Palantir Technologies Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. The company develops and deploys software platforms, including Gotham, Foundry, and Apollo, for government and commercial customers. Figures below are in U.S. dollars; financial statement amounts are unaudited.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $477.9 million | $392.1 million | $1.397 billion | $1.109 billion |
| Gross profit / GAAP gross margin | $370.3 million / 77% | $305.3 million / 78% | $1.093 billion / 78% | $857.2 million / 77% |
| Operating loss | $62.2 million | $91.9 million | $143.4 million | $352.1 million |
| Net loss | $123.9 million | $102.1 million | $404.6 million | $364.2 million |
| Net loss per share, diluted | $0.06 | $0.05 | $0.20 | $0.19 |
| Cash from operating activities | Not separately stated for the quarter | $145.0 million | $240.4 million |
- Revenue growth: Q3 revenue increased 22% year over year; nine-month revenue rose 26%. Q3 government revenue grew 26% and commercial revenue 17%. For the nine months, government revenue grew 18% and commercial revenue 37%.
- Profitability and margins: GAAP operating loss narrowed in both comparison periods, but net loss widened, primarily reflecting substantially higher investment-related losses in other income (expense). Q3 other expense was $65.0 million versus $8.5 million a year earlier; the nine-month amount was $260.7 million versus $11.3 million. The company reported $192.8 million of net unrealized losses on marketable securities for the nine months, in addition to realized losses.
- Non-GAAP measures: Management reported adjusted operating income of $81.3 million for Q3 and $306.5 million for the nine months, excluding stock-based compensation and related employer payroll taxes. These measures are not GAAP results. Gross margin excluding stock-based compensation was 80% for Q3 and 81% for the nine months.
- Stock-based compensation: Expense was $140.3 million in Q3 and $435.4 million for the nine months, down 24% and 29%, respectively, year over year. Management attributed the decreases mainly to forfeitures and lower expense on certain pre-listing awards.
- Cash, liquidity, and debt: At September 30, cash and cash equivalents were $2.411 billion; restricted cash was $41.5 million and marketable securities were $57.3 million. Operating cash flow for the first nine months fell to $145.0 million from $240.4 million, principally due to timing of customer receipts and vendor payments. The company had no debt outstanding and $950 million of undrawn revolving and delayed-draw term loan commitments; it was in compliance with facility covenants.
- Balance sheet: Total assets were $3.319 billion and total liabilities $932.2 million at September 30, 2022. Accounts receivable rose to $343.3 million from $190.9 million at year-end 2021; two customers represented 17% and 13% of receivables. Accumulated deficit was $5.890 billion.
- Customer and contracted-revenue indicators: The company reported 337 customers, up from 203 a year earlier. Remaining performance obligations were $1.3 billion; management expected to recognize approximately 44% over the next 12 months. This measure excludes cancelable contracted revenue and certain contracts with terms of 12 months or less.
Material changes versus the prior comparable period
- Revenue grew across both customer segments, with faster nine-month growth in commercial than government revenue. U.S. customers generated 62% of nine-month revenue, versus 56% in the prior-year period.
- Operating losses narrowed while GAAP gross margin was broadly stable: Q3 margin declined one percentage point, while the nine-month margin improved one point. Q3 contribution margin, a company-defined non-GAAP measure, declined to 52% from 57%; nine-month contribution margin declined to 55% from 58%.
- Net losses increased despite lower operating losses, as investment losses drove a significant deterioration in other income (expense).
- Operating cash flow decreased, while investing cash use declined to $118.5 million from $216.0 million. Cash and cash equivalents increased to $2.411 billion from $2.291 billion at December 31, 2021.
Outlook, commentary, risks, and unusual items
- Guidance: The supplied filing text does not provide a clear numerical revenue or earnings guidance range. Management said cash, operating cash flows, available funds, and financing access should be sufficient for anticipated operating needs for at least the next 12 months, while cautioning that future cash needs and cash flows are uncertain and operating cash flow may fluctuate between positive and negative.
- Costs: Management expects cost of revenue to increase as revenue grows and expects sales and marketing, research and development, and general and administrative expenses to increase in absolute dollars as the company invests in growth, product development, personnel, and public-company requirements.
- Investments: The company invested $124.5 million in entities during the first nine months of 2022, including $35.0 million for Rubicon Technologies shares in Q3. Commercial contracts with investees or related entities had a stated total value of $754.9 million, including $116.2 million of contractual options; $98.7 million of revenue from those contracts was recognized in the first nine months. Many contracts have termination provisions. Management said it did not currently anticipate entering into new agreements to purchase securities of SPACs.
- Commitments: The company reported a cloud-hosting purchase commitment of at least $1.49 billion over six contract years. It satisfied its $167.0 million commitment for the year ended September 30, 2022; the commitment for the year ending September 30, 2023 is $199.0 million.
- Legal matters: A previously disclosed KT4 Partners dispute was settled; the company paid the settlement and received insurance reimbursement by September 30, 2022. Three putative securities class actions filed in September, October, and November 2022 allege misleading statements about the business and prospects. The company disputes the claims and intends to defend them; it said the matters were too early to estimate a reasonably possible loss or range.
- Other risks and contingencies: The filing highlights customer contract termination rights, long and unpredictable sales cycles, government budget and procurement uncertainty, competition, cybersecurity and privacy risks, reliance on third-party cloud providers, and exposure to market-value changes in investments. The company noted that a stronger U.S. dollar had an unfavorable but nonmaterial revenue effect in the periods reported. It also said COVID-19 and the war in Ukraine had not materially affected results to date, while warning that future effects remain uncertain.
- Governance: The multi-class share structure and founder voting arrangements concentrate voting power. The filing also describes substantial potential dilution from outstanding equity awards and future share issuances.
Important facts for investors to verify
- Whether revenue growth—particularly commercial growth—continues, and how much comes from existing customers, new customers, or investee-related contracts.
- Whether operating cash flow recovers, given the year-over-year decline and the increase in accounts receivable.
- The performance and carrying values of marketable securities and other investments, including the potential for further gains or losses in reported earnings.
- The effect of substantial stock-based compensation and outstanding options and RSUs on GAAP profitability and share dilution.
- The extent to which remaining performance obligations and customer deposits convert into recognized revenue and cash, considering cancellation rights and options.
- Developments in the securities class actions, the cloud-hosting commitment, and the company’s $950 million undrawn credit capacity and related covenants.