Earnings Call Transcript - PLTR Q3 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Palantir Technologies Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Rodney Nelson, Head of Investor Relations. Thank you. Please go ahead.

Rodney Nelson, Head of Investor Relations

Thank you, operator. Good afternoon, and welcome to Palantir's third quarter 2020 earnings call. We'll be discussing the results announced in our press release issued after the market close and posted on our Investor Relations website. With me on the call today is Shyam Sankar, Chief Operating Officer; Dave Glazer, Chief Financial Officer; and Kevin Kawasaki, Global Head of Business Development. During the call, we will make statements regarding our business that may be considered forward-looking within applicable securities laws, including statements regarding our outlook for the fourth quarter and full year 2020, management's expectations for our future financial and operational performance and other statements regarding our plans, prospects, and expectations. These statements are not promises or guarantees and are subject to risks and uncertainties, which could cause them to differ materially from actual results. Information concerning those risks is available in our earnings press release distributed after market close today and in our SEC filings. We undertake no obligation to update forward-looking statements, except as required by law. Further, during the course of today's call, we will refer to certain adjusted financial measures. These non-GAAP financial measures should be considered in addition to, not as a substitute for or in isolation from, GAAP measures. Additional information about these non-GAAP measures, including a reconciliation of non-GAAP to comparable GAAP measures, is included in our press release issued today. Our press release, investor presentation and SEC filings are available on our Investor Relations website at investors.palantir.com. With that, I'll turn it over to Shyam.

