Palantir Technologies Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements based upon current plans, expectations, and beliefs, involving risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements. You should review the section titled “Special Note Regarding Forward-Looking Statements” for a discussion of forward-looking statements and the section titled “Risk Factors” for a discussion of factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis and elsewhere in this Quarterly Report on Form 10-Q. Our historical results are not necessarily indicative of the results that may be expected for any period in the future. Overview We founded the Company in 2003 to build software for use in counterterrorism operations. In 2008, we released our first platform, Palantir Gotham (“Gotham”), for customers in the intelligence sector. Gotham enables users to identify patterns hidden deep within datasets, ranging from signals intelligence sources to reports from confidential informants. Defense agencies in the United States then began using Gotham to investigate potential threats and to help protect soldiers from improvised explosive devices. Today, the platform is widely used by government agencies in the United States and its allies. Our software is on the front lines, sometimes literally, and that means so are we. We later began working with leading companies across industries, including companies in the energy, transportation, financial services, and healthcare sectors. In 2016, we released our second software platform, Palantir Foundry (“Foundry”), to address a common set of challenges that we saw at large companies. Foundry is becoming a central operating system not only for individual institutions but also for entire industries. In 2017, for example, our partnership with Airbus expanded into a platform for the aviation industry, and today connects data from more than one hundred airlines and 9,000 aircraft around the world. We believe that every large institution faces challenges that our platforms were designed to address. Our focus in the near term is to build partnerships with institutions that have the leadership necessary to effect structural change within their organizations — to reconstitute their operations around data. Over the long term, we believe that every large institution in the markets we serve is a potential partner. Our Business For the three months ended 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 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. 26 Table of Contents 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 Reconciliations ” below. Our Customers We define a customer to be an organization from which we have recognized revenue during the trailing twelve month period. 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. For example, while the U.S. Food and Drug Administration, Centers for Disease Control and Prevention, and National Institutes of Health are subsidiary agencies of the U.S. Department of Health and Human Services, we treat each of those agencies as a separate customer given that the governing structures and procurement processes of each agency are independent. We have built lasting and significant customer relationships with some of the world’s leading government institutions and companies. Our average revenue per customer during the trailing twelve months 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 We have recently begun to expand access to our platforms to earlier stage companies, including startups, as we continue our outreach efforts to an increasingly broad swath of the potential market. Our software platforms can now be installed and ready for use within hours. The speed with which our platforms can be deployed has significantly expanded the range of potential customers with which we plan on partnering over the long term. We anticipate that our reach among an increasingly broad set of customers, in both the commercial and government sectors, will accelerate moving forward. We believe that, as these new partners grow, we will grow with them. We have also made a number of investments in companies whose businesses rely on the ability of their organizations to manage and analyze data effectively at scale. The companies in which we are investing include some of the most innovative organizations in their fields. Our proximity to these businesses and the industries in which they are operating has enhanced, and is expected to continue enhancing, our own product and business development efforts, as we continue expanding access to our platforms to the broadest possible set of customers. Coronavirus (“COVID-19”) Impact As a result of COVID-19, we continue to take precautionary measures in order to minimize the risk of the virus to our employees, our customers, and the communities in which we operate, which included the suspension of all non-essential business travel of employees and the temporary closure of all of our major offices. Although the majority of our workforce worked remotely, there was minimal disruption in our ability to ensure the effective operation of our software platforms. 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 pandemic have been challenging for certain of our customers and prospective customers. While the broader implications of the COVID-19 pandemic on our results of operations and overall financial performance remain uncertain, the COVID-19 pandemic has, to date, not had a material adverse impact on our results of operations. The economic effects of the pandemic and resulting societal changes are currently not predictable. 