What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-11-09 compared with 2021-08-12 · 159 added, 196 removed, 350 unchanged (50% of the section changed)

18 unchanged sentences

Over the long term, we believe that every large institution in the markets we serve is a potential partner.

For the three months ended June 30, 2021, we generated $375.6 million in revenue, reflecting a 49% growth rate from the three months ended June 30, 2020, when we generated $251.9 million in revenue.

In the six months ended June 30, 2021, we generated $716.9 million in revenue, reflecting a 49% growth rate from the six months ended June 30, 2020, when we generated $481.2 million in revenue.

For the three months ended September 30, 2021, we generated $392.1 million in revenue, reflecting a 36% growth rate from the three months ended September 30, 2020, when we generated $289.4 million in revenue.

In the nine months ended September 30, 2021, we generated $1.1 billion in revenue, reflecting a 44% growth rate from the nine months ended September 30, 2020, when we generated $770.6 million in revenue.

Our operating results continued to improve when excluding stock-based compensation.

In the three months ended June 30, 2021, we incurred losses from operations of $146.1 million, or adjusted income from operations of $116.7 million when excluding stock-based compensation and related employer payroll taxes.

In the three months ended June 30, 2020, our losses from operations were $99.1 million, or adjusted income from operations of $28.7 million when excluding stock-based compensation.

In the six months ended June 30, 2021, we incurred losses from operations of $260.2 million, or adjusted income from operations of $233.3 million when excluding stock-based compensation and related employer payroll taxes.

In the six months ended June 30, 2020, our losses from operations were $169.3 million, or adjusted income from operations of $12.6 million when excluding stock-based compensation.

In the three months ended June 30, 2021, our gross profit was $284.7 million, reflecting a gross margin of 76%, or 82% when excluding stock-based compensation.

In the three months ended June 30, 2020, our gross profit was $183.5 million, reflecting a gross margin of 73%, or 80% when excluding stock-based compensation.

In the six months ended June 30, 2021, our gross profit was $551.8 million, reflecting a gross margin of 77%, or 83% when excluding stock-based compensation.

In the six months ended June 30, 2020, our gross profit was $348.5 million, reflecting a gross margin of 72%, or 78% 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;

In the three months ended September 30, 2021, we incurred losses from operations of $91.9 million, or adjusted income from operations of $116.1 million when excluding stock-based compensation and related employer payroll taxes.

In the three months ended September 30, 2020, our losses from operations were $847.8 million, or adjusted income from operations of $73.1 million when excluding stock-based compensation, related employer payroll taxes, and non-recurring

charges relating to the direct listing of our Class A common stock (“Direct Listing”) on the New York Stock Exchange (“NYSE”).

In the nine months ended September 30, 2021, we incurred losses from operations of $352.1 million, or adjusted income from operations of $349.4 million when excluding stock-based compensation and related employer payroll taxes.

In the nine months ended September 30, 2020, our losses from operations were $1.0 billion, or adjusted income from operations of $85.7 million when excluding stock-based compensation, related employer payroll taxes, and non-recurring

charges relating to our Direct Listing.

In the three months ended September 30, 2021, our gross profit was $305.3 million, reflecting a gross margin of 78%, or 82% when excluding stock-based compensation.

In the three months ended September 30, 2020, our gross profit was $140.0 million, reflecting a gross margin of 48%, or 81% when excluding stock-based compensation.

In the nine months ended September 30, 2021, our gross profit was $857.2 million, reflecting a gross margin of 77%, or 82% when excluding stock-based compensation.

In the nine months ended September 30, 2020, our gross profit was $488.5 million, reflecting a gross margin of 63%, or 79% when excluding stock-based compensation.

For more information about our income from operations, when excluding stock-based compensation, related employer payroll taxes, and non-recurring charges related to our Direct Listing;

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

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We define a customer to be an organization from which we have recognized revenue during the trailing twelve month period.

During the period ended June 30, 2021, we had 169 customers, including leading companies in various commercial sectors as well as government agencies around the world.

During the period ended June 30, 2020, we had 137 customers.

During the period ended September 30, 2021, we had 203 customers, including leading companies in various commercial sectors as well as government agencies around the world.

During the period ended September 30, 2020, we had 142 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.

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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 ended June 30, 2021 was $7.9 million, which grew 19% from $6.6 million per customer during the trailing twelve months ended June 30, 2020.

Our average revenue for the top twenty customers during the trailing twelve months ended June 30, 2021 was $39.0 million, which grew 36% from an average of $28.6 million from the top twenty customers during the trailing twelve months ended June 30, 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 six months ended June 30, 2021, commercial customers accounted for 39% of our revenue while government agencies accounted for 61%.

In the six months ended June 30, 2021, we generated 56% of our revenue from customers in the United States and the remaining 44% from customers abroad.

Our average revenue per customer during the trailing twelve months ended September 30, 2021 and 2020 was $7.0 million.

