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 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. We have deployed our newest offering, the Artificial Intelligence Platform (“AIP”), to select customers, and we are continuing to onboard additional customers to AIP while we develop and release new features and components. AIP is designed for customers across the commercial and government sectors, enabling them to derive value from recent breakthroughs in artificial intelligence via the combination of our existing software platforms with large language models (“LLMs”). We believe AIP uniquely allows users to connect LLMs with their data and operations to facilitate decision-making within the legal, ethical, and security constraints that they require. While our focus in the short term remains on making our software platforms available to increasingly broad swaths of the market, we are also working to identify additional component parts and products embedded within those platforms that have potential as commercial offerings on their own. We believe that every institution faces challenges that our platforms and products were designed to address. Our approach with all our clients is to establish a partnership that transforms the way they use data in pursuit of their goals. 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. Our Business Our customers pay us to use the software platforms we have built. While we generally offer contract terms of one to five years in length, our customers sometimes enter into shorter-term contracts. Revenue is generally recognized ratably over the contract term. Many of our customer contracts contain termination for convenience provisions. For the three months ended September 30, 2023, we generated $558.2 million in revenue, reflecting a 17% growth rate from the three months ended September 30, 2022, when we generated $477.9 million in revenue. For the nine months ended September 30, 2023, we generated $1.6 billion in revenue, reflecting a 16% growth rate from the nine months ended September 30, 2022, when we generated $1.4 billion in revenue. In the three months ended September 30, 2023, we generated income from operations of $40.0 million, or adjusted income from operations of $163.3 million when excluding stock-based compensation and related employer payroll taxes. In the three months ended September 30, 2022, we incurred losses from operations of $62.2 million, or generated adjusted income from operations of $81.3 million when excluding stock-based compensation and related employer payroll taxes. In the nine months ended 23 Table of contents September 30, 2023, we generated income from operations of $54.2 million, or adjusted income from operations of $423.4 million when excluding stock-based compensation and related employer payroll taxes. In the nine months ended September 30, 2022, we incurred losses from operations of $143.4 million, or generated adjusted income from operations of $306.5 million when excluding stock-based compensation and related employer payroll taxes. In the three months ended September 30, 2023, our gross profit was $450.2 million, reflecting a gross margin of 81%, or 82% when excluding stock-based compensation. In the three months ended September 30, 2022, our gross profit was $370.3 million, reflecting a gross margin of 77%, or 80% when excluding stock-based compensation. In the nine months ended September 30, 2023, our gross profit was $1.3 billion, reflecting a gross margin of 80%, or 82% when excluding stock-based compensation. In the nine months ended September 30, 2022, our gross profit was $1.1 billion, reflecting a gross margin of 78%, or 81% when excluding stock-based compensation. For more information about our adjusted income from operations, which excludes stock-based compensation and related employer payroll taxes; and gross profit and gross margin, excluding stock-based compensation; as well as reconciliations from income (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 September 30, 2023, we had 453 customers, including companies in various commercial sectors and government agencies around the world. During the period ended September 30, 2022, we had 337 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 and partnerships with some of the world’s leading government institutions and companies. Our average revenue for the top twenty customers during the trailing twelve months ended September 30, 2023 was $53.7 million, which grew 13% from an average of $47.7 million in revenue from the top twenty customers during the trailing twelve months ended September 30, 2022, 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. 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. 