27 Table of Contents The pandemic has made clear to many of our customers that accommodating the extended timelines ordinarily required to realize results from implementing new software solutions is not an option during a crisis. As a result, customers are increasingly adopting our software, which can be ready in days, over internal software development efforts, which may take months or years. We 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 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. See the section titled “ Risk Factors ” included elsewhere in this Quarterly Report on Form 10-Q, and Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on February 26, 2021, for further discussion of the possible impact of the COVID-19 pandemic on our business. Our Business Model Our customers pay us to use the software platforms we have built. Our business model with respect to acquiring and growing our accounts has three phases: (1) Acquire, (2) Expand, and (3) Scale. We categorize all customers into cohorts on December 31st each year. Our decisions about which customer relationships require further investment may change over time, based on our assessment of the potential long-term value that our software can generate for them. As a result, customers may move back and forth through phases, as relationship needs and our assessment of the merits of further investment change. We enter into initial pilots with customers, generally at our own expense and without a guarantee of future returns, in order to access a unique set of opportunities that others may pass over for lack of resources and shorter investment horizons. Some customers may have a rapid Acquire phase followed by a long Expand phase. Others may skip the Expand phase altogether and move immediately into the Scale phase. We manage customers at the account level, not by industry or sector, so that we can optimize on the specific growth opportunities for each. In 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 $1.1 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. Acquire We actively pursue discussions with existing and prospective customers in order to identify ways in which our software platforms can provide long-term value. In the first phase, we typically acquire new opportunities with minimal risk to our customers through short-term pilot deployments of our software platforms at no or low cost to them. We believe in proving the value of our platforms to our customers. During these short-term pilots, we operate the accounts at a loss. We believe that our investments during this phase will drive future revenue growth. 28 Table of Contents We define a customer or potential customer as being in the Acquire phase if, as of the end of a calendar year, we have recognized less than $100,000 in revenue from the customer that respective year. Customers may make nominal payments in connection with the evaluation of our software that we do not consider material in evaluating the performance of our accounts. We evaluate the success of customer accounts in the Acquire phase based on the revenue such accounts generate in the following year. In 2020, we generated $0.3 million in revenue from customers in the Acquire phase, which yielded a contribution loss of $36.8 million. In the nine months ended September 30, 2021, those same customers generated $15.6 million in revenue, which yielded a contribution loss of $7.1 million. Expand Our investment in this second phase is often significant as we seek to understand the principal challenges faced by our customers and ensure that our software delivers value and results. We define a customer in the Expand phase as any customer from which we have recognized more than $100,000 in revenue in a calendar year and whose account had a negative contribution margin during the year at issue, as determined as of the end of the year. In this phase, we operate at a loss, as measured by contribution margin, in order to drive future revenue growth and margin expansion. In 2020, we generated $20.3 million in revenue from customers that were in the Expand phase as of the end of that year, with a contribution margin of (159)%. In the nine months ended September 30, 2021, those same customers generated $62.1 million in revenue with a contribution margin of 45%. Scale As customer accounts mature, our investment costs relative to revenue generally decrease, while the value our software provides to our customer increases, often significantly, as usage of the platform increases across the customer’s operations. In this third phase, after having installed and configured the software across an entire enterprise, customers become more self-sufficient in their use of our platforms, including developing software and applications that run on top of our platforms, while still continuing to benefit from the support of our operations and maintenance (“O&M”) services. We define a customer in the Scale phase as any customer from which we recognized more than $100,000 in revenue in a calendar year and whose account had a positive contribution margin during the year at issue, as determined as of the end of the year. It is in the Scale phase of our partnerships with customers that we generally see contribution margin on particular accounts improve. In 2020, we generated $1.1 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. We also believe that contribution margin for Scale phase accounts will increase further as we become more efficient at deploying our software platforms across the entirety of our customers’ operations and at managing and operating our software. Key Business Measure In addition to the measures presented in our condensed consolidated financial statements, we use the following key non-GAAP business measure to help us evaluate our business, identify trends affecting our business, formulate business plans and financial projections, and make strategic decisions. Contribution Margin We believe that the revenue we generate relative to the costs we incur in order to generate such revenue is an important measure of the efficiency of our business. We define contribution margin as revenue less our cost of revenue and sales and marketing expenses, excluding stock-based compensation, divided by revenue. At the end of each year, we categorize each customer account into one of the three phases based on its revenue and contribution margin for that year. 29 Table of Contents Revenue is allocated to each customer