PALANTIR TECHNOLOGIES INC. 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial statements and the accompanying notes thereto included in our final prospectus (the "Prospectus") filed with theSecurities and Exchange Commission (the "SEC") pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the "Securities Act") onSeptember 30, 2020 . This discussion contains forward-looking statements based upon current plans, expectations, and beliefs, involving risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements. You should review the section titled "Special Note Regarding Forward-Looking Statements" for a discussion of forward-looking statements and the section titled "Risk Factors" for a discussion of factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis and elsewhere in this Quarterly Report on Form 10-Q. Our historical results are not necessarily indicative of the results that may be expected for any period in the future.
Overview
We founded the company in 2003 to build software for use in counterterrorism operations.
In 2008, we released our first platform, Palantir Gotham ("Gotham"), for customers in the intelligence sector. Gotham enables users to identify patterns hidden deep within datasets, ranging from signals intelligence sources to reports from confidential informants.
Defense agencies inthe United States then began using Gotham to investigate potential threats and to help protect soldiers from improvised explosive devices. Today, the platform is widely used by government agencies inthe United States and its allies. Our software is on the front lines, sometimes literally, and that means so are we.
We later began working with leading companies across industries, including companies in the energy, transportation, financial services, and healthcare sectors. In 2016, we released our second software platform, Palantir Foundry ("Foundry"), to address a common set of challenges that we saw at large companies.
Foundry is becoming a central operating system not only for individual institutions but also for entire industries.
In 2017, for example, our partnership with Airbus expanded into a platform for the aviation industry, and today connects data from more than one hundred airlines and 9,000 aircraft around the world.
We believe that every large institution faces challenges that our platforms were designed to address. Our focus in the near term is to build partnerships with institutions that have the leadership necessary to effect structural change within their organizations - to reconstitute their operations around data. Over the long term, we believe that every large institution in the markets we serve is a potential partner. Direct Listing OnSeptember 30, 2020 , we completed a direct listing of our Class A common stock (the "Direct Listing"), on theNew York Stock Exchange (the "NYSE"). Immediately prior to the direct listing and the filing of our amended and restated certificate of incorporation, all outstanding shares of redeemable convertible preferred stock and convertible preferred stock were converted into 797,743,185 shares of our Class B common stock, and all of our outstanding preferred stock warrants were converted into common stock warrants, which resulted in the reclassification of the warrants liability to additional paid-in capital. Additionally, our restricted stock units 35
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("RSUs") had a performance vesting condition that was satisfied upon the
completion of the Direct Listing. Accordingly, the Direct Listing resulted in
the vesting and settlement of RSUs covering 68,149,214 shares of Class A common
stock and as a result we recorded cumulative stock-based compensation of
$769.5 million on September 30, 2020 .
In addition, we incurred fees related to financial advisory, accounting, legal
and other professional services related to the Direct Listing and public company
readiness initiatives and recorded $53.7 million and $56.2 million primarily in
general and administrative expense for the three and nine months ended
September 30, 2020 , respectively.
Our Business
For the three months endedSeptember 30, 2020 , we generated$289.4 million in revenue, reflecting a 52% growth rate from the three months endedSeptember 30, 2019 , when we generated$190.5 million in revenue. In the nine months endedSeptember 30, 2020 , we generated$770.6 million in revenue, reflecting a 50% growth rate from the nine months endedSeptember 30, 2019 , when we generated$513.2 million in revenue.
As of
We define a customer as an organization from which we have recognized revenue in a reporting period. For large government agencies, where a single institution has multiple divisions, units, or subsidiary agencies, each such division, unit, or subsidiary agency that enters into a separate contract with us and is invoiced as a separate entity is treated as a separate customer. For example, while theU.S. Food and Drug Administration ,Centers for Disease Control , andNational Institutes of Health are subsidiary agencies of theU.S. Department of Health and Human Services , we treat each of those agencies as a separate customer given that the governing structures and procurement processes of each agency are independent. We have built lasting and significant customer relationships with some of the world's leading government institutions and companies. Our average revenue per customer in the nine months endedSeptember 30, 2020 was$5.8 million , which grew 38% from$4.2 million per customer in the nine months endedSeptember 30, 2019 . Our top twenty customers, based on our revenue in the nine months endedSeptember 30, 2020 , generated$471.1 million in revenue, or 61% of our total revenue in that period. From those top twenty customers, we generated an average revenue per customer of$23.6 million during the nine months endedSeptember 30, 2020 , which grew 36% from$17.4 million per customer in the nine months endedSeptember 30, 2019 .
Coronavirus ("COVID-19") Impact
As a result of COVID-19, we have taken precautionary measures in order to minimize the risk of the virus to our employees, our customers, and the communities in which we operate, including the suspension of all non-essential business travel of employees and the temporary closure of all of our major offices. Although the majority of our workforce currently works remotely, there has been minimal disruption in our ability to ensure the effective operation of our software platforms. The economic consequences of the COVID-19 pandemic have been challenging for certain of our customers and prospective customers. While the broader implications of the COVID-19 pandemic on our results of operations and overall financial performance remain uncertain, the COVID-19 pandemic has, to date, not had a material adverse impact on our results of operations. The economic effects of the pandemic and resulting societal changes are currently not predictable.
The pandemic has made clear to many of our customers that accommodating the extended timelines ordinarily required to realize results from implementing new software solutions is not an option during a crisis. As a result,
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customers are increasingly adopting our software, which can be ready in days, over internal software development efforts, which may take months or years.
We have seen a decrease in our travel and office-related expenditures, including temporary closures of our offices globally and reductions in related operating expenses, related to the ongoing pandemic. However, improvement of our contribution metric in the first nine months of this year has also been driven by the expansion of existing customer accounts, improved sales efficiency, and the increasing deployment of centralized hosting and other software deployment infrastructure. While we expect our travel and office-related expenditures to increase moving forward, especially once we reopen our offices, we do not expect such expenditures to return to their pre-pandemic levels, given that we have made significant investments in enabling employees to work with customers remotely.
