Palantir Technologies Inc. 10-K

ITEM 7. 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 consolidated financial statements and the accompanying notes thereto included elsewhere in this Annual Report on Form 10-K. 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 Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results that may be expected for any period in the future. This section of this Annual Report on Form 10-K generally discusses fiscal years 2021 and 2020 items and year-to-year comparisons between fiscal years 2021 and 2020. Discussions of fiscal year 2020 items and year-to-year comparisons between fiscal years 2020 and 2019 that are not included in this Annual Report on Form 10-K can be found in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, which was filed with the SEC on February 26, 2021. Overview We build software that empowers organizations to effectively integrate their data, decisions, and operations at scale. We were founded in 2003 and started building software for the intelligence community in the United States to assist in counterterrorism investigations and operations. We later began working with commercial enterprises, who often faced fundamentally similar challenges in working with data. We have built three principal software platforms, Gotham, Foundry, and Apollo. Gotham and Foundry enable institutions to transform massive amounts of information into an integrated data asset that reflects their operations. For over a decade, Gotham has surfaced insights for global defense agencies, the intelligence community, disaster relief organizations and beyond. Foundry is becoming a central operating system not only for individual institutions but also for entire industries. Apollo, which we began offering as a commercial solution in 2021, is a cloud-agnostic, single control layer that coordinates ongoing delivery of new features, security updates, and platform configurations, helping to ensure the continuous operation of critical systems. Apollo allows our customers to run their software in virtually any environment. In addition to the investments we have made in our platforms, we plan to continue to expand our ability to sell our subscriptions globally by investing in resources to address the business needs of local markets, including, increasing our sales and marketing functions and activities, expanding our ecosystem of service partners to support local deployments, and investing in personnel to support our growing customer base and product offerings. We believe that every 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 institution in the markets we serve is a potential partner. We regularly evaluate partnerships and investment opportunities in complementary businesses, employee teams, technologies, and intellectual property rights in an effort to expand our product and service offerings. For example, we have approved and entered into Investment Agreements to purchase, or commit to purchase shares of various entities, including special purpose acquisition companies and/or other privately-held or publicly-traded 76 Table of Contents entities. See further discussion in Note 4. Investments and Fair Value Measurements and Note 9. Commitments and Contingencies—Investment Commitments. Our Business For the year ended December 31, 2021, we generated $1.5 billion in revenue, reflecting a 41% growth rate from the year ended December 31, 2020, when we generated $1.1 billion in revenue. Our operating results continued to improve, including when adjusting for stock-based compensation. In the year ended December 31, 2021, we incurred losses from operations of $411.0 million, or adjusted income from operations of $473.5 million when excluding stock-based compensation and related employer payroll taxes. In the year ended December 31, 2020, our losses from operations were $1.2 billion, or adjusted income from operations of $189.9 million when excluding stock-based compensation, related employer payroll taxes, and non-recurring Direct Listing charges. In the year ended December 31, 2021, our gross profit was $1.2 billion, reflecting a gross margin of 78%, or 82% when excluding stock-based compensation. In the year ended December 31, 2020, our gross profit was $740.1 million, reflecting a gross margin of 68%, or 81% when excluding stock-based compensation. For more information about our adjusted income from operations, which excludes stock-based compensation, related employer payroll taxes, and non-recurring Direct Listing charges; and gross profit, and gross margin, which excludes 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 as an organization from which we have recognized revenue during the trailing twelve-month period. During the period ended December 31, 2021, we had 237 customers, including companies in various commercial sectors as well as government agencies around the world. During the period ended December 31, 2020, we had 139 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, and are expanding our partnerships with early- and growth-stage companies. Our average revenue per customer during the trailing twelve months ended December 31, 2021 was $6.5 million, which decreased 18% from an average of $7.9 million in revenue per customer in the year ended December 31, 2020, reflecting our continued acceleration in customer acquisition. Our average revenue for the top twenty customers during the trailing twelve months ended December 31, 2021 was $43.6 million, which grew 31% from an average of $33.2 million in revenue from the top twenty customers during the trailing twelve months ended December 31, 2020, demonstrating our expanding relationships with existing customers. 