account directly. The cost of revenue and sales and marketing costs include both the costs associated with the deployment and operation of our software as well as expenses associated with identifying new customers and expanding partnerships with existing ones. Our software engineers working with existing customers often manage the deployment and operation of our platforms as well as identify new ways that those platforms can be used. To calculate the contribution by customer, we allocate cost of revenue and sales and marketing expenses, excluding stock-based compensation, to an account pro rata based on headcount and time spent on the account during the period. To the extent certain costs or personnel are not directly assigned to a specific account, they are allocated pro rata based on total headcount staffed during such period. Direct costs, such as third-party cloud hosting services, are directly allocated to the account to which they relate. Contribution margin, both across our business and on specific customer accounts, is intended to capture how much we have earned from customers after accounting for the costs associated with deploying and operating our software, as well as any sales and marketing expenses involved in acquiring and expanding our partnerships with those customers, including allocated overhead. We exclude stock-based compensation as it is a non-cash expense. We believe that our contribution margin across the business and on specific customer accounts provides an important measure of the efficiency of our operations over time. We have included contribution margin because it is a key measure used by our management to evaluate our performance, and we believe that it also provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management team. Our calculation of contribution margin may differ from similarly titled measures, if any, reported by other companies. Contribution margin should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. For more information about contribution margin, including the limitations of this measure, and a reconciliation to loss from operations, see the section titled “ Non-GAAP Reconciliations ” below. Non-GAAP Reconciliations We use the non-GAAP measures contribution margin; gross profit and gross margin, excluding stock-based compensation; 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 expense, from these non-GAAP financial measures because we believe that excluding this item provides meaningful supplemental information regarding operational performance and provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management team. Additionally, we exclude 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. In addition, other companies may not publish these or similar metrics. Further, these metrics have certain limitations, as they do not include the impact of certain expenses that are reflected in our condensed consolidated statement of operations. Thus, our non-GAAP contribution margin; gross profit and gross margin, excluding stock-based compensation; and 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 measures to the most comparable GAAP measures. We encourage investors and others to review our business, results of operations, and financial information in its entirety, not to rely on any single financial measure, and to view these non-GAAP measures in conjunction with the most directly comparable GAAP financial measures. 30 Table of Contents Contribution Margin 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, 2021 2020 2021 2020 Loss from operations $ (91,941 ) $ (847,777 ) $ (352,103 ) $ (1,017,107 ) Add: Research and development expenses (1) 59,844 57,146 180,335 156,832 General and administrative expenses (1) 71,145 107,130 207,006 226,455 Stock-based compensation 184,835 846,959 611,308 1,028,914 Contribution $ 223,883 $ 163,458 $ 646,546 $ 395,094 Contribution margin 57 % 56 % 58 % 51 % (1) Excludes stock-based compensation. Gross Profit and Gross Margin, Excluding Stock-Based Compensation The following table provides a reconciliation of gross profit and gross margin, excluding stock-based compensation for the three and nine months ended September 30, 2021 and 2020 (in thousands, except percentages): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Gross profit $ 305,342 $ 140,026 $ 857,181 $ 488,538 Add: stock-based compensation 14,860 94,385 54,866 120,285 Gross profit, excluding stock-based compensation $ 320,202 $ 234,411 $ 912,047 $ 608,823 Gross margin, excluding stock-based compensation 82 % 81 % 82 % 79 % Adjusted Income from Operations 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, 2021 2020 2021 2020 Loss from operations $ (91,941 ) $ (847,777 ) $ (352,103 ) $ (1,017,107 ) Add: stock-based compensation 184,835 846,959 611,308 1,028,914 Add: employer payroll taxes related to stock-based compensation 23,215 20,172 90,214 20,172 Add: non-recurring Direct Listing charges (1) — 53,737 — 53,737 Adjusted income from operations $ 116,109 $ 73,091 $ 349,419 $ 85,716 (1) Non-recurring Direct Listing charges were primarily incurred during the quarter ended September 30, 2020 and were immaterial in other periods. 