See the section titled "Risk Factors" included elsewhere in this Quarterly Report on Form 10-Q and our final Prospectus for further discussion of the possible impact of the COVID-19 pandemic on our business.
Expansion & Growth
We expanded into the commercial sector in recent years. In the three months endedSeptember 30, 2020 , 44% of our revenue came from commercial customers and 56% came from government agencies. In the nine months endedSeptember 30, 2020 , 45% of our revenue came from commercial customers and 55% came from government agencies.
Large organizations in the commercial and government sectors face similar challenges when it comes to managing data, and we intend to expand our reach in both markets moving forward.
We have also expanded significantly outsidethe United States . In the three months endedSeptember 30, 2020 , we generated 54% of our revenue from customers inthe United States and the remaining 46% from customers abroad. In the nine months endedSeptember 30, 2020 , we generated 51% of our revenue from customers inthe United States and the remaining 49% from customers abroad. Our operating results have improved significantly in recent years when excluding stock-based compensation. In the three and nine months endedSeptember 30, 2020 , we incurred losses from operations of$847.8 million and$1.0 billion , respectively, or losses from operations of$0.8 million and income from operations of$11.8 million , respectively, when excluding stock-based compensation. In the three and nine months endedSeptember 30, 2019 , our losses from operations were$144.1 million and$429.0 million , respectively, or$92.4 million and$264.3 million , respectively, when excluding stock-based compensation. In the nine months endedSeptember 30, 2020 , our gross profit was$488.5 million , reflecting a gross margin of 63%, or 79% when excluding stock-based compensation. In the nine months endedSeptember 30, 2019 , our gross profit was$346.7 million , reflecting a gross margin of 68%, or 71% when excluding stock-based compensation. In the three months endedSeptember 30, 2020 , our gross profit was$140.0 million , reflecting a gross margin of 48%, or 81% when excluding stock-based compensation. In the three months endedSeptember 30, 2019 , our gross profit was$125.5 million , reflecting a gross margin of 66%, or 70% when excluding stock-based compensation.
Our Business Model
Our customers pay us to use the software platforms we have built.
As ofSeptember 30, 2020 , we expect to generate revenue under our existing customer contracts for an additional 3.6 years on average, including existing contractual obligations and assuming that our customers exercise all of the contractual options available to them, although this may change as we enter into new contracts or if 37
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customers terminate for convenience. We calculate this duration on a dollar-weighted basis to adjust for small deals. The timing of our customer billings and receipt of payments varies from contract to contract. Revenue is generally recognized over the contract term. Our contracts generally include terms that allow the customer to terminate the contract for convenience. Our business model with respect to acquiring and growing our accounts has three phases: (1) Acquire, (2) Expand, and (3) Scale. We categorize all customers into cohorts onDecember 31st each year. Our decisions about which customer relationships require further investment may change over time, based on our assessment of the potential long-term value that our software can generate for them. As a result, customers may move back and forth through phases, as relationship needs and our assessment of the merits of further investment change. We enter into initial pilots with customers, generally at our own expense and without a guarantee of future returns, in order to access a unique set of opportunities that others may pass over for lack of resources and shorter investment horizons. Some customers may have a rapid Acquire phase followed by a long Expand phase. Others may skip the Expand phase altogether and move immediately into the Scale phase. We manage customers at the account level, not by industry or sector, so that we can optimize on the specific growth opportunities for each. In 2019, we generated a total of$742.6 million in revenue, of which$0.6 million came from customers in the Acquire phase,$176.3 million came from customers in the Expand phase, and$565.7 million came from customers in the Scale phase. In the nine months endedSeptember 30, 2020 , those same customers from 2019 generated a total of$747.7 million in revenue. New customers acquired during the nine months endedSeptember 30, 2020 generated an additional$22.8 million in revenue and will be assigned a cohort as ofDecember 31, 2020 . A more detailed discussion of the three phases, for purposes of illustration of how we manage accounts across the business, follows below.
Acquire
We actively pursue discussions with existing and prospective customers in order to identify ways in which our software platforms can provide long-term value.
In the first phase, we typically acquire new opportunities with minimal risk to our customers through short-term pilot deployments of our software platforms at no or low cost to them. We believe in proving the value of our platforms to our customers. During these short-term pilots, we operate the accounts at a loss. We believe that our investments during this phase will drive future revenue growth. We define a customer or potential customer as being in the Acquire phase if, as of the end of a calendar year, we have recognized less than$100,000 in revenue from the customer that respective year. Customers may make nominal payments in connection with the evaluation of our software that we do not consider material in evaluating the performance of our accounts. We evaluate the success of customer accounts in the Acquire phase based on the revenue such accounts generate in the following year. In 2019, we generated$0.6 million in revenue from customers in the Acquire phase, which yielded a contribution loss of$65.4 million . In the nine months endedSeptember 30, 2020 , those same customers generated$41.1 million in revenue which yielded a contribution loss of$4.2 million . 38
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Expand
Our investment in this second phase is often significant as we seek to understand the principal challenges faced by our customers and ensure that our software delivers value and results.
We define a customer in the Expand phase as any customer from which we have recognized more than$100,000 in revenue in a calendar year and whose account had a negative contribution margin during the year at issue, as determined as of the end of the year. In this phase, we operate at a loss, as measured by contribution margin, in order to drive future revenue growth and margin expansion. In 2019, we generated$176.3 million in revenue from customers that were in the Expand phase as of the end of that year, with a contribution margin of (43)%. In the nine months endedSeptember 30, 2020 , those same customers generated$254.4 million in revenue, with a contribution margin of 41%.