Shyam Sankar, Chief Operating Officer

Thank you, Rodney, and thanks, everyone, for joining us today. At Palantir, we build software platforms for institutions whose work is essential to our way of life. Those institutions must be able to function in times of stability, as well as crisis and uncertainty. And to do so, they need software that works. We were founded in 2003 and started building software originally for the intelligence community in the United States to assist in counter-terrorism investigations and operations. We later began working with commercial enterprises. We have two principal software platforms: Gotham and Foundry. Gotham, which is our first software platform, was constructed for analysts at defense and intelligence agencies. They were hunting for needles, not in one, but in thousands of haystacks. And they did not have the software they needed to do their jobs. In Iraq and Afghanistan, soldiers were mapping networks of insurgency and makers of roadside bombs by hand. Gotham enables users to identify patterns hidden deep within data sets, ranging from signals intelligence sources to reports from confidential informants, and it helps U.S. and allied military personnel respond to those threats. We later found that the challenges faced by commercial institutions when it came to working with data were fundamentally similar; companies routinely struggle to manage, let alone generate, alpha from data involved in large projects. Foundry was built for them. The platform transforms the way in which organizations interact with information by creating a central operating system for their data. Our software is on the front line. And sometimes literally, that means so are we. Gotham's use has now extended beyond intelligence analysis into defense operations and mission planning. And Foundry is becoming the central operating system, not only for individual institutions, but entire industries. Turning to the third quarter, revenue grew 52% year-over-year, driven by continued expansion within our install base and initial wins at net new customers in 2020. We are distributing our platforms more efficiently than ever as we generated adjusted gross margins of 81% and contribution margin of 56% in the third quarter. Palantir has evolved significantly in the last several years, from the development of our second flagship platform Foundry to the acceleration in our government business to the operating leverage from Apollo, our powerful continuous delivery infrastructure, which gives us SaaS operating efficiencies in a very heterogeneous environment. In many ways, our business is just getting started, and this is largely a function of the technology that we've developed over these years. You can really see that based on what's happening in the field. Let me highlight a few wins. An energy supermajor was able to leverage our ERP suite in just a few weeks, generating $57 million of cash savings, a meaningful contribution to working capital for a sector that is challenged in the pandemic. The customer has already identified an incremental $315 million in potential savings on top of that. This project has created lasting changes in the way procurement will operate with a projected annualized savings of $1 billion. We also closed a five-year $300 million renewal, mid-pandemic, with a large aerospace customer, further reinforcing Foundry as core infrastructure in the operating system of their business. Aerospace has been significantly challenged in the pandemic, and we see this as a long-term commitment to each other. This is the largest deal we have done in the commercial space, and we anticipate strong contribution margin from a customer of this scale and maturity. Another commercial example I'd like to focus on is a Q3 net new Fortune 100 U.S. consumer goods company. This customer needed immediate help understanding the impact COVID may have on its employees and its operational facilities. This company was dealing with a surge in positive COVID tests across its employee base and was scrambling to monitor the health and safety of its employees, as well as the durability of its operation. Over the course of an eight-week pilot, we started in July. Foundry allowed this customer to monitor potential infections, alert individuals at facilities where potential outbreaks were occurring, and quickly triage to limit the virus's spread. This solution allowed the customer to annotate CAD-based models of their facilities with data integrated into our platform to track whether specific areas were particularly conducive to outbreaks or if the spread was being driven by internal or external factors. This enabled the customer to reach out to affected individuals and provide medical assistance. Additionally, the customer had a long-running project, looking to extract more value out of its supply chain and ERP systems. The firm had invested hundreds of millions of dollars into these solutions but was struggling to gain the promised economic and competitive advantage from that investment. They wanted to use our platform, which they came to appreciate in the context of COVID, to solve core and enduring challenges, specifically to build a real-time buying solution on top of existing investments to make optimized purchasing decisions, such as capitalizing on discounted raw materials when pricing anomalies occur. By leveraging various components and modules in Foundry, the customer is able to model a complete view of its supply chain from upstream raw materials to downstream finished goods in a few weeks. This created hundreds of opportunities across this customer's supply chain for optimization. We also signed a recent expansion with a top five pharmaceutical company. This firm, like many large pharma companies, is awash in data from thousands of clinical trials. But it's hard to draw conclusions across those trials as data is often siloed in disparate systems of record. Leveraging Foundry, this customer is able to link and interrogate data across more than 2,000 clinical trials, including symptoms, diagnoses, and treatments, to unearth valuable findings. Again, across trials, not just in a single isolated study. Our software unlocked the ability to see patient stories at a population level and answer key questions such as how many patients suffer from a particular condition, regardless of which trial they participated in? These insights will help the customer drive hypotheses around biomarkers and progressions of certain diseases to optimize research and develop new therapies. Turning to our government segment. We continue to pursue our vision of powering U.S. and allied defense to fight current and future threats, from space to mud, and in doing so, becoming the default operating system. We generated several new government wins in the third quarter, including a two-year $91 million contract with the U.S. Army Research Lab. This customer will be employing both Foundry and Gotham to build out artificial intelligence and machine learning capabilities. Palantir was selected among 999 bids, and our platform will be used to integrate, manage, and prepare data for training AI models. Early related work here has shown promising results in delivering next-generation capabilities during a recent warfighter exercise. The Army has leveraged our platforms to great effect across various lines of effort from readiness to financial management. These wins illustrate our expanding partnership with the Army, and we're looking forward to pursuing future programs with both the Army and other branches of the military. In particular, I'd highlight the continued growth of opportunities that we see at U.S. Space Force and U.S. Air Force, where we are investing. Our work serving health care agencies domestically and abroad continues to deliver results. We were selected by NIH's National Center for Advancing Translational Sciences, or NCATS, for a $36 million contract to support a secure scientific platform environment. NCATS is using Foundry for integration, management, security, and analysis across various initiatives supported by the platform, which include cancer and COVID-19 research. Foundry powers N3C UNITE, the largest COVID-19 clinical data asset in the world with over 1 million patients across more than 30 hospitals, all assembled in Foundry in a few weeks. Foundry is also the infrastructure supporting the complex supply chain and logistics for operational work speed. This builds on our existing work at CDC, HHS, the NCI, and FDA, and it intersects with our commercial work, helping retail pharmacies and drug companies coordinate plans and logistics to successfully deliver vaccines to the population. In the U.K., Foundry has been powering NHS England's response to the pandemic, including the allocation and distribution of more than 2.7 billion items of PPE and other critical equipment. I'd highlight that the President of Colombia recently released a video showing his country's response to the pandemic and the role both Palantir and Amazon Web Services played in rapidly deploying the infrastructure used to manage the situation. This engagement was sourced by Amazon, one of our channel partners. Importantly, we can already see how the pandemic is leading to lasting and systemic transformation of healthcare in various countries. We have a unique opportunity to power the holistic digital transformation of these organizations with significant improvement in the health and safety of their citizens. It may have started with COVID, but it's not going to end there as the pandemic has revealed a broad swath of challenges and opportunities these institutions are rising to meet. Taken together with our commercial healthcare work, we believe these developments will have far-reaching positive implications for the future of healthcare, and we have the opportunity to be at the center of it. Before turning it over to Dave to take us through the numbers, I wanted to touch on our R&D roadmap. We believe the investments we are making will enable us to drive significant increases in the number of customers that we can acquire and continue to improve our time to value. Our latest R&D investments include enabling our solutions to be fully modular, a take-what-you-want, build-on-what-you-have approach for the enterprise. We will be hosting product deep dives for investors in the next month or two. So, be on the lookout for an announcement coming soon about these sessions. We're going to showcase how our customers use our platforms across industries and across problem spaces, including defense, health care, supply chain, and more. We'll also discuss the latest technical developments, our roadmap, and upcoming R&D investments. I'll pass it over to Dave.