31 Table of Contents Components of Results of Operations Revenue We generate revenue from the sale of subscriptions to access our software in our hosted environment with O&M services (“Palantir Cloud”), software subscriptions in our customers’ environments with ongoing O&M services (“On-Premises Software”), and professional services. Palantir Cloud Our Palantir Cloud subscriptions grant customers the right to access the software functionality in a hosted environment controlled by Palantir and are sold together with stand-ready O&M services, as further described below. We promise to provide continuous access to the hosted software throughout the contract term. Revenue associated with Palantir Cloud subscriptions is 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. On-Premises Software Sales of our software subscriptions grant customers the right to use functional intellectual property, either on their internal hardware infrastructure or on their own cloud instance, over the contractual term and are also sold together with stand-ready O&M services. O&M services include critical updates and support and maintenance services required to operate the software and, as such, are necessary for the software to maintain its intended utility over the contractual term. Because of this requirement, we have concluded that the software subscriptions and O&M services, which together we refer to as our On-Premises Software, are highly interdependent and interrelated and represent a single distinct performance obligation within the context of the contract. Revenue is generally recognized over the contract term on a ratable basis. Professional Services Our professional services support the customers’ use of the software and include, as needed, on-demand user support, user-interface configuration, training, and ongoing ontology and data modeling support. Professional services contracts typically include the provision of on-demand professional services for the duration of the contractual term. These services are typically coterminous with a Palantir Cloud or On-Premises Software subscriptions. Professional services are on-demand, whereby we perform services throughout the contract period; therefore, the revenue is recognized over the contractual term. Cost of Revenue Cost of revenue primarily includes salaries, stock-based compensation expense, and benefits for personnel involved in performing O&M and professional services, as well as third-party cloud hosting services, allocated overhead, and other direct costs. We expect that cost of revenue will increase in absolute dollars as our revenue grows and will vary from period-to-period as a percentage of revenue. Sales and Marketing Our sales and marketing efforts span all stages of our sales cycle, including personnel engaging with or executing pilots at new or existing customers. Sales and marketing costs primarily include salaries, stock-based compensation expense, and benefits for our sales force and personnel involved in executing on pilots and customer growth activities, as well as third-party cloud hosting services for our pilots, marketing and sales event-related costs, and allocated overhead. Sales and marketing costs are generally expensed as incurred. We expect that sales and marketing expenses will increase in absolute dollars as we continue to invest in our potential and current customers, in growing our business, sales force, and enhancing our brand awareness. Research and Development Our research and development efforts are aimed at continuing to develop and refine our platforms, including adding new features and modules, increasing their functionality, and enhancing the usability of our platforms. Research and development costs primarily include salaries, stock-based compensation expense, and benefits for personnel involved in performing the activities to develop and refine our platforms, internal use third-party cloud hosting services and other IT-related costs, and allocated overhead. Research and development costs are expensed as incurred. 32 Table of Contents We plan to continue to invest in personnel to support our research and development efforts. As a result, we expect that research and development expenses will increase in absolute dollars for the foreseeable future as we continue to invest to support these activities. General and Administrative General and administrative costs include salaries, stock-based compensation expense, and benefits for personnel involved in our executive, finance, legal, human resources, and administrative functions, as well as third-party professional services and fees, and allocated overhead. We expect that general and administrative expenses will increase in absolute dollars as we hire additional personnel and enhance our systems, processes, and controls to support the growth in our business as well as our increased compliance and reporting requirements as a public company. Interest Income Interest income consists primarily of interest income earned on our cash, cash equivalents, and restricted cash balances. Interest Expense Interest expense consists primarily of interest expense and commitment fees incurred under our credit facilities. Other Income (Expense), Net Other income (expense), net consists primarily of foreign currency exchange gains and losses, 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, all of our outstanding preferred stock warrants were converted into common stock warrants, which resulted in the reclassification of the warrants liability to additional paid-in capital. As such, we do not expect additional charges related to the fair value of these warrants. Provision (Benefit) for Income Taxes Provision (benefit) for income taxes consists of income taxes related to foreign and state jurisdictions in which we conduct business and withholding taxes. Segments We have two operating segments, commercial and government, which were determined based on the manner in which the chief operating decision maker (“CODM”), who is our chief executive officer, manages our operations for purposes of allocating resources and evaluating performance. Various factors, including our organizational and management reporting structure and customer type, were considered in determining these operating segments. Our operating segments are described below: • Commercial : This segment primarily serves customers working in non-government industries. • Government : This segment primarily serves customers that are agencies in the U.S. federal government and non-U.S. governments. 