Scale
As customer accounts mature, our investment costs relative to revenue generally
decrease, while the value our software provides to our customer increases, often
significantly, as usage of the platform increases across the customer's
operations. In this third phase, after having installed and configured the
software across an entire enterprise, customers become more self-sufficient in
their use of our platforms, including developing software and applications that
run on top of our platforms, while still continuing to benefit from the support
of our operations and maintenance ("O&M") services.
We define a customer in the Scale phase as any customer from which we recognized
more than $100,000 in revenue in a calendar year and whose account had a
positive contribution margin during the year at issue, as determined as of the
end of the year.
It is in the Scale phase of our partnerships with customers that we generally
see contribution margin on particular accounts improve. In 2019, we generated
$565.7 million in revenue from customers in the Scale phase, with a contribution
margin of 55%. In the nine months ended September 30, 2020 , those same customers
generated $452.2 million in revenue with a contribution margin of 69%.
We believe that our customers will move into the Scale phase over the long term.
We also believe that contribution margin for Scale phase accounts will increase
further as we become more efficient at deploying our software platforms across
the entirety of our customers' operations and at managing and operating our
software.
Government Contracts
Our partnerships with government agencies in
As ofSeptember 30, 2020 , the total remaining deal value of the contracts that we had been awarded by government agencies inthe United States and allied countries around the world, including existing contractual obligations and contractual options available to those government agencies, was$1.3 billion , up 14% fromDecember 31, 2019 , when the total value of such contracts was$1.1 billion . When calculating the total value of such contracts, we do not include government contracts totaling$2.6 billion , as ofSeptember 30, 2020 , that we have been awarded where the funding of such contracts - also known as indefinite delivery, indefinite quantity ("IDIQ") contracts - has not yet been determined. Funding of such contracts is not guaranteed. The majority of our government contracts are subject to termination for convenience provisions, and theU.S. federal government is prohibited from exercising contract options more than one year in advance. As a result, there can be no guarantee that our contracts with government customers will not be terminated or that contract options will be exercised. 39
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Key Business Measure
In addition to the measures presented in our condensed consolidated financial statements, we use the following key non-GAAP business measure to help us evaluate our business, identify trends affecting our business, formulate business plans and financial projections, and make strategic decisions.
Contribution Margin
We believe that the revenue we generate relative to the costs we incur in order to generate such revenue is an important measure of the efficiency of our business. We define contribution margin as revenue less our cost of revenue and sales and marketing expenses, excluding stock-based compensation, divided by revenue. At the end of each year, we categorize each customer account into one of the three phases based on its revenue and contribution margin for that year. Revenue is allocated to each customer account directly. The cost of revenue and sales and marketing costs include both the costs associated with the deployment and operation of our software as well as expenses associated with identifying new customers and expanding partnerships with existing ones. Our software engineers working with existing customers often manage the deployment and operation of our platforms as well as identify new ways that those platforms can be used. To calculate the contribution by customer, we allocate cost of revenue and sales and marketing expenses, excluding stock-based compensation, to an account pro rata based on headcount and time spent on the account during the period. To the extent certain costs or personnel are not directly assigned to a specific account, they are allocated pro rata based on total headcount staffed during such period. Direct costs, such as third-party cloud hosting services, are directly allocated to the account to which they relate. Contribution margin, both across our business and on specific customer accounts, is intended to capture how much we have earned from customers after accounting for the costs associated with deploying and operating our software, as well as any sales and marketing expenses involved in acquiring and expanding our partnerships with those customers, including allocated overhead. We exclude stock-based compensation as it is a non-cash expense. We believe that our contribution margin across the business and on specific customer accounts provides an important measure of the efficiency of our operations over time. We have included contribution margin because it is a key measure used by our management to evaluate our performance, and we believe that it also provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management team. Our calculation of contribution margin may differ from similarly titled measures, if any, reported by other companies. Contribution margin should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.
For more information about contribution margin, including the limitations of this measure, and a reconciliation to loss from operations, see the section titled "- Non-GAAP Reconciliations" below.
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Non-GAAP Reconciliations
We use the non-GAAP measures contribution margin; gross profit and gross margin, excluding stock-based compensation; and income (loss) from operations, excluding stock-based compensation to help us evaluate our business, identify trends affecting our business, formulate business plans and financial projections, and make strategic decisions. We exclude stock-based compensation, which is a non-cash expense, from these non-GAAP financial measures because we believe that excluding this item provides meaningful supplemental information regarding operational performance and provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management team. Our definitions may differ from the definitions used by other companies and therefore comparability may be limited. In addition, other companies may not publish these or similar metrics. Further, these metrics have certain limitations, as they do not include the impact of certain expenses that are reflected in our condensed consolidated statement of operations. Thus, our non-GAAP contribution margin; gross profit and gross margin, excluding stock-based compensation; and income (loss) from operations, excluding stock-based compensation should be considered in addition to, not as a substitute for, or in isolation from, measures prepared in accordance with GAAP. We compensate for these limitations by providing reconciliations of these non-GAAP measures to the most comparable GAAP measures. We encourage investors and others to review our business, results of operations, and financial information in its entirety, not to rely on any single financial measure, and to view these non-GAAP measures in conjunction with the most directly comparable GAAP financial measures. Contribution Margin The following table provides a reconciliation of contribution margin for the three and nine months endedSeptember 30, 2020 and 2019 (in thousands, except percentages): Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 Loss from operations$ (847,777 ) $ (144,140 ) $ (1,017,107 ) $ (428,993 ) Add: Research and development expenses (1) 57,146 60,849 156,832 180,591 General and administrative expenses (1) 107,130 60,411 226,455 165,985 Stock-based compensation 846,959 51,763 1,028,914 164,650 Contribution$ 163,458 $ 28,883 $ 395,094 $ 82,233 Contribution margin 56 % 15 % 51 % 16 % (1) Excludes stock-based compensation. 41
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Gross Profit and Gross Margin, Excluding Stock-Based Compensation
The following table provides a reconciliation of gross profit and gross margin,
excluding stock-based compensation for the three and nine months ended
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Gross profit $ 140,026 $ 125,468 $ 488,538 $ 346,726
Add: stock-based compensation 94,385 7,183 120,285 16,520
Gross profit, excluding stock-based
compensation $ 234,411 $ 132,651 Gross margin, excluding stock-based compensation 81 % 70 % 79 % 71 %
Income (Loss) from Operations, Excluding Stock-Based Compensation
The following table provides a reconciliation of income (loss) from operations,
excluding stock-based compensation for the three and nine months ended
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Loss from operations $ (847,777 ) $ (144,140 ) $ (1,017,107 ) $ (428,993 )
Add: stock-based compensation 846,959 51,763 1,028,914 164,650
Income (loss) from operations, excluding stock- based compensation$ (818 ) $ (92,377 )
Components of Results of Operations
Revenue
We generate revenue from the sale of subscriptions to access our software in our
hosted environment with O&M services ("Palantir Cloud"), software subscriptions
in our customers' environments with ongoing O&M services ("On-Premises
Software "), and professional services.