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 year ended December 31, 2021, 58% of our revenue came from government customers and 42% came from commercial agencies. In the year ended December 31, 2021, we generated 57% of our revenue from customers in the United States and the remaining 43% from customers abroad. 77 Table of Contents Expansion of Access to Platforms We have recently begun to expand access to our platforms to early- and growth-stage companies, including startups, as we continue our outreach efforts to an increasingly broad swath of the potential market. 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. 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. 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 reopen 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. The COVID-19 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 COVID-19 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 reopen 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 Annual Report on Form 10-K 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. As of December 31, 2021, we expect to generate revenue under our existing customer contracts for an additional 3.5 years on a dollar-weighted average contract duration basis. Dollar-weighted average contract duration represents the length of time we expect to generate revenue on average, including existing contractual obligations and assuming that our customers will exercise all of the contractual options available to them, and is subject to change as we enter into new contracts 78 Table of Contents or if customers terminate for convenience. We calculate this duration on a dollar-weighted basis to adjust for smaller deals. The timing of our customer billings and receipt of payments varies from contract to contract. Revenue is generally recognized over the contract term. Our contracts generally include terms that allow the customer to terminate the contract for convenience. 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 2021, customers cohorted as of December 31, 2020 generated a total of $1.5 billion in revenue. New customers acquired during the year ended December 31, 2021 generated an additional $83.9 million in revenue and were 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. 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 2021, those same customers generated $45.1 million in revenue which yielded a contribution profit of $7.2 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. 79 Table of Contents 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 2021, those same customers generated $83.3 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 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 2021, those same customers generated $1.3 billion in revenue with a contribution margin of 63%. 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. Total Remaining Deal Value We are focused on building strategic relationships with, and delivering significant outcomes for, our customers over the long term. Our contracts with our customers reflect that long-term orientation, often lasting for multiple years at a time. Total remaining deal value is the total remaining value of contracts that have been awarded by our government and commercial customers and includes existing contractual obligations and unexercised contract options available to those customers. Total remaining deal value presumes the exercise of all contract options and no termination of contracts; however, the majority of our contracts are subject to termination provisions, including for convenience, and there can be no guarantee that contracts are not terminated or that contract options will be exercised. Also included within total remaining deal value is remaining contract value from commercial contracts entered into in connection with our strategic investments, many of which are subject to termination, including for convenience in the event the proposed business combination is not completed. As of December 31, 2021, the total remaining deal value of the contracts that we have been awarded by, or entered into with, government and commercial customers, including existing contractual obligations and contractual options available to those customers, was $3.8 billion, up 35% from December 31, 2020, when our total remaining deal value of such contracts was $2.8 billion. Of our total remaining deal value, as of December 31, 2021, the total remaining deal value of the contracts that we entered into with commercial customers, including existing contractual obligations and available contractual options, was $2.6 billion, up 71% from December 31, 2020, when the total remaining deal value of such contracts was $1.5 billion. 