Dave Glazer, Chief Financial Officer

Thanks, Shyam. I'll review our third quarter performance, followed by our outlook for the fourth quarter and full year 2020. Third quarter revenue was $289 million, up 52% year-over-year and over $9 million above the high end of the guidance we provided in connection with the direct listing. Average revenue per customer through the first nine months of this year was $5.8 million, up 38% versus the year-ago period. Average revenue for top 20 customers grew 36% year-over-year through the first nine months of 2020, totaling $23.6 million. We are seeing greater diversification in our revenue base as our top 20 customers represented 61% of total revenue through the first nine months of 2020 compared with 68% in the year-ago period. In the third quarter, we closed 15 deals of $5 million or more in total contract value, including 8 deals in excess of $10 million. Top line growth was driven by strong performance across each of our business segments. Third quarter commercial revenue grew 35% year-over-year to $127 million, driven by a combination of expansion with existing customers and increasing contributions from new customers. We also closed several large deals across our commercial portfolio in the third quarter, including a $300 million renewal in the aerospace industry and multiple wins, each over $5 million in the consumer, insurance, and financial services industries. Especially, in the midst of the pandemic, we continue to prioritize speed of delivery and value creation. While this can lead to lumpiness in our commercial revenue on a quarter-to-quarter basis due to contract timing, we are encouraged by the pipeline we see in our commercial business. Total government revenue rose 68% year-over-year to $163 million, driven primarily by growth in our U.S. government business. As Shyam mentioned, we signed several new government deals in the third quarter, including a two-year contract with the U.S. Army Research Laboratory, an IDIQ award with the National Center for Advancing Translational Sciences, and several wins in our international government business as well. At the end of the third quarter, our government deal value, including contracted amounts and contractual options, totaled $1.3 billion. I will next discuss our margins and expenses on an adjusted basis, which excludes stock-based compensation. We generated an adjusted gross margin of 81% in the third quarter, up 1,100 basis points year-over-year and reflecting enhanced automation in the delivery and maintenance of our software platforms, as well as reduced cloud hosting expenses. Contribution margin rose to 56% in the third quarter, up roughly 100 basis points sequentially and compared to a 15% contribution margin in the year-ago quarter, which demonstrates the increased scale and efficiency of our three-phase business model. Now, I'm going to turn to operating expenses. For the third quarter, operating expenses were $235 million. Additionally, in the third quarter, we incurred roughly $54 million in expenses related to our direct listing and $18 million in employer payroll taxes related to stock-based compensation. Excluding these expenses, total third quarter adjusted operating expenses would have been $164 million. Sales and marketing expenses were $71 million or 25% of revenue, down from 54% of revenue in the year-ago quarter, all while growing our direct sales force. The operating leverage in sales and marketing is a result of more efficient customer acquisition and more rapid scaling of our customers through our three-phase business model and reductions in travel and office expenses. We expect to continue investing in broadening our customer acquisition efforts, including growing our account-based sales force and developing channel partnerships. Research and development expense was $57 million or 20% of revenue, down from 32% in the year-ago quarter. As delivery and maintenance of our platforms have become more automated, we are realizing greater efficiencies in developing new features and functionality across each of our core platforms, including the modularization effort Shyam discussed, which allows us to reap savings in areas such as travel and related IT expenses. We do plan to continue to grow headcount and expect R&D expenses to grow in absolute dollars moving forward. G&A expense was $107 million or 37% of revenue, compared with 32% of revenue in the prior year period. This includes $54 million in expenses related to our direct listing. Excluding expenses related to the direct listing and employer payroll taxes related to stock-based compensation, G&A expenses would have been $49 million or 17% of revenue. The third quarter operating loss, excluding stock-based compensation, was $1 million. After excluding expenses related to our direct listing and employer payroll taxes related to stock-based compensation, third quarter adjusted operating income was $73 million, roughly $11 million ahead of the high end of our prior guidance range. We ended the quarter with total contract liabilities of $622 million. Prior to 2020, we pursued multi-year upfront payments from our customers, leading to significant growth in customer deposits, and often, our cash collections