Palantir Cloud
Our Palantir Cloud subscriptions grant customers the right to access the software functionality in a hosted environment controlled byPalantir and are sold together with stand-ready O&M services, as further described below. We promise to provide continuous access to the hosted software throughout the contract term. Revenue associated with Palantir Cloud subscriptions is recognized over the contract term on a ratable basis, which is consistent with the transfer of control of thePalantir services to the customer.
Sales of our software subscriptions grant customers the right to use functional
intellectual property, either on their internal hardware infrastructure or on
their own cloud instance, over the contractual term and are also sold together
with stand-ready O&M services. O&M services include critical updates and support
and maintenance
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services required to operate the software and, as such, are necessary for the software to maintain its intended utility over the contractual term. Because of this requirement, we have concluded that the software subscriptions and O&M services, which together we refer to as ourOn-Premises Software , are highly interdependent and interrelated and represent a single distinct performance obligation within the context of the contract. Revenue is generally recognized over the contract term on a ratable basis.
Professional Services
Our professional services support the customers' use of the software and include, as needed, on-demand user support, user-interface configuration, training, and ongoing ontology and data modeling support. Professional services contracts typically include the provision of on-demand professional services for the duration of the contractual term. These services are typically coterminous with a Palantir Cloud orOn-Premises Software subscriptions. Professional services are on-demand, whereby we perform services throughout the contract period; therefore, the revenue is recognized over the contractual term.
Cost of Revenue
Cost of revenue primarily includes salaries, stock-based compensation expense, and benefits for personnel involved in performing O&M and professional services, as well as third-party cloud hosting services, allocated overhead, and other direct costs.
We expect that cost of revenue will increase in absolute dollars as our revenue grows and will vary from period-to-period as a percentage of revenue.
Sales and Marketing
Our sales and marketing efforts span all stages of our sales cycle, including personnel engaging with or executing pilots at new or existing customers. Sales and marketing costs primarily include salaries, stock-based compensation expense, and benefits for personnel involved in executing on pilots and customer growth activities, as well as third-party cloud hosting services for our pilots, marketing and sales event-related costs, and allocated overhead. Sales and marketing costs are generally expensed as incurred. We expect that sales and marketing expenses will increase in absolute dollars as we continue to invest in our potential and current customers, in growing our business and enhancing our brand awareness.
Research and Development
Our research and development efforts are aimed at continuing to develop and refine our platforms, including adding new features and modules, increasing their functionality, and enhancing the usability of our platforms. Research and development costs primarily include salaries, stock-based compensation expense, and benefits for personnel involved in performing the activities to develop and refine our platforms, internal use third-party cloud hosting services and other IT-related costs, and allocated overhead. Research and development costs are expensed as incurred.
We plan to continue to invest in personnel to support our research and development efforts. As a result, we expect that research and development expenses will increase in absolute dollars for the foreseeable future as we continue to invest to support these activities.
General and Administrative
General and administrative costs include salaries, stock-based compensation expense, and benefits for personnel involved in our executive, finance, legal, human resources, and administrative functions, as well as third-party professional services and fees, and allocated overhead.
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We expect that general and administrative expenses will increase in absolute dollars as we hire additional personnel and enhance our systems, processes, and controls to support the growth in our business as well as our increased compliance and reporting requirements as a public company.
Interest Income
Interest income consists primarily of interest income earned on our cash, cash equivalents, and restricted cash balances.
Interest Expense
Interest expense consists primarily of interest expense and commitment fees incurred under our credit facilities.
Other Income (Expense), Net
Other income (expense), net consists primarily of foreign currency exchange gains and losses and our share of income and losses from our equity method investments.
Change in Fair Value of Warrants
The change in the fair value of warrants consists of the net changes in the fair value of our liability classified warrants to purchase redeemable convertible and convertible preferred stock that were remeasured at the end of each reporting period. In connection with the Direct Listing, all of the Company's outstanding preferred stock warrants were converted into common stock warrants, which resulted in the reclassification of the warrants liability to additional paid-in capital. As such, we do not expect additional charges related to the fair value of these warrants.
Provision (Benefit) for Income Taxes
Provision (benefit) for income taxes consists of income taxes related to foreign and state jurisdictions in which we conduct business.
Segments
We have two operating segments, commercial and government, which were determined
based on the manner in which the chief operating decision maker ("CODM"), who is
our chief executive officer, manages our operations for purposes of allocating
resources and evaluating performance. Various factors, including our
organizational and management reporting structure and customer type, were
considered in determining these operating segments.
Our operating segments are described below:
• Commercial: This segment primarily serves customers working in
non-government industries.
