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. 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. Our Business
For the three months ended
Our operating results continued to improve when excluding stock-based compensation. In the three months endedMarch 31, 2021 , we incurred losses from operations of$114.0 million , or income from operations of$116.6 million when excluding stock-based compensation and related employer payroll taxes. In the three months endedMarch 31, 2020 , our losses from operations were$70.2 million , or$16.1 million when excluding stock-based compensation. In the three months endedMarch 31, 2021 , our gross profit was$267.1 million , reflecting a gross margin of 78%, or 83% when excluding stock-based compensation. In the three months endedMarch 31, 2020 , our gross profit was$165.0 million , reflecting a gross margin of 72%, or 75% when excluding stock-based compensation. For more information about our income or loss from operations, when excluding stock-based compensation and related employer payroll taxes; and gross profit and gross margin, when excluding stock-based compensation, as well as reconciliations from loss from operations and gross profit, see the section titled "Non-GAAP Reconciliations" below. 23
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Our Customers
We have updated our definition of a customer to be an organization from which we have recognized revenue during the trailing twelve month period to provide more meaningful period over period comparisons. During the period endedMarch 31, 2021 , we had 149 customers, including leading companies in various commercial sectors as well as government agencies around the world. During the period endedMarch 31, 2020 , we had 131 customers. 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 and Prevention , 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 during the trailing twelve months endedMarch 31, 2021 was$8.1 million , which grew 29% from$6.3 million per customer during the trailing twelve months endedMarch 31, 2020 . Our average revenue for the top twenty customers during the during the trailing twelve months endedMarch 31, 2021 was$36.1 million , which grew 34% from an average of$27.0 million from the top twenty customers during the trailing twelve months endedMarch 31, 2020 . 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. In the three months endedMarch 31, 2021 , commercial customers accounted for 39% of our revenue while government agencies accounted for 61%. In the three months endedMarch 31, 2021 , we generated 58% of our revenue from customers inthe United States and the remaining 42% from customers abroad.
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. We expect to begin to open certain of our offices in a limited capacity over the remainder of the year, while closely monitoring the pandemic. 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, 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 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 as we begin to open certain of 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 Annual Report on Form 10-K for the year ended
Our Business Model
Our customers pay us to use the software platforms we have built.
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. 24
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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 2020, we generated a total of
In the three months ended
New customers acquired during the three months endedMarch 31, 2021 generated an additional$0.4 million in revenue and will be assigned a cohort as ofDecember 31, 2021 . 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 2020, we generated$0.3 million in revenue from customers in the Acquire phase, which yielded a contribution loss of$36.8 million . In the three months endedMarch 31, 2021 , those same customers generated$3.6 million in revenue, which yielded a contribution loss of$4.3 million .
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 2020, we generated$20.3 million in revenue from customers that were in the Expand phase as of the end of that year, with a contribution margin of (159)%. In the three months endedMarch 31, 2021 , those same customers generated$12.4 million in revenue with a contribution margin of 4%. 25
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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 2020, we generated
$1,072.1 million in revenue from customers in the Scale phase, with a
contribution margin of 63%. In the three months ended March 31, 2021 , those same
customers generated $324.8 million in revenue with a contribution margin of 66%.
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.
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 and related employer payroll taxes 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. Additionally, we exclude employer payroll taxes related to stock-based compensation as it is difficult to predict and outside of our control. 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 and related employer payroll taxes 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 months endedMarch 31, 2021 and 2020 (in thousands, except percentages): Three Months Ended March 31, 2021 2020 Loss from operations$ (114,014) $ (70,185) Add: Research and development expenses (1) 60,597
50,768
General and administrative expenses (1) 63,975 58,221
Stock-based compensation 193,731 54,107
Contribution $ 204,289 $ 92,911
Contribution margin 60% 41%
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(1) Excludes stock-based compensation.
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 months endedMarch 31, 2021 and 2020 (in thousands, except percentages): Three Months Ended March 31, 2021 2020 Gross profit$ 267,123 $ 165,033 Add: stock-based compensation 15,977
8,068
Gross profit, excluding stock-based compensation
Gross margin, excluding stock-based compensation 83% 75%
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Income (Loss) from Operations, Excluding Stock-Based Compensation and Related Employer Payroll Taxes
The following table provides a reconciliation of income (loss) from operations, excluding stock-based compensation and related employer payroll taxes for the three months endedMarch 31, 2021 and 2020 (in thousands): Three Months Ended March 31, 2021 2020 Loss from operations$ (114,014) $ (70,185) Add: stock-based compensation 193,731 54,107
Add: employer payroll taxes related to stock-based compensation
36,866 -
Income (loss) from operations, excluding stock-based compensation and related employer payroll taxes
$ 116,583
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 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.