Our average revenue for the top twenty customers during the trailing twelve months ended September 30, 2021 was $41.3 million, which grew 35% from an average of $30.7 million from the top twenty customers during the trailing twelve months ended September 30, 2020.

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 nine months ended September 30, 2021, commercial customers accounted for 41% of our revenue while government agencies accounted for 59%.

In the nine months ended September 30, 2021, we generated 56% of our revenue from customers in the United States and the remaining 44% from customers abroad.

Expansion of Access to Platforms

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Although the majority of our workforce worked remotely, there was minimal disruption in our ability to ensure the effective operation of our software platforms.

As local situations permit, we have opened our offices in at least a limited capacity and are allowing business travel to resume, while continuing to closely monitor the pandemic.

As local situations permit, we continue to open our offices in at least a limited capacity and are allowing business travel to resume, while continuing to closely monitor the pandemic.

The economic consequences of the COVID-19

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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 during the temporary closures of our offices globally and reductions in related operating expenses, related to the ongoing pandemic.

We saw decreases in our travel and office-related expenditures, including during the 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 our offices, we do not expect such expenditures to return to their pre-pandemic

While we expect our travel and office-related expenditures to increase moving forward, especially as we continue to open 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.

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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 $1,092.7 million in revenue.

In 2020, we generated a total of $1.1 billion in revenue.

Acquire phase customers cohorted as of December 31, 2020 generated $0.3 million in revenue in 2020.

Expand phase customers cohorted as of December 31, 2020 generated $20.3 million in revenue in 2020.

Scale phase customers cohorted as of December 31, 2020 generated $1,072.1 million in revenue in 2020.

In the six months ended June 30, 2021, customers cohorted as of December 31, 2020 generated a total of $708.0 million in revenue.

New customers acquired during the six months ended June 30, 2021 generated an additional $8.9 million in revenue and will be assigned a cohort as of December 31, 2021.

Scale phase customers cohorted as of December 31, 2020 generated $1.1 billion in revenue in 2020.

In the nine months ended September 30, 2021, customers cohorted as of December 31, 2020 generated a total of $1.1 billion in revenue.

New customers acquired during the nine months ended September 30, 2021 generated an additional $37.9 million in revenue and will be assigned a cohort as of December 31, 2021.

A more detailed discussion of the three phases, for purposes of illustration of how we manage accounts across the business, follows below.

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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 six months ended June 30, 2021, those same customers generated $8.0 million in revenue, which yielded a contribution loss of $7.5 million.

In the nine months ended September 30, 2021, those same customers generated $15.6 million in revenue, which yielded a contribution loss of $7.1 million.

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.

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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 six months ended June 30, 2021, those same customers generated $48.9 million in revenue with a contribution margin of 52%.

In the nine months ended September 30, 2021, those same customers generated $62.1 million in revenue with a contribution margin of 45%.

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.

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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 six months ended June 30, 2021, those same customers generated $651.1 million in revenue with a contribution margin of 64%.

In 2020, we generated $1.1 billion in revenue from customers in the Scale phase, with a contribution margin of 63%.

In the nine months ended September 30, 2021, those same customers generated $993.4 million in revenue with a contribution margin of 64%.

We believe that our customers will move into the Scale phase over the long term.

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gross profit and gross margin, excluding stock-based compensation;

and adjusted income from operations, which excludes 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.

and adjusted income from operations, which excludes stock-based compensation, related employer payroll taxes, and non-recurring

charges relating to our Direct Listing, 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

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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.

Additionally, we exclude expenses primarily related to our Direct Listing during the quarter ended September 30, 2020, as they are a one-time

nonrecurring charge, and 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.

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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.

and adjusted income from operations 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

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Contribution Margin

The following table provides a reconciliation of contribution margin for the three and six months ended June 30, 2021 and 2020 (in thousands, except percentages):

Three Months Ended June 30,

Six Months Ended June 30,

The following table provides a reconciliation of contribution margin for the three and nine months ended September 30, 2021 and 2020 (in thousands, except percentages):

Three Months Ended September 30,

Nine Months Ended September 30,

Loss from operations

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Gross Profit and Gross Margin, Excluding Stock-Based Compensation

The following table provides a reconciliation of gross profit and gross margin, excluding stock-based compensation for the three and six months ended June 30, 2021 and 2020 (in thousands, except percentages):

Three Months Ended June 30,

Six Months Ended June 30,

The following table provides a reconciliation of gross profit and gross margin, excluding stock-based compensation for the three and nine months ended September 30, 2021 and 2020 (in thousands, except percentages):

Three Months Ended September 30,

Nine Months Ended September 30,

stock-based compensation

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Adjusted Income from Operations

The following table provides a reconciliation of adjusted income from operations, which excludes stock-based compensation and related employer payroll taxes, for the three and six months ended June 30, 2021 and 2020 (in thousands):

Three Months Ended June 30,

Six Months Ended June 30,

The following table provides a reconciliation of adjusted income from operations, which excludes stock-based compensation, related employer payroll taxes, and non-recurring

Direct Listing charges, for the three and nine months ended September 30, 2021 and 2020 (in thousands):

Three Months Ended September 30,

Nine Months Ended September 30,

Loss from operations

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employer payroll taxes related to stock-based compensation

non-recurring

Direct Listing charges (1)

Adjusted income from operations

Non-recurring

Direct Listing charges were primarily incurred during the quarter ended September 30, 2020 and were immaterial in other periods.