• Government: This segment primarily serves customers that are agencies in
the
Segment profitability is evaluated based on contribution and contribution
margin, which is segment revenue less the related costs of revenue and sales and
marketing expenses, excluding stock-based compensation expense. To the extent
costs of revenue or sales and marketing expenses are not directly attributable
to a particular segment, they are allocated based upon headcount at each segment
during the period. We use it, in part, to evaluate the performance of, and
allocate resources to, each of our segments. It excludes certain operating
expenses that are not allocated to segments because they are separately managed
at the consolidated corporate level. These
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unallocated costs include stock-based compensation expense, research and development costs, and general and administrative costs, such as legal and accounting. Contribution margin is segment contribution divided by revenue.
Results of Operations
The following table summarizes our condensed consolidated statements of operations data (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Revenue $ 289,366 $ 190,541 $ 770,582 $ 513,197
Cost of revenue(1) 149,340 65,073 282,044 166,471
Gross profit 140,026 125,468 488,538 346,726
Operating expenses:
Sales and marketing(1) 334,911 119,666 536,082 337,255
Research and development(1) 313,915 75,880 466,530 229,728
General and administrative(1) 338,977 74,062 503,033 208,736
Total operating expenses 987,803 269,608
1,505,645 775,719
Loss from operations (847,777 ) (144,140 ) (1,017,107 ) (428,993 ) Interest income 494 3,390 4,312 12,953 Interest expense (2,085 ) (173 ) (12,325 ) (395 ) Change in fair value of warrants (9,201 ) 784 811 2,743 Other income (expense), net (3,293 ) 2,305 1,218 1,858 Loss before provision (benefit) for income taxes (861,862 ) (137,834 ) (1,023,091 ) (411,834 ) Provision (benefit) for income taxes (8,543 ) 2,026 (5,043 ) 8,485 Net loss$ (853,319 ) $ (139,860 ) $ (1,018,048 ) $ (420,319 )
(1) Includes stock-based compensation expense as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Cost of revenue $ 94,385 $ 7,183 $ 120,285 $ 16,520
Sales and marketing 263,958 15,898 322,353 56,242
Research and development 256,769 15,031 309,698 49,137
General and administrative 231,847 13,651 276,578 42,751
Total stock-based
compensation expense (i) (ii)
(i) On September 30, 2020 , in connection with the Direct Listing, we
incurred $769.5 million and $8.4 million of stock-basedcompensation
using the accelerated attribution method related to thesatisfaction
of the performance-based vesting condition for RSUs and growth units,
respectively, that had satisfied the service-based vesting condition
as of such date.
(ii) During the three months ended September 30, 2020 and 2019, we
incurred modification charges of $7.8 million , and $4.6 million ,
respectively, related to the repricing of certain options held by
our employees. During the nine months ended September 30, 2020 and
2019, we incurred modification charges of $89.5 million , and
$14.2 million , respectively, related to the repricing of certain
options held by our employees.
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The following table sets forth the components of our condensed consolidated statements of operations data as a percentage of revenue:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Revenue 100 % 100 % 100 % 100 %
Cost of revenue 52 34 37 32
Gross profit 48 66 63 68
Operating expenses:
Sales and marketing 116 63 70 66
Research and development 108 40 61 45
General and administrative 117 39 64 41
Total operating expenses 341 142 195 152
Loss from operations (293 ) (76 ) (132 ) (84 )
Interest income - 2 1 3
Interest expense (1 ) - (2 ) -
Change in fair value of warrants (3 ) 1 - 1
Other income (expense), net (1 ) 1 - -
Loss before provision (benefit) for
income taxes (298 ) (72 ) (133 ) (80 )
Provision (benefit) for income taxes (3 ) 1 (1 ) 2
Net loss (295 )% (73 )% (132 )% (82 )%
Comparison of the Three Months Ended
Revenue
Three Months Ended
September 30, Change
2020 2019 Amount %
Revenue:
Government $ 162,561 $ 96,801 $ 65,760 68 %
Commercial 126,805 93,740 33,065 35 %
Total revenue $ 289,366 $ 190,541 $ 98,825 52 %
Revenue increased by $98.8 million , or 52%, for the three months ended
September 30, 2020 compared to the three months ended September 30, 2019 .
Revenue from government customers increased by $65.8 million , or 68%, for the
three months ended September 30, 2020 compared to the three months ended
September 30, 2019 , primarily in the United States . Of the increase,
$46.7 million was from customers existing as of December 31, 2019 . Revenue from
commercial customers increased by $33.1 million , or 35%, for the three months
ended September 30, 2020 compared to the three months ended September 30, 2019 .
The increase is primarily due to an increase of $24.3 million from customers
existing as of December 31, 2019 .
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Cost of Revenue and Gross Profit
Three Months Ended
September 30, Change
2020 2019 Amount %
Cost of revenue $ 149,340 $ 65,073 $ 84,267 129 %
Gross profit 140,026 125,468 14,558 12 %
Gross margin 48 % 66 % (18 )%
Cost of revenue for the three months ended September 30, 2020 increased by
$84.3 million , or 129%, compared to the three months ended September 30, 2019 .
The increase was primarily due to increases in personnel costs of $89.0 million ,
which included an increase of $87.2 million in stock-based compensation expense
primarily due to the recognition of cumulative stock-based compensation expense
upon the Direct Listing related to the Company's RSUs as well as vesting of
stock options, and an increase of $4.3 million primarily driven by an increase
in headcount attributable to cost of revenue functions to support new and
existing customers. These costs were partially offset by a decrease in
travel-related expenses and other personnel costs of $2.5 million as a result of
COVID-related travel restrictions and company-wide initiatives to decrease
overall travel. Additionally, there was an increase of $2.1 million related to
other direct deployment costs, offset by decreases of $3.4 million related to
third-party cloud hosting services and $3.4 million related to allocated
overhead, including office related expenses.
Our gross margin for the three months ended September 30, 2020 decreased by 18%
compared to the three months ended September 30, 2019 . Gross margin decreased
primarily as a result of cumulative stock-based compensation expense related to
the Company's RSUs recognized upon the Direct Listing. For the three months
ended September 30, 2020 and 2019, gross margin, excluding stock-based
compensation would have increased by 11% to 81%.