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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 our sales force and 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, sales force, 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.
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. DuringSeptember 2020 , in connection with the direct listing of our Class A common stock on theNew York Stock Exchange ("NYSE") ("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 for Income Taxes
Provision for income taxes consists of income taxes related to foreign and state jurisdictions in which we conduct business and withholding taxes.
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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. Contribution is segment revenue less the related costs of revenue and sales and marketing expenses, excluding stock-based compensation expense. Contribution margin is contribution divided by revenue. 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 operating segment during the period. We use it, in part, to evaluate the performance of, and allocate resources to, each of our operating segments, which excludes certain operating expenses that are not allocated to operating segments because they are separately managed at the consolidated corporate level. These unallocated costs include stock-based compensation expense, research and development costs, and general and administrative costs, such as legal and accounting.
Results of Operations
The following table summarizes our condensed consolidated statements of operations data (in thousands):
Three Months Ended March 31,
2021 2020
Revenue $ 341,234 $ 229,327
Cost of revenue (1) 74,111 64,294
Gross profit 267,123 165,033
Operating expenses:
Sales and marketing (1) 136,097 98,653
Research and development (1) 98,471 65,800
General and administrative (1) 146,569 70,765
Total operating expenses 381,137 235,218
Loss from operations (114,014) (70,185)
Interest income 376 3,267
Interest expense (1,840) (4,594)
Change in fair value of warrants - 13,695
Other income (expense), net (4,894) 6,100
Loss before provision for income taxes (120,372) (51,717)
Provision for income taxes 3,102 2,557
Net loss $ (123,474) $ (54,274) (1) Includes stock-based compensation expense as follows (in thousands):
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Three Months Ended March 31,
2021 2020
Cost of revenue $ 15,977 $ 8,068
Sales and marketing 57,286 18,463
Research and development 37,874 15,032
General and administrative 82,594 12,544
Total stock-based compensation expense
The following table sets forth the components of our condensed consolidated statements of operations data as a percentage of revenue:
Three Months Ended March 31,
2021 2020
Revenue 100% 100%
Cost of revenue 22 28
Gross profit 78 72
Operating expenses:
Sales and marketing 40 43
Research and development 28 29
General and administrative 43
31
Total operating expenses 111 103
Loss from operations (33) (31)
Interest income - 1
Interest expense (1) (2)
Change in fair value of warrants - 6
Other income (expense), net (1) 3
Loss before provision for income taxes (35) (23)
Provision for income taxes 1
1
Net loss (36)% (24)%
Comparison of the Three Months Ended
Revenue
Three Months Ended March 31, Change
2021 2020 Amount %
Revenue:
Government $ 208,420 $ 118,127 $ 90,293 76%
Commercial 132,814 111,200 21,614 19%
Total revenue $ 341,234 $ 229,327 $ 111,907 49%
Revenue increased by $111.9 million , or 49%, for the three months ended
March 31, 2021 compared to the three months ended March 31, 2020 . Revenue from
government customers increased by $90.3 million , or 76%, for the three months
ended March 31, 2021 compared to the three months ended March 31, 2020 ,
primarily from customers in the United States . Of the increase, $90.1 million
was from government customers existing as of December 31, 2020 . Revenue from
commercial customers increased by $21.6 million , or 19%, for the three months
ended March 31, 2021 compared to the three months ended March 31, 2020 . The
increase is primarily due to an increase of $19.2 million from customers
existing as of December 31, 2020 . Generally, increases in revenue from our
existing customers are related to increased adoption of our products and
services within their organizations.
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Cost of Revenue and Gross Profit
Three Months Ended March 31, Change
2021 2020 Amount %
Cost of revenue $ 74,111 $ 64,294 $ 9,817 15%
Gross profit 267,123 165,033 102,090 62%
Gross margin 78% 72% 6%
Cost of revenue for the three months ended March 31, 2021 increased by
$9.8 million , or 15%, compared to the three months ended March 31, 2020 . The
increase was primarily due to increases in personnel costs of $6.0 million ,
which included an increase of $7.9 million in stock-based compensation expense
primarily due to the recognition of stock-based compensation expense related to
the Company's RSUs, which vested in connection with the Company's Direct
Listing; and $3.2 million in employer payroll taxes primarily related to income
from share-based payments. These increases in personnel costs were partially
offset by decreases in travel-related expenses and other personnel costs of
$3.3 million as a result of COVID-related travel restrictions and company-wide
initiatives to decrease overall travel, and $1.8 million in payroll and
payroll-related costs driven by a decrease of headcount attributable to cost of
revenue functions. Additionally, there were increases of $6.5 million related to
third-party cloud hosting services, and $2.7 million related to other direct
deployment costs and increased usage of field service representatives. These
increases to cost of revenue were offset by decreases of $3.7 million from
office related expenses and other allocated costs, and $1.7 million related to
reductions in hardware costs.