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. We manage customers at the account level, not by industry or sector, so that we can optimize on the specific growth opportunities for each customer. In the nine months ended September 30, 2023, 56% of our revenue came from government customers and 44% came from commercial customers. Our U.S. customers have been a meaningful source of revenue growth for our business. In the nine months ended September 30, 2023, we generated 62% of our revenue from customers in the United States and the remaining 38% from non-U.S. customers. Revenue from our U.S. customers during the trailing twelve months ended September 30, 2023 was $1.3 billion, which grew 18% from the prior twelve-month period. We expect that U.S. customers will continue to be a source of significant revenue growth for us. We continue to believe that our government customers remain a meaningful and resilient source of revenue for our business, particularly during periods of economic uncertainty. However, large government customers in particular are generally subject to a number of uncertainties regarding budgets and spending levels, changes in timing and spending priorities, and regulatory and policy changes, which can make it difficult to predict when, or if, we will make sales to such customers or the size and scope of any contract awards. See also the discussion of “Risks Related to Relationships and Business with the Public Sector” within “ Item 1A. Risk Factors” included in this Quarterly Report on Form 10-Q. Expansion of Access to Platforms 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 24 Table of contents 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. Macroeconomic Trends As a corporation with an international presence, we are subject to risks and uncertainties caused by significant events with macroeconomic impacts, including, but not limited to, the COVID-19 pandemic, the impact of the ongoing Russia-Ukraine conflict, rising inflation and interest rates, monetary policy changes, financial services sector instability, and foreign currency fluctuations. Additionally, these macroeconomic impacts have generally disrupted the operations of our customers and prospective customers. We continuously monitor the direct and indirect impacts of these circumstances on our business and financial results, as well as the overall global economy and geopolitical landscape. See the section titled “Risk Factors” included elsewhere in this Quarterly Report on Form 10-Q for further discussion of the impact of macroeconomic trends on our business. COVID-19 Impact The COVID-19 pandemic continues to impact the global economy. The extent to which COVID-19 may impact our financial conditions or results of operations in future periods remains uncertain, but to date has not had a material adverse impact on our results of operations. We continue to prioritize the health and safety of our employees, our customers, and the communities in which we operate. We have reopened our offices and have allowed business travel and in-person events to resume, while continuing to closely monitor developments around the evolving nature of the pandemic. As such, our travel and office-related expenditures have increased, and may continue to increase moving forward. However, we expect that some of our employees will continue to work remotely. 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. Russia-Ukraine Conflict We continue to closely monitor the impact of the ongoing Russia-Ukraine conflict and its global impacts on our business. While the conflict is still evolving and the outcome remains highly uncertain, we do not expect that the Russian invasion will have a material impact on our business and results of operations. We do not currently have office locations in Russia and none of our revenues came from sales to entities headquartered in Russia. In June 2022, our Chief Executive Officer, Alexander Karp, met with the President of Ukraine and other senior officials to discuss opening an office in Ukraine and providing ongoing support. In 2023, we announced partnerships with Ukraine to support its defense and reconstruction efforts and investigations of potential war crimes, among other activities. Our current operations related to Ukraine are not material to our financial position or results of operations. However, if the conflict continues or worsens, leading to greater disruptions and uncertainty within the technology industry or global economy, our business and results of operations could be negatively impacted. Foreign Currency Exchange Rates Exchange rates are subject to significant and rapid fluctuations due to a number of factors, including interest rate changes and political and economic uncertainty which may adversely affect our results of operations or financial position. Our contracts with customers and vendors are primarily denominated in U.S. dollars. However, the general strengthening of the U.S. dollar relative to other major foreign currencies (primarily the Euro and British pound sterling (“GBP”)) has had, and could in the future have, an unfavorable impact on our revenues and expenses from certain non-U.S. customers or vendors whose contracts are denominated in currencies other than U.S. dollars. For the nine months ended September 30, 2023, that impact was not material to our financial position or results of operations. Additionally, certain of our U.S. and non-U.S. subsidiaries may hold monetary assets and liabilities in currencies other than their functional currency (primarily the Japanese Yen (“JPY”), Euro, and GBP), which could subject our results of operations and cash flows to adverse fluctuations due to changes in such foreign currency exchange rates as compared to the U.S. dollar. 