Operating Expenses
Three Months Ended
September 30, Change
2020 2019 Amount %
Sales and marketing $ 334,911 $ 119,666 $ 215,245 180 %
Research and development 313,915 75,880 238,035 314 %
General and administrative 338,977 74,062 264,915 358 %
Total operating expenses $ 987,803 $ 269,608 $ 718,195 266 %
Sales and Marketing
Sales and marketing expenses increased by $215.2 million , or 180%, for the three
months ended September 30, 2020 compared to the three months ended September 30,
2019 . The increase was primarily driven by increases in personnel costs of
$230.2 million , which included an increase of $248.1 million in stock-based
compensation expense primarily due to the recognition of cumulative stock-based
compensation expense upon the Direct Listing related to the Company's RSUs and
growth units, as well as vesting of stock options; and an increase of
$8.0 million related to an increase in headcount attributable to our sales and
marketing functions. These costs were partially offset by a decrease of
$25.9 million in travel-related expenses and other personnel costs as a result
of COVID-related travel restrictions and company-wide initiatives to decrease
overall travel. Additionally, there was a decrease of $15.0 million related to
allocated overhead, including office related expenses.
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Research and Development
Research and development expenses increased by$238.0 million , or 314%, for the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 . The increase was primarily driven by increases in personnel costs of$244.0 million , which included an increase of$241.7 million in stock-based compensation expense primarily due to the recognition of cumulative stock-based compensation expense upon the Direct Listing related to the Company's RSUs as well as vesting of stock options, and an increase of$5.1 million related to an increase in headcount attributable to our research and development functions. These costs were partially offset by a decrease of$2.8 million in travel-related expenses and other personnel costs as a result of COVID-related travel restrictions and company-wide initiatives to decrease overall travel. Additionally, there was a decrease of$6.0 million in third-party cloud hosting services generally as a result of volume-based discounts.
General and Administrative
General and administrative expenses increased by$264.9 million , or 358%, for the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 . The increase in expenses was primarily driven by increases in personnel costs of$220.7 million , which included an increase of$218.2 million in stock-based compensation expense primarily due to the recognition of cumulative stock-based compensation expense upon the Direct Listing related to the Company's RSUs and growth units, as well as vesting of stock options; and an increase of$3.2 million related to an increase in headcount attributable to our general and administrative functions; These costs partially offset by a decrease of$0.7 million in travel-related expenses and other personnel costs primarily as a result of COVID-related travel restrictions and company-wide initiatives to decrease overall travel. Additionally, there were increases of$42.7 million in legal professional services primarily related to the Direct Listing and$8.0 million for other professional services related to the Direct Listing and corporate IT and consulting functions to support initiatives for becoming a public company and the overall growth of our operations, which were offset by a decrease of$6.5 million related to allocated overhead, including office related expenses. Interest Income Three Months Ended September 30, Change 2020 2019 Amount Interest income$ 494 $ 3,390 $ (2,896 )
Interest income decreased by
Interest Expense
Three Months Ended
September 30, Change
2020 2019 Amount
Interest expense $ (2,085 ) $ (173) $ (1,912 )
Interest expense increased by $1.9 million for the three months ended
September 30, 2020 compared to the three months ended September 30, 2019 . The
increase was primarily due to the absence of outstanding debt during the three
months ended September 30, 2019 .
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Change in Fair Value of Warrants
Three Months Ended
September 30, Change
2020 2019 Amount
Change in fair value of warrants
The gain on the change in fair value of warrants decreased by$10.0 million for the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 . The change was primarily due to adjustments to the fair value of the warrants immediately before reclassifying them from a liability to equity, partially offset by an increase in the fair value of the securities underlying certain warrants during the three months endedSeptember 30, 2020 as compared to the changes in the fair value of the underlying securities during the three months endedSeptember 30, 2019 . Other Income (Expense), Net Three Months Ended September 30, Change 2020 2019 Amount Other income (expense), net$ (3,293 ) $ 2,305 $ (5,598 )
Other income (expense), net decreased by
Provision (Benefit) for Income Taxes
Three Months Ended
September 30, Change
2020 2019 Amount
Provision (benefit) for income taxes
Provision (benefit) for income taxes decreased by$10.6 million for the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 . The change in provision (benefit) for income taxes was primarily due to decreases in profits from our international operations, benefits from stock-based compensation windfalls, and the revaluation of ourUK deferred tax assets as a result of a change in theUK corporate tax rate enacted during the current quarter.
Comparison of the Nine Months Ended
Revenue
Nine Months Ended
September 30, Change
2020 2019 Amount %
Revenue:
Government $ 420,257 $ 242,843 $ 177,414 73 %
Commercial 350,325 270,354 79,971 30 %
Total revenue $ 770,582 $ 513,197 $ 257,385 50 %
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Revenue increased by$257.4 million , or 50%, for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . Revenue from government customers increased by$177.4 million , or 73%, for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 , primarily inthe United States . Of the increase,$148.5 million was from customers existing as ofDecember 31, 2019 . Revenue from commercial customers increased by$80.0 million , or 30%, for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . The increase was primarily due to an increase of$67.1 million from customers existing as ofDecember 31, 2019 .
Cost of Revenue and Gross Profit
Nine Months Ended
September 30, Change
2020 2019 Amount %
Cost of revenue $ 282,044 $ 166,471 $ 115,573 69 %
Gross profit 488,538 346,726 141,812 41 %
Gross margin 63 % 68 % (5 )%
Cost of revenue increased by $115.6 million , or 69%, for the nine months ended
September 30, 2020 compared to the nine months ended September 30, 2019 . The
increase was primarily due to increases in personnel costs of $123.3 million ,
which included an increase of $103.8 million in stock-based compensation expense
primarily due to the recognition of cumulative stock-based compensation expense
upon the Direct Listing related to the Company's RSUs and vesting of stock
options, as well as the incremental charge from the repricing of certain
options; and an increase of $23.2 million primarily driven by an increase in
headcount attributable to cost of revenue functions to support new and existing
customers. These costs were partially offset by a decrease in travel-related
expenses and other personnel costs of $3.7 million as a result of COVID-related
travel restrictions and company-wide initiatives to decrease overall travel.