Components of Results of Operations

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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 the Palantir services to the customer.

Revenue associated with Palantir Cloud subscriptions is generally recognized over the contract term on a ratable basis, which is consistent with the transfer of control of the Palantir 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.

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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.

Other income (expense), net consists primarily of foreign currency exchange gains and losses, realized and unrealized losses from investments, 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.

During September 2020, in connection with the direct listing of our Class A common stock on the New 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

During September 2020, in connection with the Direct Listing, all of our outstanding preferred stock warrants were converted into common stock warrants, which resulted in the reclassification of the warrants liability to additional paid-in

As such, we do not expect additional charges related to the fair value of these warrants.

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The following table summarizes our condensed consolidated statements of operations data (in thousands):

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Cost of revenue (1)

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Includes stock-based compensation expense as follows (in thousands):

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Cost of revenue

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General and administrative

Total stock-based compensation expense

Total stock-based compensation expense (i)

On September 30, 2020, in connection with the Direct Listing, we incurred $769.5 million and $8.4 million of stock-based compensation using the accelerated attribution method related to the satisfaction of the performance-based vesting condition for RSUs and growth units, respectively, that had satisfied the service-based vesting condition as of such date.

The following table sets forth the components of our condensed consolidated statements of operations data as a percentage of revenue:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Cost of revenue

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Provision (benefit) for income taxes

Comparison of the Three Months Ended June 30, 2021 and 2020

Three Months Ended June 30,

Comparison of the Three Months Ended September 30, 2021 and 2020

Three Months Ended September 30,

Total revenue

Revenue increased by $123.8 million, or 49%, for the three months ended June 30, 2021 compared to the three months ended June 30, 2020.

Revenue from government customers increased by $92.6 million, or 66%, for the three months ended June 30, 2021 compared to the three months ended June 30, 2020, primarily from customers in the United States.

Revenue increased by $102.8 million, or 36%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020.

Revenue from government customers increased by $55.3 million, or 34%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020, primarily from customers in the United States.

Of the increase, $53.4 million was from government customers existing as of December 31, 2020.

Revenue from commercial customers increased by $31.2 million, or 28%, for the three months ended June 30, 2021 compared to the three months ended June 30, 2020.

The increase is primarily due to an increase of $20.3 million from customers existing as of December 31, 2020.

Revenue from commercial customers increased by $47.5 million, or 37%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020.

The increase is primarily due to an increase of $35.0 million from new customers that were not yet our customers 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.

Cost of Revenue and Gross Profit

Three Months Ended June 30,

Three Months Ended September 30,

Cost of revenue

Cost of revenue for the three months ended June 30, 2021 increased by $22.5 million, or 33%, compared to the three months ended June 30, 2020.

The increase was primarily due to increases in personnel costs of $9.5 million, which included an increase of $6.2 million in stock-based compensation expense primarily due to the recognition of stock-based compensation expense related to the Company’s RSUs in the current period and there was no such expense in the prior period;

$1.7 million in employer payroll taxes primarily related to income from share-based payments;

$0.5 million in travel expenses due to the relaxing of COVID travel restrictions;

and $1.1 million in payroll and payroll-related costs driven by an increase in cost per head and various incentive programs.

Additionally, there were increases of $8.1 million related to third-party cloud hosting services, $4.5 million related to other direct deployment costs and increased usage of field service representatives, and $1.0 million related to an increase in server shipments.

These increases to cost of revenue were offset by decreases of $0.6 million from office related expenses and other allocated costs.

Our gross margin for the three months ended June 30, 2021 increased by 3% compared to the three months ended June 30, 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 June 30, 2021 and 2020, gross margin, excluding stock-based compensation, would have increased by 2% to 82%.

Cost of revenue for the three months ended September 30, 2021 decreased by $62.5 million, or 42%, compared to the three months ended September 30, 2020.

The decrease was primarily due to decreases in personnel costs of $78.6 million, which included a decrease of $79.5 million in stock-based compensation expense primarily due to higher RSU expense in the prior period related to the recognition of cumulative stock-based compensation expense upon our Direct Listing.

These decreases in personnel costs were partially offset by an increase of $13.2 million related to third-party cloud hosting services.

Our gross margin for the three months ended September 30, 2021 increased by 30% compared to the three months ended September 30, 2020.