25 Table of contents Customer Impacts Current macroeconomic conditions have impacted, and may continue to adversely impact, our customers’ businesses, particularly our early- and growth-stage customers. Relationships with early- or growth-stage customers carry inherent risks because, among other things, such customers may be unable to generate sufficient revenues or profitability or to access any necessary financing or funding in a timely manner or on favorable terms to them in the current macroeconomic environment, which has impacted, and may continue to impact, our expected revenue and collections. As a result, current macroeconomic conditions have impacted, and may continue to impact, our ability to realize the full value of our commercial contracts with such early- or growth-stage customers. For additional information, see Note 4. Investments and Fair Value Measurements in the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. 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. 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 segment, 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. Allocated revenues and expenses are then aggregated into a segment based upon the customer account to which they relate. Contribution margin, both across our business and segments, 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 noncash expense. We believe that our contribution margin 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 U.S. generally accepted accounting principles (“GAAP”). For more information about contribution margin, including the limitations of this measure, and a reconciliation to income (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 and related employer payroll taxes, to help us evaluate our business, identify trends affecting our business, formulate business plans and financial projections, and make strategic decisions. We exclude stock-based compensation, which is a noncash 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 employer payroll taxes related to stock-based compensation as it is difficult to predict and outside of our control. 26 Table of contents 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 statements 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 their 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 three and nine months ended September 30, 2023 and 2022 (in thousands, except percentages): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Income (loss) from operations $ 39,983 $ (62,191) $ 54,172 $ (143,375) Add: Research and development expenses (1) 83,756 75,750 230,273 200,639 General and administrative expenses (1) 82,849 92,833 260,778 268,981 Total stock-based compensation expense 114,380 140,308 343,295 435,400 Total contribution $ 320,968 $ 246,700 $ 888,518 $ 761,645 Contribution margin 58 % 52 % 55 % 55 % ———— (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, 2023 and 2022 (in thousands, except percentages): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Gross profit $ 450,237 $ 370,269 $ 1,294,196 $ 1,093,009 Add: stock-based compensation 7,814 10,525 24,995 33,413 Gross profit, excluding stock-based compensation $ 458,051 $ 380,794 $ 1,319,191 $ 1,126,422 Gross margin, excluding stock-based compensation 82 % 80 % 82 % 81 % 27 Table of contents Adjusted Income from Operations The following table provides a reconciliation of adjusted income from operations, which excludes stock-based compensation and related employer payroll taxes for the three and nine months ended September 30, 2023 and 2022 (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Income (loss) from operations $ 39,983 $ (62,191) $ 54,172 $ (143,375) Add: stock-based compensation 114,380 140,308 343,295 435,400 Add: employer payroll taxes related to stock-based compensation 8,909 3,133 25,954 14,464 Adjusted income from operations $ 163,272 $ 81,250 $ 423,421 $ 306,489 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 operating and maintenance (“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 agree 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 field-service representatives, third-party cloud hosting services, travel costs, 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 28 Table of contents activities; as well as third-party cloud hosting services for our pilots, marketing and sales event-related costs, travel 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, in our sales force, and in 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 platforms, 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 of third-party cloud hosting services and other IT-related costs, travel 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, travel costs, and allocated overhead. We expect that general and administrative expenses will increase in absolute dollars as we enhance our systems, processes, and controls to support the growth in our business as well as our continuing compliance and reporting requirements as a public company. Interest Income Interest income consists primarily of interest income earned on our cash, cash equivalents, U.S. treasury securities, and restricted cash balances. Interest Expense Interest expense consists primarily of interest expense and commitment fees incurred under our credit facility. Other Income (Expense), Net Other income (expense), net consists primarily of foreign currency exchange gains and losses, realized and unrealized losses from equity securities, and our share of income and losses from our equity method investments. Provision for Income Taxes Provision for income taxes consists of income taxes related to foreign and state jurisdictions in which we conduct business and withholding taxes. Net Income Attributable to Noncontrolling Interests Net income attributable to noncontrolling interests represents our joint venture partners’ proportionate share of the results of operations of the respective joint venture. Segments We have two operating segments, commercial and government, which were determined based on the manner in which the chief operating decision maker, 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. 