Palantir Technologies Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with the three months ended March 31, 2020 unless noted. Amounts below are in U.S. dollars.
Business context
Palantir develops and deploys its Gotham and Foundry software platforms for government and commercial customers. In Q1 2021, government customers generated 61% of revenue and commercial customers 39%. The company reported 149 customers, compared with 131 a year earlier.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $341.2 million | $229.3 million | Up 49% |
| Gross profit / margin | $267.1 million / 78% | $165.0 million / 72% | Margin up 6 percentage points |
| Operating expenses | $381.1 million | $235.2 million | Up 62% |
| Operating loss | $114.0 million | $70.2 million | Loss widened |
| Net loss | $123.5 million | $54.3 million | Loss widened |
| Operating cash flow | $116.9 million provided | $287.2 million used | Improved |
- Revenue growth was led by government customers: government revenue rose 76% to $208.4 million; commercial revenue increased 19% to $132.8 million. The filing attributes growth mainly to expansion within existing customers.
- Gross margin excluding stock-based compensation was 83%, versus 75% a year earlier. Contribution margin, a company-defined non-GAAP measure, was 60%, versus 41%.
- Stock-based compensation was $193.7 million, compared with $54.1 million. Management reported non-GAAP operating income of $116.6 million after excluding stock-based compensation and related employer payroll taxes; GAAP operating results remained a loss. These non-GAAP measures are not substitutes for GAAP results.
- Cash and cash equivalents were $2.339 billion at March 31; restricted cash totaled $109.0 million. Total assets were $3.014 billion and total liabilities were $1.208 billion.
- Q1 operating cash flow was positive despite the net loss, with stock-based compensation a major noncash adjustment. Financing cash flow included $208.9 million from option exercises. Capital expenditures were $0.7 million.
- At March 31, the company had $200 million of term debt and a further $200 million available under its revolving facility. On April 1, it repaid the term loans and amended the facility, increasing revolving commitments to $400 million; no amounts were then outstanding.
Material changes and unusual items
- General and administrative expense rose 107% to $146.6 million; sales and marketing rose 38% to $136.1 million; and research and development rose 50% to $98.5 million. Management attributed much of the expense increase to stock-based compensation and employer payroll taxes related to share-based awards, including awards vesting after the 2020 direct listing.
- Revenue from the top three customers represented 20% of Q1 2021 revenue, compared with 31% in Q1 2020. No individual customer exceeded 10% of Q1 2021 revenue.
- Remaining performance obligations were $625.9 million at March 31, of which the company expected to recognize approximately 50% over the next twelve months. Many customer contracts can be terminated for convenience, so contracted amounts do not guarantee revenue.
- The company reported a $1.49 billion minimum cloud-hosting purchase commitment over six contract years and a separate $45 million cloud-hosting commitment over five years. It had met $111.2 million of the $126.0 million commitment for the contract year ending June 30, 2021.
- Palantir committed to invest $41 million in Lilium HoldCo, contingent on completion of a proposed business combination. Subsequent to quarter-end, it also announced several other contingent investments totaling $91 million, each paired with a multi-year enterprise subscription contract.
- The company reported an accumulated deficit of $5.1 billion and stated it had incurred losses each year since inception.
Outlook, management commentary and risks
- Management said existing cash and cash equivalents were expected to meet working capital, capital expenditure, and contractual needs for at least the next twelve months. No specific revenue or earnings guidance for future periods is provided in the supplied filing text.
- Management expects cost of revenue, sales and marketing, research and development, and general and administrative expenses to increase in absolute dollars as the business grows and invests. It expected travel and office costs to rise as offices reopened, but not return to pre-pandemic levels.
- Management said COVID-19 had not materially adversely affected results to date and had minimally disrupted platform operations, but the pandemic’s broader effects remained uncertain. Remote work, customer budget pressure, and sales-cycle disruption were identified as potential concerns.
- Key risks include continued losses and uncertain profitability; dependence on existing customers and customer expansion; long and unpredictable sales cycles and pilots that may not convert; contract termination rights; substantial stock-based compensation and potential dilution; reliance on third-party cloud providers; cybersecurity, privacy, regulatory and legal exposure; government budget and procurement risks; and concentrated founder voting control.
- The filing describes a pending lawsuit by KT4 Plaintiffs alleging tortious interference and civil conspiracy. Palantir contests the claims and said it could not estimate a possible loss range. It reported no known pending legal matter expected to have a material adverse impact on the financial statements.
Important facts for investors to verify
- Whether government-led growth and expansion among existing customers continue, and whether customer concentration or contract cancellations change materially.
- How much of reported cash generation is repeatable after considering noncash stock compensation, option-exercise proceeds, and changes in working capital.
- The scale and timing of stock-based compensation, payroll taxes on equity awards, and resulting share dilution.
- Actual cloud-hosting spend against minimum commitments, and the timing and conditions for the contingent investments and associated customer contracts.
- Conversion of remaining performance obligations into recognized revenue, given customer termination rights and variable government procurement timing.
- Post-quarter repayment of the $200 million term loan and the terms and covenants of the amended $400 million revolving facility.