Our gross margin for the three months ended March 31, 2021 increased by 6%
compared to the three months ended March 31, 2020 . Gross margin increased
primarily as a result of increased efficiencies in supporting revenue growth at
our customer deployments, including investments in our platforms as well as
reductions in hardware costs for customers. This was partly offset by increases
in stock-based compensation expense and third-party cloud hosting services. For
the three months ended March 31, 2021 and 2020, gross margin, excluding
stock-based compensation, would have increased by 8% to 83%.
Operating Expenses
Three Months Ended March 31, Change
2021 2020 Amount %
Sales and marketing $ 136,097 $ 98,653 $ 37,444 38%
Research and development 98,471 65,800 32,671 50%
General and administrative 146,569 70,765 75,804 107%
Total operating expenses $ 381,137 $ 235,218 $ 145,919 62%
Sales and Marketing
Sales and marketing expenses increased by $37.4 million , or 38%, for the three
months ended March 31, 2021 compared to the three months ended March 31, 2020 .
The increase was primarily driven by increases in personnel costs of
$44.7 million , which included an increase of $38.8 million in stock-based
compensation expense primarily due to the recognition of stock-based
compensation expense related to the Company's RSUs and growth units, which
vested in connection with the Company's Direct Listing; $11.9 million in
employer payroll taxes primarily related to income from share-based payments;
and $2.8 million in payroll due to an increase in headcount attributable to our
sales and marketing functions. These increases in personnel costs were partially
offset by a decrease of $7.2 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 $1.6 million from other
payroll-related costs. Additionally, there was an increase of $1.3 million in
third-party cloud based hosting services; offset by decreases of $6.3 million
from office related expenses and other allocated costs, and $2.3 million in
marketing costs.
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Research and Development
Research and development expenses increased by$32.7 million , or 50%, for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 . The increase was primarily driven by increases in personnel costs of$34.6 million , which included an increase of$22.8 million in stock-based compensation expense primarily due to the recognition of stock-based compensation expense related to the Company's RSUs, which vested in connection with the Company's Direct Listing;$11.2 million related to increase in payroll taxes primarily related to income from share-based payments; and$3.9 million in payroll related to an increase in headcount attributable to our research and development functions. These increases in personnel costs were partially offset by a decrease of$2.2 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$1.2 million from other payroll-related costs. Additionally, there was an increase of$2.3 million in third-party cloud hosting services and other IT; offset by decreases of$4.2 million from office related expenses and other allocated costs.
General and Administrative
General and administrative expenses increased by$75.8 million , or 107%, for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 . The increase was primarily driven by increases in personnel costs of$79.1 million , which included an increase of$70.1 million in stock-based compensation expense primarily due to the recognition of stock-based compensation expense related to the Company's RSUs and growth units, which vested in connection with the Company's Direct Listing;$9.3 million related to increase in payroll taxes primarily related to income from share-based payments; and$1.7 million in other payroll-related costs. These increases in personnel costs were partially offset by a decrease of$1.9 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, payroll related to a decrease in headcount attributable to our general and administrative functions. Additionally, there was a decrease of$3.3 million from office related expenses and other allocated costs. Interest Income Three Months Ended March 31, Change 2021 2020 Amount Interest income $ 376$ 3,267 $ (2,891)
Interest income decreased by
Interest Expense
Three Months Ended March 31, Change
2021 2020 Amount
Interest expense $ (1,840) $ (4,594) $ 2,754
Interest expense decreased by $2.8 million for the three months ended March 31,
2021 compared to the three months ended March 31, 2020 . The decrease was
primarily due to a lower debt balance during the three months ended March 31,
2021 compared to the three months ended March 31, 2020 .
Change in Fair Value of Warrants
Three Months Ended March 31, Change
2021 2020 Amount
Change in fair value of warrants $ - $ 13,695 $ (13,695)
During the three months endedMarch 31, 2020 , the$13.7 million gain from the change in fair value of warrants was primarily driven by the decrease in the fair value of our stock during the period. During the three months endedMarch 31, 2021 , there were no outstanding liability classified warrants. 33
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Other Income (Expense), Net
Three Months Ended March 31, Change
2021 2020 Amount
Other income (expense), net $ (4,894) $ 6,100 $ (10,994)
Other income (expense), net changed by $11.0 million for the three months ended
March 31, 2021 compared to the three months ended March 31, 2020 primarily due
to changes in net realized and unrealized gains from foreign exchange
transactions.
