Context on Palantir's 10/5 Press Release Referencing the Capability Drop 2 Program

Overview: Palantir on Oct. 5 issued a press release stating that it has been selected "to deliver the Army’s Intelligence data fabric and analytics foundation for the Capability Drop 2 (CD-2) program.” The release referred to a "competitive $823 million" contract but wasn't specific about the value of any new work tied to the announcement. Below we provide background on the program and our view on the announcement's significance.

Background: The press release does not refer to a new $823 million contract win. Rather, Palantir is describing a potentially positive development on an existing program, called the Distributed Common Ground System-Army (DCGS-A). The program has two components: Capability Drop 1 and Capability Drop 2. Both components operate as so-called Indefinite Delivery/Indefinite Quantity (IDIQ) contracts that allow the selected suppliers to compete against each other in sub competitions for specific orders. The contract for Capability Drop 1, valued at up to $876 million over 10 years, was awarded to Palantir and Raytheon Technologies in March 2018. Despite the contract's high ceiling value, the actual orders issued under the contract have been very limited so far (Figure 1). The contract for Capability Drop 2, valued at as much as $823 million over seven years, was issued to Palantir and BAE Systems in February 2020 (this is the one referenced in the Oct. 5 release). It also has generated few orders to date (Figure 2).

Figure 1

Figure 2

Discussion:

• Both of the DCGS-A Capability Drop contracts are set up to allow ongoing competition between the selected contractors for specific orders (i.e. they are not “down select” arrangements where one winner is chosen out of the two finalists and receives all program funding). So it is possible that both Palantir and BAE could continue to compete for various components of the project and split the available revenue.
• Palantir states in its Oct. 5 release that it was “selected to progress to the next phase” and will “support the Army as they proceed through final testing and fielding.” We note that it’s possible BAE has been selected to progress to the next phase as well.
• Notably, after losing a roughly $20 million order to Palantir under the Capability Drop 1 contract, Raytheon told Defense News: “The Army plans to award multiple delivery orders for systems over [10 years]. While we are disappointed in the Army’s decision on this initial delivery order, it represents a relatively small number of systems. We will actively compete for future delivery orders as we continue to work closely with the Army to help them meet their intelligence needs.”
• There’s some history of unusual press releases on this program. BAE in July 2020 issued a release stating it was awarded an initial order under the CD-2 contract without mentioning the order value. Although vague, the release seemed to imply that BAE had been selected over Palantir. However, government spending data shows that BAE has received only a single, $2.9 million order under the CD-2 contract, while Palantir similarly received a $2.3 million order (see figure 2).
• There’s no concrete information available on how much this announcement may be worth to Palantir, since the company didn’t attach a dollar amount to its “selection,” and no government data has been released showing a new transaction on the program. (The $823 million figure that is included in the release refers to the notional ceiling value of the program that could be awarded to Palantir and BAE combined through February 2027. IDIQ contracts such as this one often have inflated ceiling values, and this figure should not be viewed as a realistic estimate for the value of the program.) The lack of detail on the value, combined with the low historical spending on both DCGS-A components, suggests to us that Palantir’s selection most likely entails a relatively low-dollar order to provide continued testing. On the low end, this could mean a $2 million order like those previously issued on the contract, or on the high end it could mean a roughly $20 million order similar to the largest order issued to-date on the Capability Drop 1 contract.

Bottom Line: We don’t see any reason to believe this is an inflection point in the program for Palantir. The program seems to be progressing slowly, with more testing still ahead. While entering a new phase of a potentially large Army program is a notable development for Palantir, we wouldn’t expect a near-term spike in revenue under this contract. Given the program’s structure, Palantir will most likely continue to face competition from BAE for future orders.