80 Table of Contents As of December 31, 2021, the total remaining deal value of the contracts that we had been awarded by government agencies in the United States and allied countries around the world, including existing contractual obligations and contractual options available to those government agencies, was $1.2 billion, down 6% from December 31, 2020, when the total value of such contracts was $1.3 billion. When calculating the total remaining deal value of government contracts, we do not include government contracts — also known as indefinite delivery, indefinite quantity (“IDIQ”) contracts — totaling $2.8 billion, as of December 31, 2021, that we have been awarded, but where the funding of such contracts has not yet been determined. The funding of these contracts is not guaranteed. Many of our government and commercial contracts are subject to termination for convenience provisions. Additionally, the U.S. federal government is prohibited from exercising contract options more than one year in advance. As a result, there can be no guarantee that our customer contracts will not be terminated or that contract options will be exercised. Key Business Measure In addition to the measures presented in our consolidated financial statements, we use the following key non-GAAP business measure to help us evaluate our business, identify trends affecting our business, formulate business plans and financial projections, and make strategic decisions. Contribution Margin We believe that the revenue we generate relative to the costs we incur in order to generate such revenue is an important measure of the efficiency of our business. We define contribution margin as revenue less our cost of revenue and sales and marketing expenses, excluding stock-based compensation, divided by revenue. At the end of each year, we categorize each customer account into one of the three phases based on its revenue and contribution margin for that year. Revenue is allocated to each customer account directly. The cost of revenue and sales and marketing costs include both the costs associated with the deployment and operation of our software as well as expenses associated with identifying new customers and expanding partnerships with existing ones. Our software engineers working with existing customers often manage the deployment and operation of our platforms as well as identify new ways that those platforms can be used. To calculate the contribution by customer, we allocate cost of revenue and sales and marketing expenses, excluding stock-based compensation, to an account pro rata based on headcount and time spent on the account during the period. To the extent certain costs or personnel are not directly assigned to a specific account, they are allocated pro rata based on total headcount staffed during such period. Direct costs, such as third-party cloud hosting services, are directly allocated to the account to which they relate. Contribution margin, both across our business and on specific customer accounts, is intended to capture how much we have earned from customers after accounting for the costs associated with deploying and operating our software, as well as any sales and marketing expenses involved in acquiring and expanding our partnerships with those customers, including allocated overhead. We exclude stock-based compensation as it is a non-cash expense. We believe that our contribution margin across the business and on specific customer accounts provides an important measure of the efficiency of our operations over time. We have included contribution margin because it is a key measure used by our management to evaluate our performance, and we believe that it also provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management team. Our calculation of contribution margin may differ from similarly titled 81 Table of Contents 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 Direct Listing charges 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 non-recurring 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 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. Contribution Margin The following table provides a reconciliation of contribution margin for the years ended December 31, 2021 and 2020 (in thousands, except percentages): Years Ended December 31, 2021 2020 Loss from operations $ (411,046) $ (1,173,679) Add: Research and development expenses (1) 237,189 203,597 General and administrative expenses (1) 295,071 293,637 Total stock-based compensation expense 778,215 1,270,702 Contribution $ 899,429 $ 594,257 Contribution margin 58% 54% (1) Excludes stock-based compensation. 82 Table of Contents 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 years ended December 31, 2021 and 2020 (in thousands, except percentages): Years Ended December 31, 2021 2020 Gross profit $ 1,202,485 $ 740,126 Add: stock-based compensation 68,546 139,627 Gross profit, excluding stock-based compensation $ 1,271,031 $ 879,753 Gross margin, excluding stock-based compensation 82% 81% 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 years ended December 31, 2021 and 2020 (in thousands): Years Ended December 31, 2021 2020 Loss from operations $ (411,046) $ (1,173,679) Add: stock-based compensation 778,215 1,270,702 Add: employer payroll taxes related to stock-based compensation 106,283 39,105 Add: non-recurring Direct Listing charges — 53,737 Adjusted income from operations $ 473,452 $ 189,865 Components of Results of Operations Revenue We generate revenue from the sale of subscriptions to access our software in our hosted environment along with ongoing 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 83 Table of Contents 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 involved with sales functions, and 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 sales functions, executing on pilots and customer growth activities; as well as third-party cloud hosting services for our pilots, marketing and sales event-related