were greater than revenue in any given year. As a result, many customers have already paid for 2020 in prior years, which explains the negative cash flow we have seen through the first nine months. We expect this to begin to normalize over the course of 2021, as we move away from multi-year upfront payments, and we expect free cash flow margin will converge with adjusted operating margin over time. We continue to have strong visibility into future revenues across our customer base, as average contract duration as of September 30 increased to 3.6 years, up from 3.5 years as of June 30. We raised roughly $500 million, primarily stemming from equity investments made by our partner, Sompo Holdings, which closed in June and July. We reduced our total outstanding debt by roughly $100 million in the third quarter. As of September 30, remaining debt is comprised of a $200 million term loan under our credit facility, and we also have a $200 million undrawn revolver available to us. We ended the third quarter with $1.8 billion in cash and cash equivalents. Looking at the business through the lens of our three-phase model, we continue to see strong progress at each stage. As a reminder, we cohort customers at the end of each year into one of three distinct phases. Acquire phase customers are customers we have engaged in the pilot base, often at little or no cost to them, which have generated less than $100,000 in revenue in that year. Expand phase customers are those generating greater than $100,000 in revenue in that year, and we invest significantly to scale that customer and grow revenue quickly, resulting in negative contribution margins in the period. Finally, we define Scale phase customers as those generating greater than $100,000 in revenue a year, as well as positive contribution margins, exhibiting self-sufficient usage and growth with our platforms. Acquire phase customers generated $41 million in revenue through the first nine months of the year, while contribution from this cohort of customers is rapidly approaching breakeven with a contribution loss of only $4.2 million, a testament to the speed and efficiency with which we're deploying our software and helping our early-stage customers solve critical problems. This compares to just $19 million in revenue through the first six months of the year, with a contribution loss of $13.9 million. In addition, through the first nine months of 2020, we generated $23 million in revenue from new customers that we have acquired in the year, meaning these are customers that have not yet been classified into one of our three-phase customer cohorts. This compares with $8.3 million through the first nine months of 2019 and represents nearly 200% year-over-year growth. This is a testament to the speed and efficiency of our platforms and go-to-market as we shrink time to value for our customers and accelerate customers from pilot to conversion. Taken together with continued revenue growth from our Acquire phase customers, we believe the rapid growth in revenue from new customers creates a strong basis for future growth to augment the consistent expansion we are generating from our install base of customers in the Expand and Scale phases. Turning to the Expand phase, we continue to demonstrate strong growth as our customers drive increased adoption of our software to yield greater value. Expand phase customers generated $254 million in revenue in the first nine months of the year, with a contribution margin for these customers at 41%. This is up from $161 million and a contribution margin of 35% through the first six months of 2020, and a significant advancement from $176.3 million in revenue and negative contribution margin of 43% from the same accounts in full-year 2019. Finally, we continue to see strong contribution margin from our Scale phase customers. These customers generated $452 million in revenue in the first nine months of the year, with a contribution margin of 69% compared with $296 million in revenue and contribution margin of 68% through the first half of 2020. Turning to our outlook. We are raising our full-year 2020 revenue guidance to a range of $1.070 billion to $1.072 billion, up from $1.050 billion to $1.060 billion previously and representing year-over-year growth of 44%. We are also increasing full-year adjusted operating income guidance to a range of $130 million to $136 million, which excludes stock-based compensation and related employer payroll taxes, as well as direct listing related costs. For the fourth quarter, we expect revenue in a range of $299 million to $301 million, representing year-over-year growth of 30% to 31%, given our exceptionally strong Q4 2019 revenue. We expect fourth quarter adjusted operating income of $44 million to $50 million, which excludes stock-based compensation and related employer payroll taxes. For the full-year 2021, we remain encouraged by the pace of growth we are seeing in our subscription base and the acceleration we see in revenue from Acquire phase and new customers that provide a solid foundation for future growth. As a result, we continue to expect full-year 2021 year-over-year revenue growth to be greater than 30%. With that, we'll open up the call for Q&A.