Gross margin increased primarily as a result of higher RSU expense in the prior period related to the recognition of cumulative stock-based compensation expense upon our Direct Listing and as a result of increased efficiencies in supporting revenue growth at our customer deployments, including investments in our platforms.

This was partly offset by an increase in third-party cloud hosting services.

For the three months ended September 30, 2021 and 2020, gross margin, excluding stock-based compensation, would have been 82% and 81%, respectively.

Operating Expenses

Three Months Ended June 30,

Three Months Ended September 30,

Sales and marketing

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Sales and Marketing

Sales and marketing expenses increased by $59.9 million, or 58%, for the three months ended June 30, 2021 compared to the three months ended June 30, 2020.

The increase was primarily driven by increases in personnel costs of $53.7 million, which included increases of $32.1 million in stock-based compensation expense primarily due to the recognition of stock-based compensation expense related to the Company’s RSUs;

$12.5 million in employer payroll taxes primarily related to income from share-based payments;

$5.7 million in payroll due to an increase in headcount attributable to our sales and marketing functions and various incentive programs;

$2.6 million in travel expenses due to the lifting of COVID travel restrictions;

and $0.7 million in payroll and payroll-related costs driven by an increase in cost per head and various incentive programs.

Additionally, there were increases of $3.4 million in marketing costs and $2.7 million in external sales commissions.

Sales and marketing expenses decreased by $181.5 million, or 54%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020.

The decrease was primarily driven by decreases in personnel costs of $199.2 million, which included a decrease of $206.8 million in stock-based compensation expense primarily due to higher RSU expense in the prior period related to the recognition of cumulative stock-based compensation expense upon our Direct Listing.

These decreases in personnel costs were partially offset by an increase of $5.3 million in payroll costs due to an increase in headcount attributable to our sales and marketing functions, average cost per head, and commission payments.

Additionally, there was an increase of $9.8 million in marketing costs.

Research and Development

Research and development expenses increased by $23.7 million, or 27%, for the three months ended June 30, 2021 compared to the three months ended June 30, 2020.

The increase was primarily driven by increases in personnel costs of $23.8 million, which included an increase of $12.7 million in stock-based compensation expense primarily due to the recognition of stock-based compensation expense related to the Company’s RSUs;

$5.3 million related to increase in payroll taxes primarily related to income from share-based payments;

$5.2 million in payroll related to an increase in headcount attributable to our research and development functions and various incentive programs;

and $0.6 million in travel expenses due to the lifting of COVID travel restrictions.

Additionally, there was an increase of $0.7 million in allocated overhead;

offset by a decrease of $0.8 million in third-party cloud hosting services and other IT.

Research and development expenses decreased by $219.6 million, or 70%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020.

The decrease was primarily driven by decreases in personnel costs of $219.2 million, which included a decrease of $222.3 million in stock-based compensation expense primarily due to higher RSU expense in the prior period related to the recognition of cumulative stock-based compensation expense upon our Direct Listing.

General and Administrative

General and administrative expenses increased by $64.7 million, or 69%, for the three months ended June 30, 2021 compared to the three months ended June 30, 2020.

The increase was primarily driven by increases in personnel costs of $63.1 million, which included an increase of $53.9 million in stock-based compensation expense primarily due to the recognition of stock-based compensation expense related to the Company’s RSUs;

$7.2 million related to increase in payroll taxes primarily related to income from share-based payments;

$1.2 million in payroll related to an increase in headcount attributable to our general and administrative functions;

and $0.7 million in other payroll-related costs.

Additionally, there was an increase of $1.7 million from office related expenses and other allocated costs.

General and administrative expenses decreased by $189.5 million, or 56%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020.

The decrease was primarily driven by decreases in personnel costs of $150.8 million, which included a decrease of $153.5 million in stock-based compensation expense primarily due to higher RSU expense in the prior period related to the recognition of cumulative stock-based compensation expense upon our Direct Listing.

Additionally, there was a decrease of $44.1 million in legal and other consulting services primarily from non-recurring

expenses related to our Direct Listing incurred in the third quarter of 2020, partially offset by an increase of $5.5 million from increased recruiting costs, cloud-based hosting costs, and allocated overhead.

Interest Income

Three Months Ended June 30,

Three Months Ended September 30,

Interest income

Interest income decreased by $0.2 million for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 primarily due to a reduction in U.S.

Interest income decreased by $0.1 million for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 primarily due to a reduction in U.S.

interest rates on interest earned from our cash, cash equivalents, and restricted cash.

Interest Expense

Three Months Ended June 30,

Three Months Ended September 30,

Interest expense

Interest expense decreased by $5.1 million for the three months ended June 30, 2021 compared to the three months ended June 30, 2020.

The decrease was primarily due to the full repayment of the outstanding debt balance during the three months ended June 30, 2021.