costs, and allocated overhead. Sales and marketing costs are generally expensed as incurred. We expect that sales and marketing expenses will increase in absolute dollars as we continue to invest in our potential and current customers, in growing our business, sales force, and enhancing our brand awareness. Research and Development Our research and development efforts are aimed at continuing to develop and refine our platforms, including adding new features and modules, increasing their functionality, and enhancing the usability of our platforms. Research and development costs primarily include salaries, stock-based compensation expense, and benefits for personnel involved in performing the activities to develop and refine our platforms, internal use third-party cloud hosting services and other IT-related costs, and allocated overhead. Research and development costs are expensed as incurred. We plan to continue to invest in personnel to support our research and development efforts. As a result, we expect that research and development expenses will increase in absolute dollars for the foreseeable future as we continue to invest to support these activities. General and Administrative General and administrative costs include salaries, stock-based compensation expense, and benefits for personnel involved in our executive, finance, legal, human resources, and administrative functions, as well as third-party professional services and fees, and allocated overhead. 84 Table of Contents 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. Provision for (Benefit from) Income Taxes Provision for (benefit from) 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 U.S. government and non-U.S. government agencies. 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. 85 Table of Contents Results of Operations The following table summarizes our consolidated statements of operations data (in thousands): Years Ended December 31, 2021 2020 2019 Revenue $ 1,541,889 $ 1,092,673 $ 742,555 Cost of revenue (1) 339,404 352,547 242,373 Gross profit 1,202,485 740,126 500,182 Operating expenses: Sales and marketing (1) 614,512 683,701 450,120 Research and development (1) 387,487 560,660 305,563 General and administrative (1) 611,532 669,444 320,943 Total operating expenses 1,613,531 1,913,805 1,076,626 Loss from operations (411,046) (1,173,679) (576,444) Interest income 1,607 4,680 15,090 Interest expense (3,640) (14,139) (3,061) Other income (expense), net (75,415) 4,111 (2,856) Loss before provision for (benefit from) income taxes (488,494) (1,179,027) (567,271) Provision for (benefit from) income taxes 31,885 (12,636) 12,375 Net loss $ (520,379) $ (1,166,391) $ (579,646) (1)   Includes stock-based compensation expense as follows (in thousands):    Years Ended December 31, 2021 2020 2019 Cost of revenue $ 68,546 $ 139,627 $ 27,904 Sales and marketing 242,910 398,205 79,215 Research and development 150,298 357,063 67,933 General and administrative 316,461 375,807 66,918 Total stock-based compensation expense (i) $ 778,215 $ 1,270,702 $ 241,970 (i) On September 30, 2020, in connection with our 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. 86 Table of Contents The following table sets forth the components of our consolidated statements of operations data as a percentage of revenue: Years Ended December 31, 2021 2020 2019 Revenue 100% 100% 100% Cost of revenue 22 32 33 Gross profit 78 68 67 Operating expenses: Sales and marketing 40 63 61 Research and development 25 51 41 General and administrative 40 61 43 Total operating expenses 105 175 145 Loss from operations (27) (107) (78) Interest income — — 2 Interest expense — (1) — Other income (expense), net (5) — — Loss before provision for (benefit from) income taxes (32) (108) (76) Provision for (benefit from) income taxes 2 (1) 2 Net loss (34)% (107)% (78)% Comparison of the Years Ended December 31, 2021 and 2020 Revenue Years Ended December 31, Change 2021 2020 Amount % Revenue: Government $ 897,356 $ 610,198 $ 287,158 47% Commercial 644,533 482,475 162,058 34% Total revenue $ 1,541,889 $ 1,092,673 $ 449,216 41% Revenue increased by $449.2 million, or 41%, for the year ended December 31, 2021 compared to 2020. Revenue from government customers increased by $287.2 million, or 47%, for the year ended December 31, 2021 compared to 2020, primarily from customers in the United States. Of the increase, $279.2 million was from customers existing as of December 31, 2020. Generally, increases in revenue from our existing customers are a result of increases in their adoption of our products and services within their organizations. Revenue from commercial customers increased by $162.1 million, or 34%, for the year ended December 31, 2021 compared to 2020. Of the increase, $98.4 million was from new customers, of which $48.3 million was revenue from customers that we have entered into concurrent investment agreements with. See Note 4. Investments and Fair Value Measurements and Note 9. Commitments and Contingencies in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information. 