Operator, Operator

Our first question comes from Brent Thill with Jefferies. Your line is open.

Brent Thill, Analyst

Good afternoon. The government business has shown incredible strength this year. I think many are curious about how you think about the pipeline and the residual kind of carryover from the government business, and maybe if you could also address a big investor concern around the administration change. If that happens, does that have any impact on what you see in the government pipeline? Thank you.

Shyam Sankar, Chief Operating Officer

Thank you, Brent. Yes, the government business had a great quarter. I'd say both segments are performing quite well. We're excited about the pipeline of the government business. Of course, there's the contract that we just closed with the U.S. Army. There are a number of big capture pursuits in the pipeline, things we've mentioned previously, opportunities like DCGS, Capability Drop 2. There's a lot more behind that that we expect. There are a couple of more programs of record that we're up for potentially in 2021. We're investing far beyond just the Army, Space Force, the Navy, Air Force, so very robust pipeline, but that's just DoD. Honestly, there's been enormous acceleration for a part of a business that was pretty small 18 months ago in health care. The work we've done with the FDA, CDC, HHS, the NIH has really accelerated. It created enormous opportunities for us. While many of those opportunities certainly accelerated because of COVID, it may have started there, but it's clear it's not going to end there. We're seeing opportunities for large systemic transformation in health care in the U.S. but also abroad, COVID-exposed opportunities for improvement, and I think governments will invest there. In terms of your other question around administration change, look, for the 17 years we've been around, we've served every administration in the U.S. We've worked with five administrations in the U.K., four administrations in France, and two in Germany. Our users and the folks who buy our software have worked with many more because they are actually career civil servants. So, we don't expect any change really as a result of this.

Operator, Operator

Our next question comes from Keith Weiss with Morgan Stanley. Your line is open.