Provision for Income Taxes
Three Months Ended March 31, Change
2021 2020 Amount
Provision for income taxes $ 3,102 $ 2,557 $ 545
Provision for income tax increased by $0.5 million for the three months ended
March 31, 2021 compared to the three months ended March 31, 2020 . The change was
primarily due to increases in profits from the Company's international
operations partially offset by decreases in foreign withholding taxes.
Liquidity and Capital Resources
Since our inception, we have primarily generated negative cash flows from operations and have financed our operations primarily through the sale of our equity securities, including proceeds from option exercises, and payments received from our customers. 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 twelve months, as well as our short-term and long-term contractual obligations and commitments primarily consisting of operating lease commitments and non-cancelable purchase commitments related to third-party cloud hosting services. As ofMarch 31, 2021 , our accumulated deficit balance was$5.1 billion , and our principal sources of liquidity were$2.3 billion of cash and cash equivalents, exclusive of additional restricted cash of$109.0 million . 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 ofMarch 31, 2021 , we had$200.0 million of term loans outstanding under the 2014 Credit Facility and had additional$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." Our future capital requirements will depend on many factors, including, but not limited to the rate of our growth, our ability to attract and retain customers and their willingness and ability to pay for our products and services, and the timing and extent of spending to support our efforts to market and develop our products. Further, we may enter into future arrangements to acquire or invest in businesses, products, services, strategic partnerships, and technologies. As such, we may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If additional funds are not available to us on acceptable terms, or at all, our business, financial condition, and results of operations could be adversely affected. 34
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The following table summarizes our cash flows for the periods indicated (in
thousands):
Three Months Ended March 31,
2021 2020
Net cash provided by (used in):
Operating activities $ 116,881 $ (287,184 )
Investing activities (708 ) (3,016 )
Financing activities 206,354 2,494Effect of foreign exchange on cash, cash equivalents, and restricted cash
(2,197 ) (1,627 )
Net increase (decrease) in cash, cash equivalents, and
restricted cash $ 320,330 $ (289,333 )
Operating Activities
Net cash provided by operating activities was $116.9 million for the three
months ended March 31, 2021 . The factors affecting our operating cash flows
during this period were our net loss of $123.5 million , offset by non-cash
charges of $204.2 million and changes in net operating assets and liabilities of
$36.1 million . The non-cash charges primarily consisted of $193.7 million in
stock-based compensation expense, $6.5 million in operating lease expense, and
$3.2 million of depreciation and amortization. The net change in operating
assets and liabilities were due to an increase in accounts payable and accrued
liabilities of $44.5 million due to timing of expense payments, and a net
increase of $8.9 million in deferred revenue and customer deposits due to
increases in customer billings, partially offset by a net increase in assets of
$10.1 million .
Net cash used in operating activities was $287.2 million for the three months
ended March 31, 2020 . The factors affecting our operating cash flows during this
period were our net loss of $54.3 million , offset by non-cash charges of
$54.8 million and changes in net operating assets and liabilities of
$287.7 million . The non-cash charges primarily consisted of $54.1 million in
stock-based compensation expense, $10.2 million in operating lease expense, and
$3.7 million of depreciation and amortization, partially offset by a
$13.7 million reduction in the fair value of warrant liabilities. The net change
in operating assets and liabilities were due to a net decrease of $123.5 million
in deferred revenue and customer deposits due to increases in revenue recognized
from amounts billed and collected in prior periods, a decrease in accounts
payable and accrued liabilities of $80.2 million , and an increase in assets of
$67.8 million primarily due to an increase in accounts receivable.
Investing Activities
Net cash used in investing activities was
Financing Activities
Net cash provided by financing activities was
Net cash provided by financing activities was$2.5 million for the three months endedMarch 31, 2020 , which primarily consisted of$6.7 million of proceeds from exercise of common stock options, offset by$3.8 million net cash used for repurchases of common stock. Credit Facilities 2014 Credit Facility InOctober 2014 , we entered into an unsecured revolving credit facility which has been subsequently amended (the "2014 Credit Facility"). The 2014 Credit Facility bears interest at the London 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. The 2014 Credit Facility is secured with substantially all of our assets. As ofMarch 31, 2021 , we had$200.0 million of term loans outstanding under the 2014 Credit Facility and an additional$200.0 million undrawn revolving credit facility available. DuringApril 2021 , we amended the credit facility to increase the total undrawn revolving credit facility to be$400.0 million and which also provides for an incremental loan facility of additional term loans or revolving loans in an aggregate principal amount of up to$100.0 million with one or more existing or new lenders upon mutual agreement between the Company and such lenders. Upon amending the facility, we repaid the outstanding$200.0 million term loan. 35
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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 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, 2020 . See our Annual Report on Form 10-K for the year endedDecember 31, 2020 , which was filed with theSEC onFebruary 26, 2021 , 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 Annual Report on Form 10-K for the year ended
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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