Interest expense decreased by $1.5 million for the three months ended September 30, 2021 compared to the three months ended September 30, 2020.

The decrease was primarily due to the full repayment of the outstanding debt balance during the second quarter of 2021.

Change in Fair Value of Warrants

Three Months Ended June 30,

Three Months Ended September 30,

Change in fair value of warrants

During the three months ended June 30, 2020, the $3.7 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 ended June 30, 2021, there were no outstanding liability classified warrants.

During the three months ended September 30, 2020, the $9.2 million loss from the change in fair value of warrants was primarily driven by the increase in the fair value of our stock during the period.

During the three months ended September 30, 2021, there were no outstanding liability classified warrants.

Other Income (Expense), Net

Three Months Ended June 30,

Three Months Ended September 30,

Other income (expense), net

Other income (expense), net changed by $3.7 million for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 primarily due to changes in net realized and unrealized gains from foreign exchange transactions.

Other income (expense), net changed by $5.2 million for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 primarily due to changes in realized and unrealized gains, net from foreign exchange transactions and unrealized losses, net from our investments in marketable securities.

Provision (Benefit) for Income Taxes

Three Months Ended June 30,

Three Months Ended September 30,

Provision (benefit) for income taxes

We recorded a benefit for income taxes of $5.7 million for the three months ended June 30, 2021 compared to a provision for income taxes of $0.9 million for the three months ended June 30, 2020.

The change was primarily due to the revaluation of our United Kingdom (“UK”) deferred tax assets as a result of a change in the UK corporate tax rate enacted during the current quarter, which increased the rate from 19% to 25% and will be effective April 1, 2023.

Comparison of the Six Months Ended June 30, 2021 and 2020

Six Months Ended June 30,

We recorded a provision for income taxes of $1.4 million for the three months ended September 30, 2021 compared to a benefit from income taxes of $8.5 million for the three months ended September 30, 2020.

The change was primarily due to the benefits from stock-based compensation windfalls and the revaluation of the UK deferred tax assets as a result of a change in the UK corporate tax rate recorded in the third quarter of 2020 but not in the current quarter.

Comparison of the Nine Months Ended September 30, 2021 and 2020

Nine Months Ended September 30,

Total revenue

Revenue increased by $235.7 million, or 49%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

Revenue from government customers increased by $182.8 million, or 71%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020, primarily from customers in the United States.

Revenue increased by $338.4 million, or 44%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

Revenue from government customers increased by $238.1 million, or 57%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, primarily from customers in the United States.

Of the increase, $236.0 million was from government customers existing as of December 31, 2020.

Revenue from commercial customers increased by $52.8 million, or 24%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

The increase is primarily due to an increase of $38.5 million from customers existing as of December 31, 2020.

Revenue from commercial customers increased by $100.3 million, or 29%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

Of such increase, $51.0 million is from customers existing as of December 31, 2020 and the remaining amount is from new customers acquired during the nine months ended September 30, 2021.

Generally, increases in revenue from our existing customers are related to increased adoption of our products and services within their organizations.

Cost of Revenue and Gross Profit

Six Months Ended June 30,

Nine Months Ended September 30,

Cost of revenue

Cost of revenue for the six months ended June 30, 2021 increased by $32.3 million, or 24%, compared to the six months ended June 30, 2020.

The increase was primarily due to increases in personnel costs of $15.5 million, which included an increase of $14.1 million in stock-based compensation expense primarily due to the recognition of stock-based compensation expense related to the Company’s RSUs in the current period and there was no such expense in the prior period;

and $4.9 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 $2.8 million as a result of COVID-related travel restrictions and company-wide initiatives to decrease overall travel, and $0.7 million in payroll and payroll-related costs driven by a decrease of headcount attributable to cost of revenue functions partially offset by an increase in various incentive programs.

Additionally, there were increases of $14.6 million related to third-party cloud hosting services and $7.3 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 $4.4 million from office related expenses and other allocated costs and $0.7 million related to reductions in server shipments.

Our gross margin for the six months ended June 30, 2021 increased by 5% compared to the six months ended June 30, 2020.

This was partly offset by increases in stock-based compensation expense and third-party cloud hosting services.

For the six months ended June 30, 2021 and 2020, gross margin, excluding stock-based compensation, would have increased by 5% to 83%.

Cost of revenue for the nine months ended September 30, 2021 decreased by $30.2 million, or 11%, compared to the nine months ended September 30, 2020.

The decrease was primarily due to decreases in personnel costs of $63.1 million, which included a decrease of $65.4 million in stock-based compensation expense primarily due to higher RSU expense in the prior period related to the recognition of cumulative stock-based compensation expense upon our Direct Listing.

These decreases in personnel costs were partially offset by increases of $27.8 million related to third-party cloud hosting services and $10.6 million related to other direct deployment costs and increased usage of field service representatives.

Our gross margin for the nine months ended September 30, 2021 increased by 14% compared to the nine months ended September 30, 2020.

