1.
The P&L
Here is Planet Labs profit and loss statement for the last five years. The bottom lines is that it’s lost a lot of money. Nearly $700M over that time. It lost $140M just last year alone. Woof.
Planet manufactures images from its fleet of satellites. Part of its business is buying material and parts for those satellites. Accountants treat those parts like parts for any sort of factory or machinery: their value goes on Planet’s balance sheet and then its runs through the P&L as an expense over the lifetime of those satellites.
Planet also spends a lot on engineers to create those parts, software engineers to process its images and create tools so that its images are useful to customers and sales people to go out and create markets for this whizzy new service. Accountants say “sure, all of this is investment, but since we can’t figure out when any of these investments pay off, you’ll just have to run all that through your profit and loss statement right now.”
These expenses show up as “Research & development” and “Sales & marketing” on Planet’s P&L. These chalk up 70% of Planet’s expenses over that run. Not all of those expenses are investment though, some relate to current business Most, though, don’t.
“Matching” is an crucial piece of accounting. Expenses are supposed run through a company’s P&L when they’re related to the revenue for whatever period a company is reporting.
When expenses don’t match, it’s tough to tell what kind of profit or loss a company actually made.
As more activity in the economy has shifted to things like software, or in Planet’s case, images, the challenge has grown.
For Planet, the potential profit is tantalizing. Its unit economics — how much profit it’ll make from one individual unit of production — are great. It costs Planet next to nothing to sell another image to another customer. It produces an image once. It can sell that image infinity times to infinity customers without and additional direct cost.
From an accounting standpoint, it’s a challenge. It cost Planet some amount of money to produce the image — satellite costs, software costs, engineering costs — but since once it creates the unit, there aren’t additional costs to sell it again. The unit is “non-rival.” But this means accountants can’t match a dollar of expense to a dollar of revenue.
2.
Research & Development
Figuring out how much of Planet’s R&D expense relates to investment is easy. All of it. When should the company run those expenses through it’s P&L? That’s much trickier.
Mauboussin’s primer on running this analysis suggests running R&D expenses through a company’s P&L over three years. He cites research that backs up this suggestion. This is for the average case though.
In the specific case of Planet, we should consider a few things. Planet’s R&D activity doesn’t immediately go to the shop floor and start producing economic activity. There’s a lag. Years in the case of Planet.
It announced a new satellite model, Taniger, back in late 2022. It had already been working on some of the elements before that. The first Taniger satellite is just now at Vandenberg Space Force Base, ready to launch in July 2024.
Planet also designed the gear to last longer than three years. Instead of using the average case of running R&D expenses through the P&L over three years beginning today, Lamplighter started running R&D expenses through the P&L after a lag of one year and for a duration of four years.
Lamplighter expects that a lot of Planet’s R&D takes longer than a year to impact revenue and that its projects have a longer revenue benefit than four years, but the analysis is limited by Planet’s lack of publicly available financial reports before 2019.
The result is a more conservative analysis anyway, which is generally preferrable.
Lamplighter’s exercise results in additional pre-tax profit of $37M for Planet’s most recent fiscal year (January 2024).
3.
Sales & Marketing
Lamplighter takes Planet's Sales & Marketing expenses a bit more by the book.
Like R&D expenses, Sales & Marketing expenses present a challenge of matching. A sales person spends months (years?) cultivating a customer relationship. Finally, the customer agrees to a pilot program, where there's some revenue. Then, sometime later, maybe, a real contract comes in. All those months paying the sales person don't match with the revenue they ultimately bring in.
This is especially true for Planet's business, which is predominantly serving federal and civil governments. These contracts take a long time to bid, review, pilot, then sign. Once they kick-off though, they often last more than a year and may not require much hand holding from sales reps. And, unless a contract kicks off January 1, revenue from these deals will come more in later years than in the first one. There's a big upfront cost, then a low-cost stream of revenue after that, a pretty similar profile to R&D activity.
So, Planet's sales & marketing activities fit the bill to try and adjust them to more closely match its revenue.
Lamplighter doesn't have detailed insight into the specific activities and how those might, precisely, match revenue. We take the base case and apply it to Planet. Mauboussin takes 30% of Sales & Marketing expenses and spreads those costs across three years. Lamplighter does the same here. This allows for 70% of Sales & Marketing expense to either relate to the current year, or to yield no contracts at all. Putting up donuts is consistent with trying to open new markets. A lot of this activity won't result in any sales, so is just an expense today.
After jumping through all the hoops, the exercise boosts Planet’s fiscal 2024 operating profit by $6M. A modest, but positive insight.
4.
Stock-based Compensation
Companies use stock-based compensation to pay employees. Employees like cash because they can pay the bills with it. They like stock because it might end up being worth more than when they receive it. Paying employees in stock has the added benefits of nudging employees to deliver results, giving an incentive to stay with the company and it creates an overall sense of “we’re in this together.”
Stock-based compensation is also a sneaky way to finance a growing business.
Instead of running around trying to find outside investors to pony-up cash to pay expensive employees, companies can just sort of skip some steps and “pay” their employees, who then turnaround and “invest” in the company.
Since stock-based compensation is a way to pay employees, accountants tell companies to treat it as an expense. So they should.
Since companies don’t pay stock-based compensation in cash, its impact on how investors should think about expense and value is a little squidgy.
Michael Mauboussin (again) suggests a framework — well, two — for investors to tackle this. The first is straightforward: stock-based compensation is a real, regular expense, even if it’s not cash, so treat it that way. This lowers the cash earnings that go to other shareholders, but simplifies how investors look at the price of the company.
Since Planet doesn’t yet generate cash overall, Lamplighter expects the second framework to work better. That is to treat stock-based compensation as a proper fundraising activity. The value of stock-based compensation accumulates on top of other shareholder equity. this makes the company’s price larger.
The two methods result in the same “value” for shareholders. They just get there in a different way.
Planet doesn’t generate cash and still invests heavily for future growth. Treating stock-based compensation as an additional piece of equity financing seems a better fit. For Lamplighter’s profit analysis, we chose this method. The result boosts profit — which helps Lamplighter’s narrow argument on profit — but increases how an investor should think about price.
5.
Profit?
So, does all this spreadsheet magic get Planet to a profit last year?
Nah.
It still made a loss of $74 million. That’s better than it’s reported $140 million. And if it had a longer history of published financials the result would have been something better.
It does put it into a better position to make a profit soon though.
Disclaimer: None of this is investment advice. It's meant to illustrate ways LCM thinks about investing. Things that LCM decides are good investments for LCM and its clients are based on many criteria, not all of which are covered here. Some or all of LCM's ideas may not be suitable for other investors. LCM does not recommend investing either long or short any position mentioned. LCM may own positions in some of the companies mentioned. Some of its ideas will lose money — investing entails risk. See full disclaimer here.