Palantir Technologies Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; filed August 7, 2023. Palantir develops and deploys software platforms, including Gotham, Foundry, and Apollo, and was developing its Artificial Intelligence Platform (AIP). Unless otherwise stated, financial figures below are in U.S. dollars.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $533.3 million | $473.0 million | $1,058.5 million | $919.4 million |
| Gross profit / margin | $426.4 million / 80% | $370.8 million / 78% | $844.0 million / 80% | $722.7 million / 79% |
| Operating income (loss) | $10.1 million | $(41.7) million | $14.2 million | $(81.2) million |
| Net income (loss) | $27.9 million | $(179.3) million | $47.0 million | $(280.7) million |
| Net income (loss) attributable to common stockholders | $28.1 million | $(179.3) million | $44.9 million | $(280.7) million |
| Basic and diluted EPS | $0.01 | $(0.09) | $0.02 | $(0.14) |
Q2 revenue grew 13% year over year; six-month revenue grew 15%. Government revenue grew 15% in Q2 and 17% for the half; commercial revenue grew 10% and 13%, respectively. U.S. customers accounted for 63% of first-half revenue. Palantir reported 421 customers for the trailing twelve months, versus 304 a year earlier; average trailing-twelve-month revenue from its top 20 customers was $52.6 million, up 15%.
GAAP gross margin improved year over year, while gross margin excluding stock-based compensation was 81% in both comparative periods. Stock-based compensation was $114.2 million in Q2 and $228.9 million in the first half. Management’s adjusted operating income, excluding stock-based compensation and related employer payroll taxes, was $135.0 million in Q2 and $260.1 million in the first half; these are non-GAAP measures.
Cash, liquidity, and debt
- At June 30, 2023, cash and cash equivalents were $1.056 billion and marketable securities were $2.047 billion, predominantly short-term U.S. Treasury securities. Management described $3.1 billion of cash, cash equivalents, and short-term Treasuries as available liquidity.
- First-half operating cash flow was $277.6 million, versus $97.9 million a year earlier. Investing activities used $1.946 billion, primarily reflecting purchases of marketable securities; financing provided $116.7 million, mainly from stock-option exercises.
- Cash, cash equivalents, and restricted cash totaled $1.074 billion at June 30, 2023, down from $2.627 billion at the start of the year. The decline largely reflects cash converted into marketable securities.
- No debt was outstanding. The credit facility had $950 million of undrawn commitments at June 30, including a $450 million delayed-draw term loan commitment that expired undrawn on July 1, 2023. The $500 million revolving facility matures in March 2027. The company reported covenant compliance.
- Current assets were $3.577 billion and current liabilities were $685.4 million. Contract liabilities—deferred revenue and customer deposits—totaled $497.8 million. Remaining performance obligations were $967.6 million; Palantir expected to recognize approximately 58% within 12 months. Many contracts are terminable for convenience, which may affect expected revenue.
Material changes and unusual items
- Palantir moved from operating and net losses in the prior-year periods to GAAP operating and net income in the 2023 periods. Lower stock-based compensation contributed to the operating improvement; Q2 stock-based compensation fell 22% year over year.
- Interest income rose to $30.3 million in Q2 and $51.2 million for the first half, primarily due to higher interest rates and increased interest-bearing balances.
- Other expense narrowed substantially year over year, mainly because losses on equity securities were lower than in 2022. Q2 other expense was $9.0 million, compared with $135.8 million; first-half other expense was $11.9 million, compared with $195.7 million.
- Palantir sold its gold holdings during the first half for $51.1 million, recording an immaterial gain. It also sold and reinvested $694.6 million of debt securities; realized gains and losses were immaterial.
- In August 2023, after quarter-end, the board authorized a share repurchase program of up to $1.0 billion. Timing and amount of any repurchases are discretionary; the filing does not provide a commitment to repurchase a specific amount.
Outlook, commentary, and risks
The filing does not provide a clear numerical revenue or earnings forecast. Management said available liquidity, operating cash flows, and access to financing were expected to be sufficient for anticipated operating needs for at least the next 12 months, while noting that future cash needs and cash flows are uncertain. Management described U.S. customers as an expected source of significant revenue growth and government customers as a resilient revenue source, but highlighted uncertainty in government budgets, priorities, and contract timing.
- AIP was being developed for government and commercial customers, combining Palantir’s platforms with large language models. The company cautioned that AI can create risks involving inaccurate outputs, bias, privacy, intellectual property, regulation, and reputational harm.
- Other material risks include customer concentration and contract cancellations, long and unpredictable sales cycles, competition, implementation and service demands, cybersecurity and third-party cloud dependence, evolving privacy and AI rules, foreign-exchange fluctuations, and macroeconomic uncertainty.
- One government customer represented 10% of revenue in both Q2 and the first half. Customer I represented 19% of accounts receivable at quarter-end, creating collection concentration risk.
- Palantir disclosed consolidated securities class actions and related stockholder derivative actions. The cases were at an early stage, and the company could not estimate a reasonably possible loss or range of loss. It stated that it was unaware of pending legal matters expected to have a material adverse financial impact.
- The company had a minimum cloud-hosting purchase commitment of $1.49 billion over six contract years. For contract year three, ending September 30, 2023, it had satisfied $124.2 million of a $199.0 million commitment as of June 30, 2023.
- Management concluded disclosure controls and procedures were effective at a reasonable-assurance level; it reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth and customer expansion persist, particularly across government and commercial accounts, and how much growth comes from existing customers.
- How much of reported profitability depends on interest income and reduced stock-based compensation; track both GAAP results and the substantial ongoing stock-based compensation expense.
- Cash generation and collections, including the concentrated receivable exposure, customer deposits, and the potential effects of contract cancellations or customer financial distress.
- Conversion of remaining performance obligations into revenue, keeping in mind that many customer contracts are cancellable and the disclosed figure excludes cancellable contracted revenue.
- Actual use of the credit facility and the impact of the expired delayed-draw commitment; verify the amount and timing of any share repurchases against liquidity needs.
- Progress and commercial adoption of AIP, along with related product, security, privacy, regulatory, and reputational risks.
- Developments in the securities and derivative litigation, and performance against the cloud-hosting purchase commitment.