Keith Weiss, Analyst

This is actually Keith Weiss in for Mark. Looking at the metrics on sort of the new customers that were acquired in the first nine months, it's up 175% year-on-year. Really impressive new customer adds. Can you talk to us a little bit about how much of that comes from sort of the ramping efforts and building out the direct sales force? So is that starting to have a positive impact? Maybe if you could help us, kind of mark-to-market, where are you with that effort in terms of sales teams or whatnot? How do you expect that to roll out on a going-forward basis? And then just one on operating margins. Really nice sort of uplift in operating margins this year, even though you're building out the direct sales force. Can you drill down a little bit more and help us understand kind of where those expense savings come from? How much of that is going to be kind of – you guys aren't traveling as much this year because of the COVID environment? Should we expect that to come back into the income statement on a go-forward basis?

Kevin Kawasaki, Global Head of Business Development

Great. Thanks, Keith. So first, regarding what we're doing with the account-based sales force. We've talked a bit about this. We began building the team really at the beginning of last year. In hindsight, I think our main mistake was that we should have done more. It's worked very well for us last year and into this year. We're increasing this effort. We've talked about tripling our total headcount there today, a fairly small part of the company. So, we're going to continue to invest here because it's working. You can see some of the results in some of our general categories or new accounts that we've closed this year, accounts in the Acquire phase, growing revenue, and the Expand and Scale phases really performing. But what's really working here, I think, is a little bit more of a technology and product story. Our speed to value for customers is getting much faster. There are many reasons, but I'm going to highlight two. First, Foundry modules and software-defined data integration. Shyam talked briefly about a customer mentioned earlier that started using our ERP suite. They've already saved over $50 million, and they were able to use the software in just a few hours. This is important to highlight because what used to take weeks of complex data integration and ontology building can now be automated. This was an example in the sort of large industrial complex. A consumer goods company used that same ERP suite, connected it to our Vertex Foundry module to simulate their supply chain, and it's now helping them run their business more efficiently. The same thing here. The software is driving more of the work. That means time to value is faster and that equals more efficient sales. By the way, this recent example was actually sourced by one of our more recent account salespeople. Big congrats to you and that team out there. You guys all know who you are. These advancements are big opportunities for sales teams. There are also opportunities for channel partners who seem to be very excited about this. That's the Foundry modules. We haven't talked a lot about channel partners, but I suspect we will in future periods. I'm going to hand it back to Dave for the conversation about the operating margin.

Dave Glazer, Chief Financial Officer

Thanks, Kevin. So I'll sort of just revisit our long-term targets for margins, retargeting adjusted gross margin of 35% plus contribution margin by 70% plus and adjusted operating margin of 35% plus. In terms of adjusted operating income, we raised our 2020 full-year guidance to $133 million at the mid-point. When you're looking at our adjusted operating income, you can see that COVID accelerated a lot of change across the company. This has really resulted in leveraging many of our previous R&D investments in things like Apollo. While a lot of change happened with COVID, and you're going to see a lot of that sticking, but with that said, we will continue to invest. As Kevin talked about, we're going to continue to invest in our direct sales force, continue to build out products, like Apollo, and continue to get that operating leverage. We'll continue to see top line growth continue to outpace expense growth.

Operator, Operator

Our next question comes from Alex Zukin with RBC. Your line is open.

Alex Zukin, Analyst

Hi guys, thanks for taking my questions and congrats on a great first quarter. You mentioned a little bit about modularizing the platform componentry and something that you're going to talk about here in the near term. Can you talk about what kind of motion is that going to unlock, why you're doing that now, what do you expect that to have a bigger impact on commercial or federal sales? And then just a financial question. If we think – remind us a little bit about the seasonality of the business. As we look to next year around top line growth specifically, how should we think about revenue linearity, specifically maybe 4Q to 1Q and then beyond?