Such increases to cost of revenue were also offset by decreases of $6.1 million
related to third-party cloud hosting services generally as a result of
volume-based discounts and $2.6 million related to other direct deployment
costs.
Our gross margin for the nine months ended September 30, 2020 decreased by 5%
compared to the nine months ended September 30, 2019 . Gross margin decreased
primarily as a result of cumulative stock-based compensation expense related to
the Company's RSUs recognized upon the Direct Listing. For the nine months ended
September 30, 2020 , gross margin, excluding stock-based compensation would have
increased by 8% to 79% compared to the nine months ended September 30, 2019 .
Operating Expenses
Nine Months Ended
September 30, Change
2020 2019 Amount %
Sales and marketing $ 536,082 $ 337,255 $ 198,827 59 %Research and development 466,530 229,728 236,802 103 %
General and administrative 503,033 208,736 294,297 141 %
Total operating expenses
Sales and Marketing Sales and marketing expenses increased by$198.8 million , or 59%, for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . The increase was primarily due to increases in personnel costs of$215.9 million , which included an increase of$266.1 million in stock-based compensation expense primarily due to the recognition of cumulative stock-based compensation expense upon the Direct 50
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Listing related to the Company's RSUs and growth units, and vesting of stock options, as well as the incremental charge from the repricing of certain options. Such increase was partially offset by decreases of$49.8 million in travel-related expenses and other personnel costs as a result of COVID-related travel restrictions and company-wide initiatives to decrease overall travel and$17.1 million related to allocated overhead, including office related expenses.
Research and Development
Research and development expenses increased by$236.8 million , or 103%, for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . The increase was primarily due to increases in personnel costs of$250.0 million , which included an increase of$260.6 million in stock-based compensation expense primarily due to the recognition of cumulative stock-based compensation expense upon the Direct Listing related to the Company's RSUs and vesting of stock options, as well as the incremental charge from the repricing of certain options. Such increase was partially offset by a decrease of$10.5 million in travel-related expenses and other personnel costs as a result of COVID-related travel restrictions and company-wide initiatives to decrease overall travel, as well as a decrease of$11.8 million in third-party cloud hosting services generally as a result of volume-based discounts.
General and Administrative
General and administrative expenses increased by$294.3 million , or 141%, for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . The increase in expenses was primarily driven by increases in personnel costs of$231.9 million which included an increase of$233.8 million in stock-based compensation expense primarily due to the recognition of cumulative stock-based compensation expense upon the Direct Listing related to the Company's RSUs and growth units, and vesting of stock options, as well as the incremental charge from the repricing of certain options; an increase of$4.1 million primarily driven by an increase in headcount attributable to general and administrative functions,$51.3 million in legal professional services primarily related to the Direct Listing and$17.9 million for other professional services related to the Direct Listing and corporate IT and consulting functions to support initiatives for becoming a public company and the overall growth of our operations. These costs were partially offset by decreases of$6.0 million in travel-related expenses and other personnel costs primarily as a result of COVID-related travel restrictions and company-wide initiatives to decrease overall travel, and$6.8 million in allocated overhead, including office related expenses. Interest Income Nine Months Ended September 30, Change 2020 2019 Amount Interest income$ 4,312 $ 12,953 $ (8,641)
Interest income decreased by
Interest Expense
Nine Months Ended
September 30, Change
2020 2019 Amount
Interest expense $ (12,325) $ (395) $ (11,930 )
Interest expense increased by $11.9 million for the nine months ended
September 30, 2020 compared to the nine months ended September 30, 2019 . The
increase was primarily due to the absence of outstanding debt during the nine
months ended September 30, 2019 .
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Change in Fair Value of Warrants
Nine Months Ended
September 30, Change
2020 2019 Amount
Change in fair value of warrants
(1,932)
The gain on the change in fair value of warrants decreased by$1.9 million for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . The change was primarily due to adjustments to the fair value of the warrants immediately before reclassifying them from a liability to equity, partially offset by an increase in the fair value of the securities underlying certain warrants during the nine months endedSeptember 30, 2020 as compared to the nine months endedSeptember 30, 2019 . Other Income (Expense), Net Nine Months Ended September 30, Change 2020 2019 Amount Other income (expense), net$ 1,218 $ 1,858 $ (640)
Other income (expense), net decreased by
Provision (Benefit) for Income Taxes
Nine Months Ended
September 30, Change
2020 2019 Amount
Provision (benefit) for income taxes
Provision (benefit) for income taxes decreased by$13.5 million for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . The change in provision (benefit) for income taxes was primarily due to decreases in profits from our international operations, benefits from stock-based compensation windfalls, and the revaluation of ourUK deferred tax assets as a result of a change in theUK corporate tax rate enacted during the current quarter.
Liquidity and Capital Resources
Since our inception, we have generated negative cash flows from operations and have financed our operations primarily through the sale of our equity securities, borrowings under our credit facilities, and payments received from our customers. For many customers, we bill and collect payment for the entire contract term in advance of our performance of the related obligations. We believe our existing cash and cash equivalents will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months.
As of
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Cash and cash equivalents consist primarily of cash on deposit with banks as well as institutional money market funds. Restricted cash primarily consists of cash and certificates of deposit that are held as collateral against letters of credit and guarantees we are required to maintain for various purposes. As ofSeptember 30, 2020 , we had fully drawn down the$200.0 million available term commitment under the 2014 Credit Facility and had$200.0 million revolving credit facility available and undrawn. For more information, see the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations - Credit Facilities."