87 Table of Contents Cost of Revenue and Gross Profit Years Ended December 31, Change 2021 2020 Amount % Cost of revenue $ 339,404 $ 352,547 $ (13,143) (4)% Gross profit 1,202,485 740,126 462,359 62% Gross margin 78% 68% 10% Cost of revenue for the year ended December 31, 2021 decreased by $13.1 million, or 4%, compared to 2020. The decrease was primarily due to a decrease of $71.1 million in stock-based compensation expense as a result of the recognition of cumulative stock-based compensation expense related to RSUs upon our Direct Listing in the prior year. This was partially offset by increases of $43.6 million related to third-party cloud hosting services and $15.4 million related to higher usage of field service representatives and other direct deployment costs. Our gross margin for the year ended December 31, 2021 increased from 68% in 2020 to 78% as a result of efficiencies in supporting the revenue growth at our customer deployments, for example investments in our platforms, as well as a decrease in stock-based compensation expense as compared to the prior year. Operating Expenses Years Ended December 31, Change 2021 2020 Amount % Sales and marketing $ 614,512 $ 683,701 $ (69,189) (10)% Research and development 387,487 560,660 (173,173) (31)% General and administrative 611,532 669,444 (57,912) (9)% Total operating expenses $ 1,613,531 $ 1,913,805 $ (300,274) (16)% Sales and Marketing Sales and marketing expenses decreased by $69.2 million, or 10%, for the year ended December 31, 2021 compared to 2020. The decrease was primarily due to decreases in personnel costs of $107.6 million, which included a decrease of $155.3 million in stock-based compensation expense as a result of the recognition of cumulative stock-based compensation expense related to RSUs upon our Direct Listing in the prior year; partially offset by increases of $25.7 million from employer payroll taxes mainly driven by higher option exercises and $21.6 million in payroll costs related to an increase in headcount attributable to our sales and marketing functions. Additionally, there was an increase of $26.7 million in marketing and advertising expenses. Research and Development Research and development expenses decreased by $173.2 million, or 31%, for the year ended December 31, 2021 compared to 2020. The decrease was primarily due to a decrease of $206.8 million in stock-based compensation expense as a result of the recognition of cumulative stock-based compensation expense related to RSUs upon our Direct Listing in the prior year; partially offset by $18.8 million in payroll costs related to an increase in headcount attributable to our research and development functions. General and Administrative General and administrative expenses decreased by $57.9 million, or 9%, for the year ended December 31, 2021 compared to 2020. The decrease in expenses was primarily due to a decrease in stock-based compensation 88 Table of Contents expense of $59.3 million as a result of the recognition of cumulative stock-based compensation expense related to RSUs upon our Direct Listing in the prior year; partially offset by increases of $17.5 million in employer payroll taxes, mainly driven by higher option exercises. Additionally, there was a net decrease of $48.8 million in legal professional services generally due to non-recurring legal services incurred in the prior year related to our Direct Listing. Interest Income Years Ended December 31, Change Amount 2021 2020 Interest income $ 1,607 $ 4,680 $ (3,073) Interest income decreased by $3.1 million for the year ended December 31, 2021 compared to 2020 primarily due to a reduction in U.S. interest rates on interest earned from our cash, cash equivalents, and restricted cash. Interest Expense Years Ended December 31, Change Amount 2021 2020 Interest expense $ (3,640) $ (14,139) $ 10,499 Interest expense decreased by $10.5 million for the year ended December 31, 2021 compared to 2020. The decrease was primarily due to the full repayment of the outstanding debt balance during the second quarter of 2021. Other Income (Expense), Net Years Ended December 31, Change Amount 2021 2020 Other income (expense), net $ (75,415) $ 4,111 $ (79,526) Other income (expense), net changed by $79.5 million for the year ended December 31, 2021 compared to 2020 primarily due to unrealized losses, net from our investments in marketable securities. Provision for (Benefit from) Income Taxes Years Ended December 31, Change Amount 2021 2020 Provision for (benefit from) income taxes $ 31,885 $ (12,636) $ 44,521 We recorded a provision for income taxes of $31.9 million for the year ended December 31, 2021 compared to a benefit from income taxes of $12.6 million for the year ended December 31, 2020. The change was primarily due to the establishment of a valuation allowance against our U.K. deferred tax assets during the fourth quarter of 2021, partially offset by a one-time benefit related to the refund of the Company’s U.K. 2019 taxes paid based on the tax election to carry back the 2020 U.K. net tax operating losses. Liquidity and Capital Resources We generated positive cash flow from operations for the year ended December 31, 2021 as our customer billing cycles have continued to normalize and our growth in customer collections outpaced our operating expenses. We 89 Table of Contents had $2.3 billion in cash and cash equivalents available as of December 31, 2021. We believe that cash flows generated from operations, cash, cash equivalents, available funds and access to financing sources, including our revolving credit facility, will be sufficient to meet our anticipated operating cash needs for at least the next twelve months. However, any projections of future cash needs and cash flows are subject to substantial uncertainty. Historically we generated negative cash flows from operations, and financed our operations primarily through the sale of our equity securities, including proceeds from option exercises, and payments received from our customers. As of December 31, 2021, our accumulated deficit balance was $5.5 billion, and our principal sources of liquidity were $2.3 billion of cash and cash equivalents. During April 2021, we repaid our outstanding term loans of $200.0 million. As of December 31, 2021, we had no outstanding debt balances and an available and undrawn $400.0 million revolving credit facility. For more information, see Note 7. Debt in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K . 