This was partly offset by an increase in third-party cloud hosting services and direct deployment costs.

For the nine months ended September 30, 2021 and 2020, gross margin, excluding stock-based compensation, would have been 82%.

Operating Expenses

Six Months Ended June 30,

Nine Months Ended September 30,

Sales and marketing

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Sales and Marketing

Sales and marketing expenses increased by $97.3 million, or 48%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

The increase was primarily driven by increases in personnel costs of $98.4 million, which included an increase of $70.9 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;

$24.4 million in employer payroll taxes primarily related to income from share-based payments;

and $7.6 million in payroll due to an increase in headcount attributable to our sales and marketing functions and various incentive programs.

These increases in personnel costs were partially offset by a decrease of $4.6 million in travel-related expenses and other personnel costs as a result of COVID-related travel restrictions and company-wide initiatives to decrease overall travel.

Additionally, there were increases of $1.7 million in third-party cloud based hosting services, $1.1 million in marketing costs, and $0.7 million in external sales commissions;

offset by a decrease of $4.6 million from office related expenses and other allocated costs.

Sales and marketing expenses decreased by $84.2 million, or 16%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

The decrease was primarily driven by decreases in personnel costs of $100.8 million, which included a decrease of $135.9 million in stock-based compensation expense primarily due to higher RSU expense in the prior period related to the recognition of cumulative stock-based compensation expense upon our Direct Listing.

These decreases in personnel costs were partially offset by increases of $24.8 million in employer payroll taxes primarily related to income from share-based payments and $13.1 million in payroll mainly due to an increase in headcount attributable to our sales and marketing functions, average costs per head, and commission payments.

Additionally, there was an increase of $11.0 million in marketing costs.

Research and Development

Research and development expenses increased by $56.4 million, or 37%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

The increase was primarily driven by increases in personnel costs of $58.4 million, which included an increase of $35.6 million in stock-based compensation expense primarily due to the recognition of stock-based compensation expense related to the Company’s RSUs;

$16.5 million related to increase in payroll taxes primarily related to income from share-based payments;

and $9.1 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 $1.6 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 $1.4 million in third-party cloud hosting services and other IT;

offset by decreases of $3.5 million from office related expenses and other allocated costs.

Research and development expenses decreased by $163.2 million, or 35%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

The decrease was primarily driven by decreases in personnel costs of $160.8 million, which included a decrease of $186.7 million in stock-based compensation expense primarily due to higher RSU expense in the prior period related to the recognition of cumulative stock-based compensation expense upon our Direct Listing.

These decreases in personnel costs were partially offset by increases of $15.0 million related to payroll taxes primarily for income from share-based payments and $13.7 million in payroll related to increases in headcount attributable to our research and development functions and cost per head.

General and Administrative

General and administrative expenses increased by $140.5 million, or 86%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

The increase was primarily driven by increases in personnel costs of $142.3 million, which included an increase of $123.9 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;

$16.5 million related to increase in payroll taxes primarily related to income from share-based payments;

$0.6 million in payroll related to an increase in headcount attributable to our general and administrative functions;

and $1.8 million in other payroll-related costs.

These increases in personnel costs were partially offset by a decrease of $0.6 million in travel-related expenses and other personnel costs as a result of COVID-related travel restrictions and company-wide initiatives to decrease overall travel.

Additionally, there was a decrease of $1.8 million from office related expenses and other allocated costs.

General and administrative expenses decreased by $49.0 million, or 10%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

The decrease was primarily driven by a decrease of $49.6 million in legal professional services primarily from non-recurring

expenses related to our Direct Listing incurred in the third quarter of 2020, partially offset by an increase of $6.1 million from office related expenses.

Additionally, there were decreases in personnel costs of $8.6 million, which included a decrease of $29.5 million in stock-based compensation expense primarily due to higher RSU expense in the prior period related to the recognition of cumulative stock-based compensation expense upon our Direct Listing.

These decreases in personnel costs were partially offset by an increase of $16.8 million related to payroll taxes primarily for income from share-based payments.

Interest Income

Six Months Ended June 30,

Nine Months Ended September 30,

Interest income

Interest income decreased by $3.1 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 primarily due to a reduction in U.S.

Interest income decreased by $3.2 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily due to a reduction in U.S.

interest rates on interest earned from our cash, cash equivalents, and restricted cash.

Interest Expense

Six Months Ended June 30,

Nine Months Ended September 30,

Interest expense

Interest expense decreased by $7.8 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

The decrease was primarily due to the full repayment of the outstanding debt balance during the six months ended June 30, 2021.

Interest expense decreased by $9.3 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

The decrease was primarily due to the full repayment of the outstanding debt balance during the second quarter of 2021.

Change in Fair Value of Warrants

Six Months Ended June 30,

Nine Months Ended September 30,

Change in fair value of warrants

During the six months ended June 30, 2020, the $10.0 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 six months ended June 30, 2021, there were no outstanding liability classified warrants.

