Earnings Call Transcript - PLTR Q3 2021

Operator, Operator

Good morning. Welcome to Palantir's Third Quarter 2021 earnings call. We'll be discussing the results announced in our press release issued prior to the market open and posted on our Investor Relations website. During the call, we will make statements regarding our business that may be considered forward-looking within applicable securities laws, including statements regarding our fourth quarter and fiscal 2021 results, 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 prior to market open today and in our SEC filings. We undertake no obligation to update these 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 reconciliation of non-GAAP to comparable GAAP measures is included in our press release and investor presentation provided today. Our press release, investor presentation, and SEC filings are available on our Investor Relations website at investors.palentir.com. Joining me on today's call are Shyam Sankar, Chief Operating Officer; Dave Glazer, Chief Financial Officer; and Kevin Kawasaki, Global Head of Business Development. Over the course of the call, we will refer to various growth rates when discussing our business. These rates reflect year-over-year comparisons unless otherwise stated. I will turn the call over to Shyam to get us started.

Shyam Sankar, COO

Thank you, Rodney. It was a fantastic quarter across the board. In Q3, total revenue grew 36%. Commercial revenue growth has accelerated in every quarter over the last year, from 4% in Q4 2020 to 19% in Q1 to 28% in Q2. Now, 37% in Q3. At this scale, acceleration like this is gravity-defying. U.S. commercial revenue growth accelerated once again to 103% year-over-year. We added 34 net new customers in Q3. To put this in perspective, our commercial customer count grew by 46% sequentially. We have more than doubled our commercial customer count since the beginning of the year. We closed 54 deals of $1 million or more, 33 of which were $5 million or more, and 18 of which were $10 million or more. Adjusted free cash flow was $119 million, a margin of 30%. Total deal value grew 50% to $3.6 billion. Commercial deal value more than doubled to $2.2 billion. Remaining performance obligations increased by 172%, and year-to-date we have grown revenue 44% to over $1.1 billion. We have generated adjusted free cash flow margin of 29% and a 32% adjusted operating margin. There are so many wins this quarter. Instead of going through them customer by customer as I usually do, I wanted to highlight three themes. (1) We are seeing more traction selling into the defense industrial base as a customer. Foundry has shown that it can help in the production of the A-320 of Ram pickup trucks, auto parts, PPE, and tractors. It can do it better, faster, and cheaper. And the defense industrial base is seeing that it can have the same impact on the production of fighter jets, naval ships, and land vehicles. We are excited to do more here with L3Harris, Huntington Ingalls, and other large primes. Secondly, our work in automotive, and more generally, mobility is growing. We are adding more customers across the mobility value chain, from OEMs and their suppliers all the way to EV charging companies and insurers. And lastly, our work in healthcare is exploding. The NHS, MD Anderson, 70 academic medical centers through the NIH’s N3C, the Department of Veteran Affairs, and even more regional U.S. providers means that Foundry is helping to manage over 300 million patient lives and growing. We have a very unique opportunity and a diverse footprint that we believe continues to uniquely position us to deliver on the necessary transformation in healthcare delivery from operational excellence to complex clinical care. Cutting-edge product and continued innovation and distribution drove these exceptional results in Q3. And you can really see that in the consistently accelerating commercial business. We are seeing a profound pull on Foundry in the market as organizations digest and synthesize lessons from the shocks of COVID and subsequent events. There is a canonical spot for Foundry in the enterprise architecture that the market has synthesized. Foundry is the nervous system and the cardiovascular system of the enterprise. It is the connective tissue that connects your analytics to your operational systems. Such an architecture marries a digital twin of the enterprise with action APIs that allow you to first model and simulate, and second orchestrate and execute complex, cross-functional transactions. As the COVID-19 crisis pulled the tide out, that's exactly what was revealed as missing. Companies needed to move beyond visibility, beyond analytical insights to having the technical infrastructure to translate that into coordinated, orchestrated actions in the operations of their business. One of the coolest places to see this working is with our Day Zero companies. These companies have enormous ambition and deeply value the step change in speed and the reduction of expenses that Foundry delivers when consumed as infrastructure as a service. Wejo was able to develop market-ready applications in as little as six weeks on Foundry; Sarcos is integrating 0.5 trillion data points per month to accelerate design, maintenance, and commercialization of their iron man suits. Lilium is flying through ground and flight testing using the vast data generated by every sensor streaming from the aircraft. I'd like to introduce some of our Day Zero founders to unpack this a little bit more.