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 December 31, 2021, our approved investment commitments outstanding totaled $134.5 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. The following table summarizes our cash flows for the periods indicated (in thousands): Years Ended December 31, 2021 2020 2019 Net cash provided by (used in): Operating activities $ 333,851 $ (296,608) $ (165,215) Investing activities (397,912) (14,920) (21,964) Financing activities 306,747 1,036,453 324,533 Effect of foreign exchange on cash, cash equivalents, and restricted cash (3,918) 1,259 (2,227) Net increase (decrease) in cash, cash equivalents, and restricted cash $ 238,768 $ 726,184 $ 135,127 Operating Activities Net cash provided by operating activities was $333.9 million for the year ended December 31, 2021. The factors affecting our operating cash flows during this period were our net loss of $520.4 million and changes in net operating assets and liabilities of $92.1 million, offset by non-cash charges of $946.3 million. The non-cash charges primarily consisted of $778.2 million in stock-based compensation expense, $73.3 million of net unrealized and realized losses and gains from marketable securities, and $43.3 million of deferred income taxes mainly due to the recording of a full valuation allowance for our UK deferred tax assets. The change in net working capital was generally driven by decreases of $80.2 million related to a decrease in deferred revenue and customer deposits, $49.5 million related to increases in accounts receivable, prepaid expenses, and other current and noncurrent assets, and $32.2 million related to a decrease in operating lease liabilities, current and noncurrent; offset by an increase of $73.0 million in accounts payable and accrued liabilities. 90 Table of Contents Net cash used in operating activities was $296.6 million for the year ended December 31, 2020. The factors affecting our operating cash flows during this period were our net loss of $1.2 billion and changes in net working capital of $454.1 million, offset by non-cash charges of $1.3 billion, which primarily consisted of stock-based compensation expense. The change in net working capital generally consisted of a net decrease of $261.8 million in deferred revenue and customer deposits, and an increase in assets of $156.0 million mainly due to an increase in accounts receivable. Investing Activities Net cash used in investing activities was $397.9 million for the year ended December 31, 2021, which consisted of purchases of marketable securities of $308.3 million, purchases of alternative investments of $50.9 million, purchases of privately-held securities of $23.0 million, and purchases of property and equipment of $12.6 million. Net cash used in investing activities was $14.9 million for the year ended December 31, 2020, which consisted primarily of purchases of property and equipment of $12.2 million. Financing Activities Net cash provided by financing activities was $306.7 million for the year ended December 31, 2021, which primarily consisted of proceeds from the exercise of common stock options of $507.5 million, partially offset by repayments of $200.0 million of debt. Net cash provided by financing activities was $1.0 billion for the year ended December 31, 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, $298.8 million of proceeds from the exercise of common stock options, partially offset by repayments of $400.0 million of debt. Contractual Obligations and Commitments The following table summarizes our contractual obligations and commitments as of December 31, 2021 (in thousands): Payments Due by Period Total Less than 1 year 1-3 years 3-5 years More than 5 years Noncancelable purchase commitments (1) $ 1,360,837 $ 107,187 $ 474,001 $ 779,649 $ — Operating lease commitments, net of sublease income amounts (2) 190,313 40,798 63,554 51,250 34,711 Investment commitments (3) 134,500 134,500 — — — Total contractual obligations and commitments $ 1,685,650 $ 282,485 $ 537,555 $ 830,899 $ 34,711 (1) Noncancelable purchase commitments primarily relate to purchase commitments for third-party cloud hosting services and represents only contracts which are enforceable and legally binding. Obligations under contracts that we can cancel without a significant penalty are not included in the table above. Refer to Note 9. Commitments and Contingencies in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information. (2) The contractual commitment amounts under operating leases in the table above are primarily related to facility and equipment leases. Operating lease commitments are reflected net of $132.7 million of sublease income from tenants in certain of our leased facilities. Refer to Note 8. Leases in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information. (3) Investment commitments relate to commitments under Investment Agreements we entered into with investees to purchase shares. The closings of certain of such Investments are contingent upon the completion of a proposed business combination between the applicable Investee and other applicable parties. Refer to Note 4. Investments and Fair Value Measurements and Note 9. Commitments and Contingencies in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information. 