a risk does that pose on one side but also when you think about the opportunity on the other, if we're having a conversation like this in in twelve or twenty, four months, how much do you want that list to increase in size or do you just want to keep that group effectively and a effectively raise the margin or cost for those clients? And grow that business. Well, we want to do all the we're going to do all of the above. So interesting about our client list people people ask, well, how can you have the super? Valuable Company they're only one hundred and twenty-five customers to which I respond but one hundred and twenty-five most interesting institutions in the world. These aren't just any institutions. The literally, I would ask people who are watching this to make. A list of the institutions they admire in the world and then roughly figure out if they're using, we don't go out and advertise our product, but I would say the list of our clients is the single most impressive institutions in the world I've ever seen we. So we want to keep these clients. Also investors will of noticing in the one that well over ninety percent of our growth in the first half of the. Year came from our existing clients. What does that mean our existing clients? The most important clients in the world are really happy that's what it means. So of course, we're going to expand those really happy clients who happen to be the coolest people on the planet, and then we've built this product which has gotten very little attention called Apollo Apollo allows us to maintain and deliver software to any number of clients with essentially. Not growing our our force apparent and force at all. So we're planning now that we have Apollo to grow the number of super cool customers all over the world, and we can do it without raising our headcount, and so what you're going to see is we're going to continue building with our clients why they're the most interesting clients in the world and they clearly based on our numbers like us and some of us. We are going to expand our client base. Why? Because now with Apollo, we can deliver the whole stack in six hours. I don't think any other company I've ever seen in the world can do that, and we can do with efficiencies that I don't know any other companies going to do because we can do this with a small number of people sitting in our office that we have maintaining, updating and providing them with new products we built. So they don't have the Frankenstein monster that takes two years to build and has to be maintained with either human hours like in the government contracting case or by purchasing new product or compensating sales people or behind. It people you don't even talking to you can actually buy one stack. So we are going to increase revenue with current customers, get new customers and continue our march. Alex how easier heart is because I know you've talked about trying to keep things in in terms of the platform if you will how he's your heart it for four clients to leave in terms of the churn. Well, as I mentioned, ninety, five percent of our revenue comes from existing customers. So customers, obviously if a customer wants to leave they, can I think the main reason our customers stay besides the fact that the output is very significant as they look at this product, we supply foundry the average customers paying less than six million dollars and they compare it to buying twenty products paying ongoing licensing. Fees. You can't get out of or building something over years, and the last thing they compare it to is we're not delivering a roadmap. Most people are living roadmap of what are you going to get in a year we're delivering a product after six hours so customers can leave. But what you see in the numbers is they by and large don't, and it's not because of my charming personality. Alex well, let me ask you a different question. We've had lots of fascinating geopolitical and philosophical questions about the role of technology and Pailin tear itself as well as the approaches silicon valley has taken. I'm curious in terms of risks how you think about this Amnesty International as you know, criticized, the company recently for its role of working with ice. How much of that does that pose a risk to the larger business? Especially, the corporate business at a time when we have corporations at taking both political positions and also being oftentimes being socially at activist. To Your Business Well, look the fact that we take positions that are sometimes controversial can cost. US clients. But it also gets us. Clients because when we talked to a client and we say look we're going to work with you. We're not gonNA walk away just because the winds change and this is super important especially to our government clients if you're supplying special forces and army and the US, those clients have to know that they will not be left on the battlefield. Because a because Silicon Valley has decided they don't like the warfighter. So of course that costs revenue many of our decisions of cost US revenue we only work in certain countries we've walked away from work because if human rights issues we've said, we disagree with very prominent human rights organizations and we engage in dialogue but also by the way is a reason why I Think people who are watching this may consider investing or not investing. We are not going to stand up here and say we're for everybody we're not going to pretend, and by the way we're going to try avoid jargon. We will actually tell you what we think it's not going to be created by fifty media people it may have to be carried by a couple. Of Lawyers but one of the unique things about power tears, we actually say things and we actually stick to them and that's something not everyone likes but many of our customers do and by the way I think it is a reason why ninety five percent of our revenue comes from customers because when we tell them, we're going to deliver we are going to deliver. Alex. One of the other questions now you all republic company. But as you know, you have three tiers of stock classes of shares that is and to some degree there have been critics who said, this is effectively a private company masquerading as a public company. Can you speak to the decision to structure the shares the way that they are structured and how governance experts and folks should think about that I think it's important for government experts to look and make an deliver opinion but I would also ask them to consider the environment we live in pound tear has been in silicon valley up till recently for seventeen years and in silicon. Valley. Defending the. warfighter providing our troops with technology that allowed them to come home is very controversial. I do not believe a company like ours that makes really consequential decisions for government clients and non-government clients could be run without an F. share structure and I understand there's criticisms investors look and say, well, why should talent you're having F. structure? What is my? What is my what? What can I do if? I don't agree with them. The primary reason why we fought for an structure and we asked investors to buy into it was we need to be able to go to our especially our Intel and defense clients and say, we will not just blow with the wind. And does shares for a company like ours gives us a unique ability to have long-term commitments to the most important clients in the world, both commercial and government, and that's why I believe they're super important, and I also again would encourage people if that's not something you're comfortable with there are many shares to buy. We don't have to buy challenge your shares. You should buy shares knowing that these shares reflect our views. Alex we've often had these conversations in Davos where globalization has ruled the roost but as you know so well, the world seems to be shifting to a globalized world, a splinter net if you will. How do you think long term that will affect the business of here We made this decision, which is actually a secret only because no one believes it's true which is that we didn't solve the problem of fighting terrorism. We solve the problem of doing data protection and fighting terrorism, and the architecture we built both PG and for foundry will allow a super set to work with subsets, which means if the world's splinters and every country has its own jurisdictions, it's GonNa be very hard for normal software companies because they're not built to do that but it's going to be very good for Palette here and finally Alex. Decision five years from now today. How would you measure success? Here, what would be the metrics which measure it? We know they're there obviously financial metrics but I'll tell you Powell cheer has recruited and retained I believe the most interesting most talented most ethical people I've ever met and we work I've interacted with thousands of institutions and in five years when meet I think he'll say to me. Wow, that wasn't just you saying that because it was the right thing to say it's actually true. And the products that will build over that period we'll we'll. We'll be unique and they will tilt the course of history. In favor of things that are good and noble. And will not avoid the complexity that's necessary to do that outlets. Carpool. You lots of luck and we do look forward to having that conversation hopefully in five years. But hopefully sooner than that. Thanks so much Alex.