Greg, Founder Presentation

Apollo is an orchestration engine for the enterprise, enabling continuous deployment, configuration management, and central software operations across many cloud and on-prem environments. Apollo employs several different concurrent processes, including version management, advanced rollout strategies, and release promotion to ensure platforms stay up-to-date and operational 24/7. With Apollo, you can release new capabilities, deploy mid-scale, and compose them into novel platforms, de-risk releases, and rapidly resolve problems as they arise. Apollo facilitates software stability across these different environments by using a concept called release channels. Environments can subscribe to a release channel in accordance with their individual risk tolerance and appetite for new features. Once pushed via release channel, Apollo enables the evaluation roll-outs through a powerful suite of tools to help operators understand the risks associated with each pipeline, surfacing problems in shipped code better. Apollo makes it possible to take the same approach to continuous delivery across different security classification boundaries by enabling you to deploy an Apollo hub within each network boundary. Each network hub is responsible for managing the environments on that network. This compliance-aware change management enables Apollo to essentially manage services in environments across different compliance regimes, powering seamless operations across highly regulated business environments. Apollo effectively removes the deployment environment as a constraint, enabling engineers to focus on velocity and application code. The rate code works for all customer requirements.

Shyam Sankar, COO

And we continue to push the envelope of Apollo capability by enabling streaming processing at the Edge. Once again, we are building five years ahead of the market. A software is building technology that will meet its moment. With our latest investments, we'll be able to develop streaming pipelines in Foundry that you can then package up, version, and continuously deploy to Edge's compute infrastructure, be it a Humby, a satellite, a 5G base station to enable real-time processing of large amounts of data in a decentralized, efficient manner. These pipelines will be version upgraded and managed, orchestrated by Apollo. Imagine, you'll be able to Bluegreen upgrade your streaming pipeline across submarines, factory floors, 5G, and 6G networks. This is a revolutionary capability that will give our customers the edge against their competition. There are two modular offerings we've taken to market that we are really quite excited about, carbon and emissions management and AML for crypto and fintech. Starting with carbon emissions management, there is a huge need to not simply account for carbon, and more broadly, emissions, but what are you going to do about it? Day-to-day, month-to-month, how do you manage trade-offs between production on time, full revenue, margin, and emissions targets? How do you understand the levers you have to pull and the implications of each lever? Do you have the ability to understand the consequences of changing a supplier, setting a different delivery routing, or changing a production location on your emissions? Can you put that information into a single pane of glass? The same pane that your company uses to manage production, revenue, or margin. Because until you do, emissions management will only be a source of beta for you, something that you do so that you're not left behind. But once you do, you'll be able to use it to beat your competition and win in the market. These workflows are tailor-made for Foundry and leverage our digital twin and supply chain capabilities to present a single pane of glass to view revenue, margin, production, and all emissions to not just see, but to manage the outcome. We are seeing growing momentum in this area, no small part because of the obvious charisma of the alpha of developing a competitive edge. Customers across disparate industries are building carbon-focused common operating pictures to track live emissions, simulate emissions impacts of changes to suppliers, technologies, regulations, and make real-time changes to their business. The other offering we're really excited about is Foundry for crypto. We have found a unique fit with fast-growing crypto companies that need industrialized compliance solutions. We are leveraging our deep anti-money laundering and know-your-customer expertise developed over years helping governments find compliance issues with the world's largest banks and helping those banks respond and harden their compliance programs. I mentioned last quarter how one of Europe's largest retail banks deployed our AML solution in two days. Two days! The cost, speed, and performance is unmatchable. These crypto exchanges and fintech disruptors are technically advanced and can easily discern what legacy banks struggle to do. We believe there are no alternatives that can compete on cost, speed, and performance. We're really excited to put more weight behind this in the market. Turning to government, we continue to advance our mission of becoming the U.S. government's central operating system as we extend our footprint across defense, healthcare, and civilian agencies. In the third quarter, we signed new deals with the Department of Health and Human Services, the Air Force, the NIH, and more. I'm proud to say that the MetaConstellation, which we featured in last quarter's earnings call, met its moment when called upon by UK MOD to enable Noncombatant Evacuation Operations in Afghanistan. As a reminder, the MetaConstellation is radically changing how satellites are tested, the latency of collection, and it's creating a fundamental link in the AI-enabled kill chain. We are orchestrating a meta-constellation of more than 300 satellites by working with an array of commercial space companies. These companies have been deploying constellations of hyperspectral radar and Elan sensors into orbit. And we're putting all that power directly into the hands of the frontlines, empowering the Edge. The end-to-end Gotham and Foundry infrastructure, including Meta-constellation, provided unparalleled capability and was stood up in less than a day for UK MOD operations. In addition, Meta-constellation was also used to great effect at last month's U.S. military exercises, providing timely and effective targeting information. This is all made possible because of Apollo for Edge AI. We were recently down-selected by the U.S. Army to be the sole provider of the Army's intelligence data fabric and analytics foundation for the Capability Drop 2 program. The Army will deploy Gotham to support intelligence workflows worldwide with a globally federated intelligence data fabric and analytics platform, spanning multiple security classifications. Our work on CD2 is just one of many initiatives with which we are engaging with the Army, including CD1 and TITAN that will accelerate the decision chain and provide a decisive advantage for our armed forces in the near-peer fight. We have a motivating set of customers and growing pipeline for big pursuits in '22 and beyond, and it is growing every quarter. We're not just competing for programs. Our unique capabilities are creating their own opportunities. Our work in healthcare continues to expand, and we recently signed a four-year $87 million contract with the Department of Veteran Affairs. This department serves nine million veterans and their family members and spends nearly $0.25 trillion per year. After supporting them in the exigency during COVID-19 response, we won an unrestricted competition to help power their data transformation efforts. Our software is going to enable the VA to integrate data across its large IT landscape and ultimately to deliver better care and services for our veterans. It is a privilege to serve our veterans and warfighters, both on the battlefield and in their period after service. Our collaboration with the NIH continues in the fight against COVID-19. As N3C deepens its partnership with Palantir, leveraging Foundry as their research backbone. This two-year award carries a total potential value of $60 million, and the N3C data enclave represents one of the largest collections of COVID-19 health records in the world. Additionally, our work with NCATS expanded with an increase in total potential value of $24 million.