During the nine months ended September 30, 2020, the $0.8 million gain from the change in fair value of warrants was primarily driven by the decrease of fair value of the underlying stock.

During the nine months ended September 30, 2021, there were no outstanding liability classified warrants.

Other Income (Expense), Net

Six Months Ended June 30,

Nine Months Ended September 30,

Other income (expense), net

Other income (expense), net changed by $7.3 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 primarily due to changes in net realized and unrealized gains from foreign exchange transactions.

Provision (Benefit) for Income Taxes

Six Months Ended June 30,

Provision (benefit) for income taxes

We recorded a benefit for income taxes of $2.6 million for the six months ended June 30, 2021 compared to a provision for income taxes of $3.5 million for the six months ended June 30, 2020.

The change was primarily due to the revaluation of our UK deferred tax assets as a result of a change in the UK corporate tax rate enacted during the current quarter, which increased the rate from 19% to 25% and will be effective April 1, 2023.

Other income (expense), net changed by $12.5 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily due to changes in realized and unrealized gains, net from foreign exchange transactions and unrealized losses, net for investments in marketable securities.

Benefit from Income Taxes

Nine Months Ended September 30,

Benefit from income taxes

We recorded a benefit from income taxes of $1.1 million for the nine months ended September 30, 2021 compared to a benefit from income taxes of $5.0 million for the nine months ended September 30, 2020.

The change was primarily due to the benefits from stock-based compensation windfalls and the revaluations of the UK deferred tax assets as a result of a change in the UK corporate tax rate enacted during the third quarter of 2020 and the second quarter of 2021, which will be effective on April 1, 2023, offset by decreases in profits from our international operations.

Liquidity and Capital Resources

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purchase commitments related to third-party cloud hosting services.

As of June 30, 2021, our accumulated deficit balance was $5.2 billion, and our principal sources of liquidity were $2.3 billion of cash and cash equivalents, exclusive of additional restricted cash of $98.7 million.

As of September 30, 2021, our accumulated deficit balance was $5.3 billion, and our principal sources of liquidity were $2.3 billion of cash and cash equivalents, exclusive of additional restricted cash of $88.1 million.

Cash and cash equivalents consist primarily of cash on deposit with banks as well as institutional money market funds.

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During April 2021, we repaid our outstanding term loans of $200.0 million.

As of June 30, 2021, we had no outstanding balance under the 2014 Credit Facility and a $400.0 million revolving credit facility available and undrawn.

As of September 30, 2021, we had no outstanding balance under the 2014 Credit Facility and a $400.0 million revolving credit facility available and undrawn.

For more information, see the section titled “ Management’s Discussion and Analysis of

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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, as of June 30, 2021, we have approved and entered into investment commitments totaling $250.0 million, as well as additional subsequent investments and commitments, and we may enter into future arrangements to acquire or invest in businesses, products, services, strategic partnerships, and technologies.

Further, as of September 30, 2021, our approved investment commitments outstanding totaled $226.5 million, which are in addition to the investments we made during the period, and 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.

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The following table summarizes our cash flows for the periods indicated (in thousands):

Six Months Ended June 30,

Nine Months Ended September 30,

Net cash provided by (used in):

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Operating Activities

Net cash provided by operating activities was $139.6 million for the six months ended June 30, 2021.

The factors affecting our operating cash flows during this period were our net loss of $262.1 million, offset by non-cash

charges of $449.5 million and changes in net operating assets and liabilities of $47.8 million.

charges primarily consisted of $426.5 million in stock-based compensation expense, $14.4 million in operating lease expense, and $8.0 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 $23.7 million due to timing of expense payments, and a net increase of $25.0 million in deferred revenue and customer deposits due to increases in customer billings, partially offset by a net increase in assets of $80.6 million, primarily due to an increase in accounts receivable.

Net cash used in operating activities was $226.3 million for the six months ended June 30, 2020.

Net cash provided by operating activities was $240.4 million for the nine months ended September 30, 2021.

The factors affecting our operating cash flows during this period were our net loss of $364.2 million, offset by non-cash

charges of $656.1 million and changes in net operating assets and liabilities of $51.5 million.

charges primarily consisted of $182.0 million in stock-based compensation expense, $19.8 million in operating lease expense, and $7.8 million of depreciation and amortization, partially offset by a $10.0 million reduction in the fair value of warrant liabilities.

The net change in operating assets and liabilities were due to a net decrease of $104.8 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 $65.4 million as a result of timing of payments to vendors accrued for in prior periods, and an increase in assets of $69.7 million primarily due to an increase in accounts receivable.

charges primarily consisted of $611.3 million in stock-based compensation expense, $23.4 million in operating lease expense, $11.1 million in depreciation and amortization, $7.2 million in unrealized loss from marketable securities and $3.1 million in other operating activities.