33 Table of Contents Segment profitability is evaluated based on contribution and contribution margin. Contribution is segment revenue less the related costs of revenue and sales and marketing expenses, excluding stock-based compensation expense. Contribution margin is contribution divided by revenue. To the extent costs of revenue or sales and marketing expenses are not directly attributable to a particular segment, they are allocated based upon headcount at each operating segment during the period. We use it, in part, to evaluate the performance of, and allocate resources to, each of our operating segments, which excludes certain operating expenses that are not allocated to operating segments because they are separately managed at the consolidated corporate level. These unallocated costs include stock-based compensation expense, research and development costs, and general and administrative costs, such as legal and accounting. Results of Operations The following table summarizes our condensed consolidated statements of operations data (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Revenue $ 392,146 $ 289,366 $ 1,109,022 $ 770,582 Cost of revenue (1) 86,804 149,340 251,841 282,044 Gross profit 305,342 140,026 857,181 488,538 Operating expenses: Sales and marketing (1) 153,443 334,911 451,919 536,082 Research and development (1) 94,316 313,915 303,311 466,530 General and administrative (1) 149,524 338,977 454,054 503,033 Total operating expenses 397,283 987,803 1,209,284 1,505,645 Loss from operations (91,941) (847,777) (352,103) (1,017,107) Interest income 379 494 1,127 4,312 Interest expense (609) (2,085) (3,039) (12,325) Change in fair value of warrants — (9,201) — 811 Other income (expense), net (8,528) (3,293) (11,297) 1,218 Loss before provision (benefit) for income taxes (100,699) (861,862) (365,312) (1,023,091) Provision (benefit) for income taxes 1,438 (8,543) (1,121) (5,043) Net loss $ (102,137) $ (853,319) $ (364,191) $ (1,018,048) (1) Includes stock-based compensation expense as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Cost of revenue $ 14,860 $ 94,385 $ 54,866 $ 120,285 Sales and marketing 57,124 263,958 186,418 322,353 Research and development 34,472 256,769 122,976 309,698 General and administrative 78,379 231,847 247,048 276,578 Total stock-based compensation expense (i) $ 184,835 $ 846,959 $ 611,308 $ 1,028,914 (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. 34 Table of Contents The following table sets forth the components of our condensed consolidated statements of operations data as a percentage of revenue: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Revenue 100% 100% 100% 100% Cost of revenue 22 52 23 37 Gross profit 78 48 77 63 Operating expenses: Sales and marketing 39 116 41 70 Research and development 24 108 27 61 General and administrative 38 117 41 64 Total operating expenses 101 341 109 195 Loss from operations (23) (293) (32) (132) Interest income — — — 1 Interest expense — (1) — (2) Change in fair value of warrants — (3) — — Other income (expense), net (3) (1) (1) — Loss before provision (benefit) for income taxes (26) (298) (33) (133) Provision (benefit) for income taxes — (3) — (1) Net loss (26)% (295)% (33)% (132)% Comparison of the Three Months Ended September 30, 2021 and 2020 Revenue Three Months Ended September 30, Change 2021 2020 Amount % Revenue: Government $ 217,836 $ 162,561 $ 55,275 34% Commercial 174,310 126,805 47,505 37% Total revenue $ 392,146 $ 289,366 $ 102,780 36% 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 $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 September 30, Change 2021 2020 Amount % Cost of revenue $ 86,804 $ 149,340 $ (62,536) (42)% Gross profit 305,342 140,026 165,316 118% Gross margin 78% 48% 30% 35 Table of Contents 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 September 30, Change 2021 2020 Amount % Sales and marketing $ 153,443 $ 334,911 $ (181,468) (54)% Research and development 94,316 313,915 (219,599) (70)% General and administrative 149,524 338,977 (189,453) (56)% Total operating expenses $ 397,283 $ 987,803 $ (590,520) (60)% Sales and Marketing 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 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 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 September 30, Change 2021 2020 Amount Interest income $ 379 $ 494 $ (115) 36 Table of Contents 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 September 30, Change 2021 2020 Amount Interest expense $ (609) $ (2,085) $ 1,476 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 September 30, Change 2021 2020 Amount Change in fair value of warrants $ — $ (9,201) $ 9,201 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 September 30, Change 2021 2020 Amount Other income (expense), net $ (8,528) $ (3,293) $ (5,235) 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 September 30, Change 2021 2020 Amount Provision (benefit) for income taxes $ 1,438 $ (8,543) $ 9,981 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. 37 Table of Contents Comparison of the Nine Months Ended September 30, 2021 and 2020 Revenue Nine Months Ended September 30, Change 2021 2020 Amount % Revenue: Government $ 658,375 $ 420,257 $ 238,118 57% Commercial 450,647 350,325 100,322 29% Total revenue $ 1,109,022 $ 770,582 $ 338,440 44% 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 $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 Nine Months Ended September 30, Change 2021 2020 Amount % Cost of revenue $ 251,841 $ 282,044 $ (30,203 ) (11 )% Gross profit 857,181 488,538 368,643 75 % Gross margin 77 % 63 % 14 % 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. 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 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 Nine Months Ended September 30, Change 2021 2020 Amount % Sales and marketing $ 451,919 $ 536,082 $ (84,163) (16 )% Research and development 303,311 466,530 (163,219) (35 )% General and administrative 454,054 503,033 (48,979) (10 )% Total operating expenses $ 1,209,284 $ 1,505,645 $ (296,361) (20 )% Sales and Marketing 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. 