Dave Glazer, CFO

Thanks, Shyam. I'll review our third-quarter performance followed by our outlook. We had a record-breaking Q3 as continued product innovation and our ongoing investments in distribution led to accelerating customer account growth and strong free cash flow. We generated revenue growth of 36% in the quarter, bringing Q3 revenue to $392 million and year-to-date revenue to more than $1.1 billion, up 44% versus the first nine months of last year. Our business continues to demonstrate very strong cash generation. Third quarter cash operations was $101 million, an improvement of $153 million versus the prior year period. We delivered $119 million in adjusted free cash flow in the third quarter, representing a margin of 30%. The strength of our third quarter performance brings year-to-date adjusted free cash flow to $320 million, representing a free cash flow margin of 29% and a $605 million improvement from the prior-year period. Third quarter adjusted operating income increased to $116 million, representing a margin of 30%, our fourth consecutive quarter with adjusted operating margin of 30%. Total customer count grew 20% quarter-over-quarter. Our commercial customer count increased 46% quarter-over-quarter. Our U.S. business continues to demonstrate strong growth with revenue increasing 45% year-over-year in Q3. We see broad-based momentum in our commercial business, representing our third straight quarter of accelerating commercial revenue growth. Our investments in product and distribution continued to drive growth, particularly in the U.S. where commercial revenue increased 103% in Q3.

Operator, Operator

Thanks, Dave. We will begin with questions from our shareholders submitted today. Shyam, this first one's for you. Jason B and Jacob P both asked, does Palantir view any other AI companies as competitors? If so, what makes Palantir platforms a better choice?

Shyam Sankar, COO

Thank you, Jason. Thank you, Jacob. Our competition is not any other company. It's really — the competition is our customer, specifically our customer’s IT department and their desire to build their own solution. And you know what? It's not even really their fault. There's an army of consultants and comp providers who pedal completely bogus DIY market textures that are never going to work. It took us 15 years and nearly $3 billion of development and we continue to innovate every day. Just last week, we had a meeting with the Fortune 200 CIO, who was so excited to see Foundry because he has spent the last three years trying unsuccessfully to solve the same problems with a leading cloud provider; three years. And they aren't the only ones. These are our favorite conversations because having tried and failed, the customer knows exactly how valuable it is to buy a solution that works in days at scale. But that's not really what makes us a better choice. We're a better choice because we focus exclusively on alpha. We express their strategy. Whereas most enterprise software makes the customer more similar to the competition, our products are designed to make them more different, more differentiated.