91 Table of Contents The contractual obligations and commitments in the table above are associated with agreements that are enforceable and legally binding. Contract Liabilities Our contract liabilities consist of deferred revenue and customer deposits. Deferred revenue represents billings under noncancelable contracts before the related product or service is transferred to the customer. The portion of deferred revenue that is anticipated to be recognized as revenue during the succeeding twelve-month period is recorded as deferred revenue and the remaining portion is recorded as deferred revenue, noncurrent. Customer deposits consist of refundable payments received for anticipated revenue generating activities in advance of the start of the contractual term or for the portion of a contract term that is subject to cancellation. The portion of customer deposits that is anticipated to be recognized as revenue during the succeeding twelve-month period is recorded as customer deposits and the remaining portion is recorded as customer deposits, noncurrent. Our deferred revenue and deferred revenue, noncurrent as of December 31, 2021 were $227.8 million and $40.2 million, respectively. Our customer deposits and customer deposits, noncurrent as of December 31, 2021 were $161.6 million and $33.7 million, respectively. Our total deferred revenue and deferred revenue, noncurrent as of December 31, 2020 was $189.5 million and $50.5 million, respectively. Our total customer deposits and customer deposits, noncurrent as of December 31, 2020 was $210.3 million and $81.5 million, respectively. Critical Accounting Policies and Estimates Our consolidated financial statements and the accompanying notes thereto included elsewhere in this Annual Report on Form 10-K are prepared in accordance with GAAP. The preparation of 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. We believe that the accounting policies described below involve a significant degree of judgment and complexity. Accordingly, we believe these are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations. For further information, see Note 2. Significant Accounting Policies in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Revenue Recognition We generate revenue from the sale of subscriptions to access our software Palantir Cloud and On-Premises Software, with ongoing O&M services and professional services. In accordance with ASC 606, Revenue from Contracts with Customers , we recognized revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for promised goods or services. We apply the following five-step revenue recognition model in accounting for our revenue arrangements: • Identification of the contract(s) with the customer, including whether collectability of the consideration is probable by considering the customers’ ability and intention to pay; • Identification of the performance obligations in the contract; 92 Table of Contents • Determination of the transaction price; • Allocation of the transaction price to the performance obligations in the contract; and • Recognition of revenue when, or as, we satisfy a performance obligation. Each of our significant performance obligations and our application of ASC 606 to our revenue arrangements is discussed in further detail below. Palantir Cloud Our Palantir Cloud subscriptions grant customers the right to access the software functionality in a hosted environment controlled by Palantir and are also sold together with stand-ready O&M services. 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 Cloud 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 sold together with stand-ready O&M services. The O&M services include critical updates, support, and maintenance services required to operate our software and, as such, are necessary for our 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 subscription or the On-Premises Software. Professional services are on-demand, whereby we perform services throughout the contract period; therefore, the revenue is recognized over the contractual term. Contract Liabilities The timing of customer billing and payment relative to the start of the service period varies from contract to contract; however, we bill many of our customers in advance of the provision of services under our contracts, resulting in contract liabilities consisting of either deferred revenue or customer deposits. Deferred revenue represents billings under noncancelable contracts before the related product or service is transferred to the customer. Customer deposits consist of refundable payments received in advance of the start of the contractual term or for anticipated revenue generating activities for the portion of a contract term that is subject to cancellation. Many of our arrangements include terms that allow the customer to terminate the contract for convenience and receive a pro-rata refund of the amount of the customer deposit for the period of time remaining in the contract term after the applicable termination notice period