Shyam Sankar, Chief Operating Officer

Great. Thanks, Alex. To back up a little, thinking about Foundry here, we've built this over the last five years as an end-to-end platform. We've been investing significantly in the R&D to do that, and that really paid off. In the first three weeks of COVID, we started 83 new engagements. We could do that because we had a solution that customers could start using in a matter of a few hours that can solve scaled problems in an end-to-end sort of way. This has a premium in a crisis, and crises have always been a tailwind for our business, whether it's the global financial crisis, ISIS attacks in Europe in 2015 and 2016, or the present-day pandemic. We recognize that many customers have made investments in IT capabilities that they are more or less happy with. By modularizing the offering, we're enabling them to take what they need from the offering but then build on what they already have. This gives us a more nuanced land and expand motion over time. It changes the offering in a way that gives customers more flexibility on the price point and how they go to market with channel partners. We think this opens up a lot of opportunities. Customers are pretty excited about that. We've seen opportunities to leverage those modules already with new customers and on the pipeline side. I expect to see this in both government and commercial.

Kevin Kawasaki, Global Head of Business Development

I'll touch base a little on the guidance for 2021. 93% of our customers, or 93% of our revenue is from existing customers, recurring and growing. We're focused on bringing on new accounts because that creates a starting point for this land and expand dynamic, but again, 93% comes from existing customers, recurring and growing. A few more numbers that are important to focus on: average revenue per customer through the first nine months of this year grew 38% compared to last year. Average revenue for our top 20 customers grew 36% compared to last year. And for both these numbers, still three months to go here. We've also reduced our customer concentration. Our top 20 customers have gone from 68% of our total revenue to 61% of the total revenue through the first nine months of 2020. Regarding seasonality, it's important to note that we had a very strong fourth quarter in 2019, about 20% sequential growth. What you're seeing a little bit in 2020 is smoothing out. You've also seen our guidance raised a little, up to 44% for the full year.

Operator, Operator

Our next question comes from Chris Merwin with Goldman Sachs. Your line is open.

Chris Merwin, Analyst

Okay, thanks very much for taking my question. I wanted to ask about the commercial business. It looks like it grew 35% in the quarter, which I think was well above the growth rate you had for last year. I know you had a very significant $300 million renewal in the quarter. Was that the main driver of the acceleration? Or were it the other wins that you called out as well? How should we be thinking about the sustainability of that higher growth rate for the commercial business in the near term here? Thanks.

Kevin Kawasaki, Global Head of Business Development

Yes. It's been a great couple of quarters on the commercial side here. The drivers are really a diversified set of new deals. If we look at the renewal, that's looking at 2021 revenue and beyond. So, we should look at that towards future periods. The work we've done with the U.S. consumer goods company, the work that we've done with other manufacturing companies, U.S. and abroad, all of these are building into the commercial business, and we expect to continue closing deals in this area. We're leaning into helping our customers, especially as the second wave of the pandemic seems to be upon us. We're aggressive about getting started and working immediately. We can deploy our solution within hours and can have a meaningful impact on the durability of their operation within hours to days. It's a great opportunity for Foundry to be the core operating system that delivers in a big moment. It's what we spent the last five years investing our R&D in, and the software is there to meet this moment.

Chris Merwin, Analyst

Great. And maybe just a follow-up on the commercial as well. I think you touched on it briefly before, but I wanted to ask about how the sales motion is evolving. I know there's a lot of use cases for commercial, a growing number of use cases for commercial. But in terms of making these customers aware of the power of the platform, is that going to be a direct sales effort? Or could we see some more investments in growing the partner ecosystem, given the complexity that the issues a lot of the commercial customers are facing?

Kevin Kawasaki, Global Head of Business Development

Sure. The direct sales force is – we're continuing to invest and doing quite well there. It’s a little early here, but we feel somewhat optimistic about early work with some channel partners. We've seen some early success. I think we'll be talking more about that going forward. Particularly in the commercial market, the faster we do it, the more opportunities it opens up for us. You'll hear more about Foundry modules, where the customer has more input, not only on how they use Foundry but what specific pieces of Foundry they would like to use. Instead of being required to use the full Foundry stack, the customer can now choose only the part they need, so they can build on what else they have. This gives us a lot of flexibility, on pricing, but also opens a big opportunity, as Shyam mentioned, for channel partners who seem quite excited about that. Look for more about Foundry modules; we plan to showcase as much as we're able to in upcoming presentations.