Additionally, during the nine months ended
The following table summarizes our cash flows for the periods indicated (in
thousands):
Nine Months Ended
September 30,
2020 2019
Net cash (used in) provided by:
Operating activities $ (278,320 ) $ (500,048 )
Investing activities (9,975 ) (10,947 )
Financing activities 817,344 (59,434 ) Effect of foreign exchange on cash, cash equivalents, and restricted cash
(678 ) (2,992 )
Net increase (decrease) in cash, cash equivalents, and restricted cash$ 528,371 $ (573,421 ) Operating Activities Net cash used in operating activities was$278.3 million for the nine months endedSeptember 30, 2020 . The factors affecting our operating cash flows during this period were our net loss of$1.0 billion , offset by non-cash charges of$1.0 billion , and changes in net operating assets and liabilities of$303.1 million . The net change in operating assets and liabilities were primarily due to net decrease of$171.1 million in deferred revenue and customer deposits due to increases in revenue recognized from amounts billed and collected in prior periods, and an increase in assets of$143.3 million primarily due to an increase in accounts receivable driven by the timing of billings to and collections from our customers. The non-cash charges primarily consisted of$1.0 billion in stock-based compensation expense, and$10.3 million of depreciation and amortization. Net cash used in operating activities was$500.0 million for the nine months endedSeptember 30, 2019 . The factors affecting our operating cash flows during this period were our net loss of$420.3 million , offset by non-cash charges of$171.4 million , and changes in net operating assets and liabilities of$251.2 million . The net change in operating assets and liabilities were primarily due to net decrease of$124.7 million in deferred revenue and customer deposits due to increases in revenue recognized from amounts billed and collected in prior periods, an increase in assets of$110.6 million primarily due to an increase in accounts receivable. The non-cash charges primarily consisted of$164.7 million in stock-based compensation expense and$9.5 million of depreciation and amortization.
Investing Activities
Net cash used in investing activities was
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Net cash used in investing activities was
Financing Activities
Net cash provided by financing activities was$817.3 million for the nine months endedSeptember 30, 2020 , which primarily consisted of$942.5 million of net proceeds from the issuance of common stock,$199.4 million of net proceeds from borrowings under our credit facilities, and$79.5 million of proceeds from the exercise of common stock options, partially offset by repayments of$400.0 million of debt. Net cash used in financing activities was$59.4 million for the nine months endedSeptember 30, 2019 , which primarily consisted of$168.0 million for the redemption of redeemable convertible preferred stock, and$7.1 million net cash used for repurchases of common stock, partially offset by$100.0 million of net proceeds from the issuance of common stock,$9.3 million of proceeds from exercise of common stock options, and$7.5 million of proceeds from the sale of redeemable convertible preferred stock.
Credit Facilities
2014 Credit Facility
InOctober 2014 , we entered into an unsecured revolving credit facility (the "2014 Credit Facility"). The 2014 Credit Facility bears interest at theLondon Interbank Offered Rate ("LIBOR") plus a margin of 2.75% per annum, subject to certain adjustments, and incurs a commitment fee of 0.375% assessed on the daily average undrawn portion of revolving commitments. Interest and commitment fees are payable at the end of an interest period or at each three-month interval if the interest period is longer than three months. InDecember 2019 , we entered into an amendment to the 2014 Credit Facility to include an additional$150.0 million term loan and secured the credit facility with substantially all of our assets. Upon entering into this amendment, we drew down the$150.0 million term loan and$150.0 million under the existing revolving credit facility. The term loan portion of the 2014 Credit Facility was fully repaid and terminated as ofDecember 31, 2019 . InJune 2020 , we amended the 2014 Credit Facility to include a$150.0 million term loan, extend the maturity date toJune 4, 2023 , and add an additional lender. Additionally, this amendment increased the requirement to maintain minimum liquidity to$50.0 million , and we were provided with an option to increase the total commitments by up to an additional$200.0 million , subject to the lenders' approval. All other terms and conditions remained substantially the same upon the effectiveness of the amendment. Upon entering into this amendment, we drew down the total available term loan commitment of$150.0 million . InJuly 2020 , we entered into another amendment to the 2014 Credit Facility, which added an additional lender and provided for an increase of$50.0 million to the revolving credit facility and a$50.0 million term loan. The incremental commitments were provided under the same terms as the existing commitments under the 2014 Credit Facility. DuringJuly 2020 , we drew down the additional available term loan of$50.0 million and repaid the$150.0 million outstanding revolving credit facility.
As of
Contractual Obligations and Commitments
Our contractual obligations and commitments primarily consist of operating lease
commitments for our facilities and non-cancelable purchase commitments related
to third-party cloud hosting services. For additional
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information, refer to Note 8. Commitments and Contingencies to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. There has been no material change in our contractual obligations and commitments other than in the ordinary course of business since our fiscal year endedDecember 31, 2019 . See our Prospectus for additional information regarding the Company's contractual obligations.
Off-Balance Sheet Arrangements
We did not have, during the periods presented, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements and the accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q are prepared in accordance with GAAP. The preparation of condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from our estimates. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected.
There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates discussed in the Prospectus except for the determination of the fair value of our common stock, which is used in estimating the fair value of stock-based awards at grant date as discussed below.
Prior to our Direct Listing, our common stock was not publicly traded; therefore we estimated the fair value of our common stock as discussed in the Prospectus. Following our Direct Listing, the closing sale price per share of our common stock as reported on the NYSE on the date of grant is used to determine the fair value of our common stock. Our significant accounting policies are discussed in "Notes to Consolidated Financial Statements - Note 2. Significant Accounting Policies" in the Prospectus. JOBS Act Accounting Election We are an emerging growth company, as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until those standards apply to private companies. We have elected to use this extended transition period for complying with certain new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our condensed consolidated financial statements may or may not be comparable to companies that comply with new or revised accounting pronouncements as of public companies' effective dates.
Recent Accounting Pronouncements
For information on recently issued accounting pronouncements, refer to Note 2. Significant Accounting Policies in our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
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