38 Table of Contents Research and Development 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 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 Nine Months Ended September 30, Change 2021 2020 Amount Interest income $ 1,127 $ 4,312 $ (3,185) 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 Nine Months Ended September 30, Change 2021 2020 Amount Interest expense $ (3,039) $ (12,325) $ 9,286 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 Nine Months Ended September 30, Change 2021 2020 Amount Change in fair value of warrants $ — $ 811 $ (811) 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. 39 Table of Contents Other Income (Expense), Net Nine Months Ended September 30, Change 2021 2020 Amount Other income (expense), net $ (11,297) $ 1,218 $ (12,515) 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, Change 2021 2020 Amount Benefit from income taxes $ (1,121) $ (5,043) $ 3,922 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 Historically, we primarily generated negative cash flows from operations and have financed our operations primarily through the sale of our equity securities, including proceeds from option exercises, and payments received from our customers. We believe our existing cash and cash equivalents and cash flows from operations will be sufficient to meet our working capital and capital expenditure needs for at least the next twelve months, as well as our short-term and long-term contractual obligations and commitments primarily consisting of operating lease commitments and non-cancelable purchase commitments related to third-party cloud hosting services. As 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. Restricted cash primarily consists of cash and certificates of deposit that are held as collateral against letters of credit and guarantees we are required to maintain for various purposes. During April 2021, we repaid our outstanding term loans of $200.0 million. 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 Financial Condition and Results of Operations — Credit Facilities. ” Our future capital requirements will depend on many factors, including, but not limited to the rate of our growth, our ability to attract and retain customers and their willingness and ability to pay for our products and services, and the timing and extent of spending to support our efforts to market and develop our products. Further, 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. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If additional funds are not available to us on acceptable terms, or at all, our business, financial condition, and results of operations could be adversely affected. 40 Table of Contents The following table summarizes our cash flows for the periods indicated (in thousands): Nine Months Ended September 30, 2021 2020 Net cash provided by (used in): Operating activities $ 240,424 $ (278,320) Investing activities (216,039) (9,975) Financing activities 274,282 817,344 Effect of foreign exchange on cash, cash equivalents, and restricted cash (3,638) (678) Net increase in cash, cash equivalents, and restricted cash $ 295,029 $ 528,371 Operating Activities 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. The non-cash 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. The non-cash 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 $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 $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. 41 Table of Contents Credit Facilities 2014 Credit Facility In October 2014, we entered into an unsecured revolving credit facility which has been subsequently amended (the “2014 Credit Facility”). The 2014 Credit Facility bears interest at the London Interbank Offered Rate (“LIBOR”) plus a margin of 2.75% per annum, subject to certain adjustments, and incurs a commitment fee of 0.375% assessed on the daily average undrawn portion of revolving commitments. The 2014 Credit Facility is secured with substantially all of our assets. During April 2021, we amended the credit facility to increase the total undrawn revolving credit facility to be $400.0 million and which also provides for an incremental loan facility for additional loans in an aggregate principal amount of up to $100.0 million with one or more existing or new lenders upon mutual agreement between us and such lenders. Upon amending the facility, we repaid the outstanding $200.0 million term loans. As of September 30, 2021, there were no amounts outstanding under the 2014 Credit Facility. Contractual Obligations and Commitments Our contractual obligations and commitments primarily consist of operating lease commitments for our facilities, non-cancelable purchase commitments related to third-party cloud hosting services, and commitments to invest in shares of various entities, certain of which are contingent upon certain business combinations. For additional information, refer to Note 8. Commitments and Contingencies and Note 14. Subsequent Events to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Except as already disclosed in Note 8. Commitments and Contingencies and Note 14. Subsequent Events in our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, there has been no other material change in our contractual obligations and commitments other than in the ordinary course of business since our fiscal year ended December 31, 2020. 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 our contractual obligations. Off-Balance Sheet Arrangements We did not have, during the periods presented, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Critical Accounting Policies and Estimates Our condensed consolidated financial statements and the accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q are prepared in accordance with GAAP. The preparation of condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from our estimates. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected. There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates discussed in the Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on February 26, 2021. Recent Accounting Pronouncements For information on recently issued accounting pronouncements, refer to Note 2. Significant Accounting Policies in our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.