Operator, Operator

Our next question comes from Brad Zelnick with Credit Suisse. Your line is open.

Brad Zelnick, Analyst

Great. Thanks so much and congrats to you all on a nice strong quarter out of the gate. My one question is pretty simple. I just wanted to ask about contract duration, which I think you disclosed at 3.6 years this quarter. Maybe you can comment on how that's trended year-on-year and how you expect that might trend forward into calendar 2021.

Kevin Kawasaki, Global Head of Business Development

So, we're happy with getting additional visibility on revenue. I think when we're thinking about 2021, we are looking at our success with the breakdown of the three-phase model. When we looked at new customers acquired in a year, that group has grown nearly 200%. The Acquire phase has grown over 100% just in the last three months. The interesting thing about the Acquire phase is that there are many accounts in pilot phase that we believe will grow over time into the Expand and Scale phases. You're seeing some of this in the growth of the Acquire and new account phases. The Expand phase accounts generated $254 million through the first nine months of the year, and those accounts had a 41% contribution margin. In the last period, this group had a negative contribution margin of negative 43% in 2019. There should be growth in the Scale phase category.

Operator, Operator

Our next question comes from Tyler Radke with Citi. Your line is open.

Tyler Radke, Analyst

Hey, thanks so much for taking my question. Shyam, I wanted to ask a couple of questions to you, and I thought it was pretty interesting, one of your comments on just saying that you wish you'd invested faster or sooner in the direct sales force. I guess, I'm curious now that you've looked at the successful investments, just how are you thinking about growing overall headcount from here? I think the original target was for somewhat muted headcount growth in 2020, maybe 4% to 5%. Given some of the successes and the things you're investing in with the Foundry modules, how are you thinking about growing headcount going forward? Just a quick follow-up: on the Foundry modules, how do you think that changes the competitive environment for you? Do you think you're going to be going up against some of these data and analytics point tools and the best-of-breed vendors? Maybe just give us a sense for how that changes your competitive landscape as well. Thank you.

Shyam Sankar, Chief Operating Officer

On the first question – thanks, Tyler. Regarding headcount growth, we are confident that top line will continue to grow much faster than operating expenses. If we find opportunities to invest, we're going to take them. But right now, I'd reiterate our expectation around 4% headcount growth for overall staffing. We are getting much more efficient. What we’re able to do with our sales and marketing spend, and although we're hiring into our direct sales force, it might seem like it's dropping, which isn't actually what's happening. We are doing more sales and marketing, but we're much more efficient at delivering it based on investments made around Apollo and software-defined data integration. We're getting benefits from that. Regarding Foundry modules in the competitive landscape, I believe there are unique things we're doing on the modules that customers are hearing about. I think customers will continue to pick those, working with them to find what investments they believe in and ensuring the architecture fits with their future plans. It's less about competing against best-of-breed tools. It's really about leveraging the investments they've already made to win more customers. It means our direct sales force will also be more effective moving forward.

Operator, Operator

Ladies and gentlemen, we have reached the end of the allotted time for questions. I will now turn the call back over to Palantir management for closing remarks.

Shyam Sankar, Chief Operating Officer

Thank you all so much for joining us for our first quarterly conference call. We hope to have many more with this group here. I would like to end by just thanking all of our employees, past and present. It's the commitment to do the hard thing that we see from them all the time, and it's so inspiring. They built this company over years and years of hard work. When the crisis came, when the pandemic came, they were ready. They met their moment. So, thank you guys so much. Thank you all.

Operator, Operator

This concludes today's conference call. You may now disconnect.