expires. In these arrangements, we concluded there are no enforceable rights and obligations after such notice period and therefore the consideration received or due from the customer that is subject to termination for convenience is recorded as customer deposits. The payment terms and conditions vary by contract; however, our terms generally require payment within 30 to 60 days from the invoice date. In instances where the timing of revenue recognition differs from the timing of 93 Table of Contents payment, we elected to apply the practical expedient in accordance with ASC 606 to not adjust contract consideration for the effects of a significant financing component as we expect, at contract inception, that the period between when promised goods and services are transferred to the customer and when the customer pays for those goods and services will be one year or less. As such, we determined our contracts do not generally contain a significant financing component. Areas of Judgment and Estimation Our contracts with customers can include multiple promises to transfer goods or services to the customer. Determining whether promises are distinct performance obligations that should be accounted for separately – or not distinct within the context of the contract and, thus, accounted for together – requires significant judgment. We concluded that the promise to provide a software subscription is highly interdependent and interrelated with the promise to provide O&M services and such promises are not distinct within the context of our contracts and are accounted for as a single performance obligation for our On-Premises Software. Additionally, the pricing of our contracts is generally fixed; however, it is possible for contracts to include variable consideration in the form of performance bonuses, which can be based on subjective or objective criteria. We include the estimated amount of variable consideration that we expect to receive to the extent it is probable that a significant revenue reversal will not occur. Any amounts received in the form of performance bonuses were not material in the periods presented. Significant estimates and assumptions are used in the identification of performance obligations in customer contracts and collectability of contract consideration, including accounts receivable. Estimates and judgments are based on historical experience, forecasted events, and various other assumptions that management believes to be reasonable under the circumstances. Actual results could differ from those estimates and such differences could affect our financial position and results of operations. Income Taxes We estimate our current tax expense together with assessing temporary differences resulting from differing treatment of items not currently deductible for tax purposes. These differences result in deferred tax assets and liabilities on our consolidated balance sheets, which are estimated based upon the difference between the financial statement and tax bases of assets and liabilities using the enacted tax rates that will be in effect when these differences reverse. In general, deferred tax assets represent future tax benefits to be received when certain expenses previously recognized in our consolidated statements of operations become deductible expenses under applicable income tax laws or loss or credit carryforwards are utilized. Accordingly, the realization of our deferred tax assets are dependent on future taxable income against which these deductions, losses, and credits can be utilized. We evaluate the realizability of our deferred tax assets and recognize a valuation allowance when it is more likely than not that a future benefit on such deferred tax assets will not be realized. Because of our history of U.S. and U.K. net operating tax losses, we have established a full valuation allowance against potential future benefits for U.S. federal, state and U.K. deferred tax assets. We expect to maintain this full valuation allowance for the foreseeable future as it is more likely than not that some or all of those deferred tax assets may not be realized based on our history of losses. We consider all evidence, both positive and negative, in determining any required valuation allowance and will continue to evaluate the need for a valuation allowance on a regular basis. If certain factors change and we determine that the deferred tax assets are realizable at a more-likely-than-not level, we will adjust the valuation allowance in the period the determination is made. In the year ended December 31, 2021, due to the Company’s current and projected U.K. tax losses, the Company has determined its U.K. deferred tax assets are currently not more likely than not to be realized, and accordingly, the Company established a full valuation allowance against its total net U.K. deferred tax assets. Changes in the valuation allowance, when 94 Table of Contents recorded, would be included in our consolidated statements of operations. Our judgment is required in determining the valuation allowance recorded against our net deferred tax assets. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. We recognize interest and penalties related to uncertain tax positions in our provision (benefit) for income taxes. Recent Accounting Pronouncements For information on recently issued accounting pronouncements, refer to Note 2. Significant Accounting Policies in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.