The net change in operating assets and liabilities were due to a net increase in assets of $31.4 million, primarily due to an increase of $15.4 million in accounts receivable, a net decrease of $20.0 million in deferred revenue and customer deposits due to increases in revenue recognized from amounts billed and collected in prior periods, and a net decrease of $22.8 million in operating lease liabilities due to payments on our operating leases, partially offset by an increase in accounts payable and accrued liabilities of $21.5 million due to timing of expense payments.

Net cash used in operating activities was $278.3 million for the nine months ended September 30, 2020.

The factors affecting our operating cash flows during this period were our net loss of $1.0 billion, offset by non-cash

charges of $1.1 billion and changes in net operating assets and liabilities of $331.9 million.

charges primarily consisted of $1.0 billion in stock-based compensation expense, $28.8 million in operating lease expense, and $10.3 million of depreciation and amortization.

The net change in operating assets and liabilities were due to a net decrease of $171.1 million in deferred revenue and customer deposits due to increases in revenue recognized from amounts billed and collected in prior periods, a net increase in accounts payable and accrued liabilities of $12.8 million as a result of timing of payments to vendors accrued for in prior periods, and an increase in assets of $145.3 million primarily due to an increase in accounts receivable.

Investing Activities

Net cash used in investing activities was $1.4 million and $5.7 million for the six months ended June 30, 2021 and 2020, which primarily consisted of purchases of property and equipment.

Net cash used in investing activities was $216.0 million for the nine months ended September 30, 2021, which primarily consisted of purchases of marketable securities of $155.3 million, alternative investments of $50.9 million, and property and equipment of $6.8 million.

Net cash used in investing activities was $10.0 million for the nine months ended September 30, 2020, which primarily consisted of purchases of property and equipment.

Financing Activities

Net cash provided by financing activities was $174.9 million for the six months ended June 30, 2021, which primarily consisted of $376.7 million of proceeds from the exercise of common stock options, partially offset by $200.0 million of payments on term loans.

Net cash provided by financing activities was $467.3 million for the six months ended June 30, 2020, which primarily consisted of $542.9 million of net proceeds from the issuance of common stock, $149.7 million of net proceeds from borrowings under our credit facilities, and $28.8 million of proceeds from exercise of common stock options, partially offset by the repayments of debt of $250.0 million and $3.8 million net cash used for repurchases of common stock.

Net cash provided by financing activities was $274.3 million for the nine months ended September 30, 2021, which primarily consisted of $474.7 million of proceeds from the exercise of common stock options, partially offset by $200.0 million of payments on term loans.

Net cash provided by financing activities was $817.3 million for the nine months ended September 30, 2020, which primarily consisted of $942.5 million of net proceeds from the issuance of common stock, $199.4 million of net proceeds from borrowings under our credit facilities, and $79.5 million of proceeds from exercise of common stock options, partially offset by the repayments of debt of $400.0 million and $3.8 million net cash used for repurchases of common stock.

Credit Facilities

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Upon amending the facility, we repaid the outstanding $200.0 million term loans.

As of June 30, 2021, there were no amounts outstanding under the 2014 Credit Facility.

As of September 30, 2021, there were no amounts outstanding under the 2014 Credit Facility.

Contractual Obligations and Commitments

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See our Annual Report on Form 10-K

for the year ended December 31, 2020, which was filed with the SEC on February 26, 2021, for additional information regarding the Company’s contractual obligations.

for the year ended December 31, 2020, which was filed with the SEC on February 26, 2021, for additional information regarding our contractual obligations.

Sheet Arrangements

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in our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks in the ordinary course of our business, which primarily relate to fluctuations in interest rates, foreign exchange, and inflation.

Interest Rate Risk

Our cash, cash equivalents, and restricted cash consist of cash, certificates of deposit, and money market funds.

Our primary investment policy and strategies are focused on the preservation of capital and supporting our liquidity requirements.

Other than the investments and investment commitments disclosed in Note

Commitments and Contingencies

Subsequent Events

in our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q,

we have not entered into investments for trading or speculative purposes.

Due to the short-term nature of the financial instruments, we have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in interest rates.

A hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our condensed consolidated financial statements.

As of June 30, 2021, we had no debt outstanding.

Foreign Currency Exchange Risk

Our contracts with customers are primarily denominated in U.S.

dollars, with a small amount denominated in foreign currencies.

Our expenses are generally denominated in the currencies of the jurisdictions in which we conduct our operations, which are primarily in the United States, United Kingdom, and other European countries.

Our results of current and future operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro and GBP.

Additionally, fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our statement of operations.

To date, foreign currency transaction gains and losses have not been material to our condensed consolidated financial statements, and we have not engaged in any foreign currency hedging transactions.

Inflation Risk

We do not believe that inflation has had a material effect on our business, results of operations, or financial condition.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis