Palantir Technologies Inc. — Q3 2020 Form 10-Q
Reporting period: Unaudited quarter and nine months ended September 30, 2020, compared with the same 2019 periods. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions unless stated otherwise.
Business context
Palantir develops and deploys Gotham and Foundry software platforms for government and commercial customers. It completed a direct listing of its Class A shares on the NYSE on September 30, 2020. The listing converted preferred shares into Class B common shares and triggered vesting of performance-based restricted stock units (RSUs), generating a large, one-time stock-based compensation charge.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $289.4m | $190.5m | $770.6m | $513.2m |
| Gross profit / margin | $140.0m / 48% | $125.5m / 66% | $488.5m / 63% | $346.7m / 68% |
| Operating loss | $(847.8)m | $(144.1)m | $(1,017.1)m | $(429.0)m |
| Net loss | $(853.3)m | $(139.9)m | $(1,018.0)m | $(420.3)m |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(278.3)m | $(500.0)m |
- Revenue rose 52% in Q3 and 50% for the first nine months. Q3 government revenue increased 68% to $162.6m; commercial revenue increased 35% to $126.8m. For the nine months, government revenue grew 73% and commercial revenue 30%.
- Q3 stock-based compensation was $847.0m, including $769.5m of cumulative RSU expense recognized when the direct listing satisfied the performance condition. Nine-month stock-based compensation was $1,028.9m. Management reported Q3 operating loss of $0.8m and nine-month operating income of $11.8m excluding stock-based compensation; these are non-GAAP measures, not GAAP profitability.
- Gross margin excluding stock-based compensation was 81% in Q3 versus 70% a year earlier, and 79% for the nine months versus 71%. Contribution margin, another company-defined non-GAAP measure, was 56% in Q3 versus 15%, and 51% for the nine months versus 16%.
- Cash and cash equivalents were $1.80bn at quarter-end; cash, cash equivalents, and restricted cash totaled $1.93bn. Current assets were $2.39bn and current liabilities $942.2m. The filing includes $339.4m of equity-related withholding tax and exercise proceeds receivable in prepaid current assets.
- Debt carrying value was $197.8m, representing $200m principal on a variable-rate term loan due June 2023. A further $200m revolving facility was undrawn. The company reported compliance with facility covenants.
- Nine-month financing cash flow was $817.3m, including $942.5m net proceeds from common stock issuance and $199.4m net debt proceeds, partly offset by $400m of debt repayments. Operating cash use improved from 2019, but remained negative.
Material changes and unusual items
- The direct listing materially affected reported earnings and equity: preferred stock converted to common stock, warrants were reclassified from liabilities to equity, and 68.1m RSUs vested. The company also recorded $53.7m of direct-listing-related and public-company readiness costs in Q3, primarily in general and administrative expense.
- Operating expenses rose sharply year over year, with substantial increases in stock-based compensation. Q3 GAAP gross margin declined 18 percentage points, chiefly due to listing-triggered stock compensation.
- Palantir issued $942.5m net proceeds from common stock sales during the first nine months. Total common shares outstanding at September 30 were 1.727bn across Classes A, B, and F.
- At September 30, the company had 132 customers. The top 20 customers generated 61% of nine-month revenue; the top three generated 27%. Average revenue per customer for the nine-month period was $5.8m, up 38% from $4.2m.
Outlook, management commentary, and risks
- Management said existing cash and cash equivalents should cover working capital and capital expenditure needs for at least 12 months. The filing provides no numerical revenue or earnings guidance.
- Management attributed improved contribution performance partly to expansion of existing accounts, better sales efficiency, and centralized hosting and deployment infrastructure. COVID-19 had not materially harmed results to date, according to the company, but its broader effects remained uncertain. Remote work and reduced travel lowered some costs; management expected travel and office spending to rise as offices reopened, but not return to pre-pandemic levels.
- Management expects cost of revenue, sales and marketing, research and development, and public-company administrative costs to rise in absolute dollars. The company’s model also entails upfront investment in pilots and customer deployments, which may not lead to material contracts.
- Remaining performance obligations were $321.6m, with approximately 58% expected to be recognized over the next 12 months. These exclude cancelable contracted revenue; many customer contracts can be terminated for convenience, and government options are not assured.
- Government contracts awarded had $1.3bn of remaining deal value, including options; a further $2.6bn of IDIQ awards was excluded because funding was undetermined and not guaranteed. Cloud-hosting commitments include at least $1.49bn over six contract years, with $60m of the $126m 2020 commitment satisfied by September 30.
- Key risks include customer and government contract cancellations or non-renewals, customer concentration, lengthy and unpredictable sales cycles, competition, dependence on third-party cloud providers, cybersecurity and privacy incidents, regulatory and government procurement requirements, and uncertain COVID-19 effects. The filing also describes pending KT4 Partners and BTIG lawsuits; Palantir disputes the claims, and says it cannot estimate a possible loss range.
- The multi-class structure gives Class B shares ten votes per share and Class F shares variable voting rights. The founders’ arrangements can preserve up to 49.999999% of voting power while specified ownership conditions are met, limiting other shareholders’ influence.
Important facts for investors to verify
- How much of the reported loss and margin deterioration reflects listing-related stock compensation, and how do GAAP results compare with the company’s non-GAAP measures?
- Whether customer expansion and contribution-margin improvements persist after COVID-related cost reductions, and whether customer growth broadens beyond major accounts.
- Cash conversion and collections, including the unusually large equity-related receivable, customer deposits, and deferred revenue balances.
- The renewal, termination, and funding status of major commercial and government contracts, including IDIQ awards and options, and progress against cloud-hosting commitments.
- Potential dilution from outstanding options, RSUs, future equity awards, and share sales, alongside the implications of founder voting control.
- Developments in the KT4 and BTIG litigation, and any changes to the company’s liquidity, debt covenants, or outlook.