Palantir Technologies Inc. quarterly report, Q3 FY2021

Business context and reporting period

Palantir Technologies Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2021. It develops and deploys Gotham and Foundry software platforms for government and commercial customers. Comparisons below are with the corresponding 2020 periods unless noted.

Financial performance and liquidity

Adjusted operating income excludes stock-based compensation, related employer payroll taxes and, for 2020, nonrecurring Direct Listing charges; it is not a GAAP measure. Stock-based compensation was $184.8 million in Q3 2021 and $611.3 million for the first nine months, compared with $847.0 million and $1.029 billion, respectively, in 2020. The prior-year expense included substantial accelerated recognition at the 2020 Direct Listing, an important reason GAAP losses and margins improved sharply.

• Revenue mix: Q3 government revenue was $217.8 million, up 34%, and commercial revenue was $174.3 million, up 37%. For the first nine months, government revenue rose 57% to $658.4 million and commercial revenue rose 29% to $450.6 million. Government customers represented 59% of nine-month revenue.
• Cash flow: Operating cash flow was positive $240.4 million for the first nine months, versus negative $278.3 million in 2020. Investing used $216.0 million, principally for marketable securities and gold; financing provided $274.3 million, including $474.7 million from stock-option exercises and $200.0 million of debt repayment.
• Liquidity and debt: September 30 cash and cash equivalents were $2.335 billion; total cash, cash equivalents and restricted cash were $2.423 billion. Marketable securities were $148.1 million. No debt was outstanding; the company had a $400 million undrawn revolving facility. Total current assets were $2.811 billion and current liabilities were $681.5 million.
• Other metrics: The company reported 203 customers in the trailing twelve months, versus 142 a year earlier. Remaining performance obligations were $873.9 million, with approximately 45% expected to be recognized over the next 12 months; many customer contracts can be terminated for convenience.

Material changes versus the prior comparable period

Growth came from both segments, including expansion among existing government customers and new commercial customers. Management attributed improved deployment economics to customer-account expansion, increased sales efficiency and centralized hosting infrastructure. GAAP gross margin rose substantially, but the comparison is heavily affected by unusually high 2020 stock-based compensation. Excluding that expense, gross margin was broadly stable.

Cash and cash equivalents increased from $2.011 billion at December 31, 2020, while total liabilities declined to $976.3 million from $1.168 billion, principally following repayment of the $200 million term loan. Stock-option exercises generated significant financing cash and contributed to share issuance; common shares outstanding increased from approximately 1.792 billion at year-end 2020 to 1.991 billion at September 30, 2021.

Outlook, management commentary, risks and unusual items

• The filing provides no specific numerical revenue or earnings guidance. Management said existing cash and operating cash flows should meet working-capital, capital-expenditure and contractual needs for at least 12 months, while noting future financing needs could depend on growth and investment activity.
• Management expects operating expenses to increase in absolute dollars as the company invests in sales, research and development, personnel and public-company compliance. It also expects travel and office spending to rise as offices reopen, though not necessarily to pre-pandemic levels. The company said COVID-19 had not materially adversely affected results to date, but its future impact remained uncertain.
• Investing activity was notable: the company purchased $153 million of shares under investment agreements and $50.9 million of gold bars. At September 30, approved investment commitments totaled $226.5 million. Related commercial contracts had up to $640.2 million of potential revenue, including options, but many include termination provisions tied to investment or business-combination outcomes. After quarter-end, the company purchased another $55 million of shares and reported $26 million of additional investment commitments.
• The company had a minimum cloud-hosting purchase commitment of $1.49 billion over six contract years; it had met $34 million of the $167 million commitment for the contract year ending June 30, 2022. A separate five-year hosting commitment was $45 million, of which $8 million had been met.
• Marketable securities generated $7.2 million of unrealized losses in the first nine months. The company cautioned that investment values may be volatile and that investment capital could be partly or entirely lost.
• Legal proceedings include a 2017 Delaware lawsuit by KT4 Plaintiffs alleging tortious interference and civil conspiracy. Palantir disputes the claims; a possible loss was described as reasonably possible, but the company could not estimate a range. It reported no pending legal matters expected to have a material adverse impact on the financial statements.
• Key risks include continuing losses and uncertain profitability, customer concentration and contract termination rights, long and costly sales cycles, dependence on government spending, competition, cybersecurity and privacy exposure, reliance on third-party cloud providers, and extensive regulation. The multi-class structure gives the founders substantial voting control.
• The company reported effective disclosure controls at quarter-end and no material changes to internal control over financial reporting during the period. It also noted that annual auditor attestation of internal controls was expected to begin with the 2021 Form 10-K.

Important facts for investors to verify

• Track organic revenue growth and customer expansion by government and commercial segment, alongside customer concentration and contract renewals or terminations.
• Assess operating performance using GAAP results as well as non-GAAP adjustments, particularly the effect of stock-based compensation, payroll taxes and dilution.
• Monitor operating cash generation against planned investment commitments, cloud-hosting obligations and any future financing needs.
• Evaluate the performance, valuation and liquidity of strategic investments, and whether investment-linked customer contracts convert into durable, collectible revenue.
• Review developments in the KT4 litigation, cybersecurity and regulatory exposures, and the implications of founder voting control and potential share issuance.