Operator, Operator

Great, Shyam, another one for you. Alex and Jeff asked, are you planning to invest in any cryptocurrency?

Shyam Sankar, COO

Thanks, Alex and Jeff. We are super excited about Foundry for crypto. We see a unique fit with fast-growing crypto companies that need industrialized compliance solutions. These are highly technical buyers and they're highly motivated disruptors. We are leveraging our deep anti-money laundering and know-your-customer expertise, expertise that we developed over years, helping governments find compliance issues with the world's largest banks, and helping those banks respond and harden their compliance programs. We're going to be a massive accelerator for crypto companies. We're going to give them credible AML platforms to enable them to go toe-to-toe and beyond with the legacy players. We're going to deliver.

Dave Glazer, CFO

Thanks, Rodney. As you see in our results, we're delivering strong growth with strong cash flow. We expect revenue growth of 40% for the full year. Expecting our second year in a row of 40% or higher revenue growth. We've raised our adjusted free cash flow guide to an excess of $400 million for the year to the second straight quarter raising our guidance. And it implies an over $670 million year-over-year improvement. Stepping back, we are continuing to deliver high growth with very strong cash flow results and we remain focused on expansion. And so pivoting to expansion, we have more pilots today than at any time in our history. We added 34 net new customers in Q3.

Shyam Sankar, COO

Thanks, Rodney. Another one for you, Daniel asks, Gotham and Foundry can be used on personal computers, tablets, and smartphones. Can Palantir's platforms be used on augmented reality and virtual reality devices? How impactful will AR, VR, and the metaverse be for Palantir, its clients, and big data analytics? Thanks, Daniel. We have been doing augmented and virtual reality for a long time, more than a decade. We have worked on pushing mission information to smartphones in augmented reality. You can hold up your phone and view mission plans, route, HLZ helicopter landing zones, points of interest, waypoints overlaid while you're on mission. We have worked on augmenting imagery and full-motion video with AI detection in mission context real-time to drive operational decision-making. At a recent military exercise, our Apollo for Edge AI capability was used across air-launched effects and unmanned aerial vehicles to send targets to fighter jets. Those targets popped up in the pilot's augmented reality heads-up display. We are at the Edge. We are integrating with Edge devices from night vision goggles to heads-up displays from augmented reality and cockpit training simulations. AI enabling the kill chain requires pushing context to the decision-making Edge. So we see AI and VR as integral part of everything that we do.

Kevin Kawasaki, Global Head of Business Development

Thank you, Justin. Thank you, Jackson. Our SMB offering delivers the full power of Foundry through Apollo and is to be adopted in days. And we see this with Foundry for Builders and other Day Zero companies. Not only our companies using Foundry as our internal infrastructure. They are pioneering the use of Foundry and Apollo as a platform to build consumer software products as well. With Foundry, they are doing the faster companies in mobility, building entire data ecosystems in Foundry for connected vehicles and autonomous vehicles of renewable energy Company using Foundry, not just for advanced physics models, but also using Foundry to create software offerings for their customers. A B2B software Company, building an ERP for construction. The founder told us that Foundry is making it possible for him to build orders of magnitude bigger and with less effort.

Shyam Sankar, COO

Yeah, we talked earlier about the module, though it was a big thing a year ago that really changed how we went to market. The modules have been very successful. Just this quarter we discussed the carbon emissions management module, and Foundry for crypto. But if we go back a little bit, what we can see is the real success of software-defined data integration, the SDDI and ERP suite modules, where we've been able to really use these modules to meet our customers where they are, predictable price points. It also enables us to really scale channels and enable our partners to help us go to market. So predictable price points, clear problems to go after. And in doing so, we've developed enough success to see that after solving a single problem in an understandable way, it really sets us up to better expand and land the full proposition of Foundry and expand the contract over time there. We really have a lot of faith in the module strategy, both as a direct sales force augmentation and channel partners in commercial.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.