29 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 costs. 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, 2023 2022 2023 2022 Revenue $ 558,159 $ 477,880 $ 1,616,662 $ 1,397,247 Cost of revenue 107,922 107,611 322,466 304,238 Gross profit 450,237 370,269 1,294,196 1,093,009 Operating expenses: Sales and marketing 176,373 182,918 547,629 512,278 Research and development 105,708 100,863 295,341 277,635 General and administrative 128,173 148,679 397,054 446,471 Total operating expenses 410,254 432,460 1,240,024 1,236,384 Income (loss) from operations 39,983 (62,191) 54,172 (143,375) Interest income 36,864 5,540 88,027 7,559 Interest expense (742) (1,082) (3,334) (2,346) Other income (expense), net 3,864 (65,046) (8,021) (260,714) Income (loss) before provision for income taxes 79,969 (122,779) 130,844 (398,876) Provision for income taxes 6,530 1,096 10,382 5,707 Net income (loss) 73,439 (123,875) 120,462 (404,583) Less: Net income attributable to noncontrolling interests 1,934 — 4,028 — Net income (loss) attributable to common stockholders $ 71,505 $ (123,875) $ 116,434 $ (404,583) 30 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, 2023 2022 2023 2022 Revenue 100 % 100 % 100 % 100 % Cost of revenue 19 23 20 22 Gross margin 81 77 80 78 Operating expenses: Sales and marketing 32 38 34 36 Research and development 19 21 18 20 General and administrative 23 31 25 32 Total operating expenses 74 90 77 88 Income (loss) from operations 7 (13) 3 (10) Interest income 6 1 5 — Interest expense — — — — Other income (expense), net 1 (14) — (19) Income (loss) before provision for income taxes 14 (26) 8 (29) Provision for income taxes 1 — 1 — Net income (loss) 13 (26) 7 (29) Less: Net income attributable to noncontrolling interests — — — — Net income (loss) attributable to common stockholders 13 % (26) % 7 % (29) % Comparison of the Three and Nine Months Ended September 30, 2023 and 2022 Revenue Three Months Ended September 30, Change Nine Months Ended September 30, Change 2023 2022 Amount % 2023 2022 Amount % Revenue: Government $ 307,603 $ 273,834 $ 33,769 12 % $ 898,178 $ 778,622 $ 119,556 15 % Commercial 250,556 204,046 46,510 23 % 718,484 618,625 99,859 16 % Total revenue $ 558,159 $ 477,880 $ 80,279 17 % $ 1,616,662 $ 1,397,247 $ 219,415 16 % Revenue increased by $80.3 million, or 17%, for the three months ended September 30, 2023 compared to the same period in 2022. Revenue from government customers increased by $33.8 million, or 12%, for the three months ended September 30, 2023 compared to the same period in 2022, primarily from customers in the United States. Of the increase, $26.9 million was from government customers existing as of December 31, 2022. Revenue from U.S. government customers was $229.2 million for the three months ended September 30, 2023 compared to $208.9 million for the same period in 2022. Revenue from commercial customers increased by $46.5 million, or 23%, for the three months ended September 30, 2023 compared to the same period in 2022. Of the increase, $16.4 million was from customers existing as of December 31, 2022, which included an offsetting decrease of $13.5 million of revenue from Strategic Commercial Contracts. Revenue increased by $219.4 million, or 16%, for the nine months ended September 30, 2023 compared to the same period in 2022. Revenue from government customers increased by $119.6 million, or 15%, for the nine months ended September 30, 2023 compared to the same period in 2022, primarily from customers in the United States. Of the increase, $107.0 million was from government customers existing as of December 31, 2022. Revenue from U.S. government customers was $684.0 million for the nine months ended September 30, 2023 compared to $601.6 million for the same period in 2022. Revenue from commercial customers increased by $99.9 million, or 16%, for the nine months ended September 30, 2023 compared to the same period in 2022. Of the increase, $49.4 million was from customers existing as of December 31, 2022, which included an offsetting decrease of $31.2 million of revenue from Strategic Commercial Contracts. 31 Table of contents Generally, increases in revenue from our existing customers are related to increased adoption of our products and services within their organizations. For additional information on Strategic Commercial Contracts, see Note 4. Investments and Fair Value Measurements in our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Cost of Revenue and Gross Profit Three Months Ended September 30, Change Nine Months Ended September 30, Change 2023 2022 Amount % 2023 2022 Amount % Cost of revenue $ 107,922 $ 107,611 $ 311 — % $ 322,466 $ 304,238 $ 18,228 6 % Gross profit 450,237 370,269 79,968 22 % 1,294,196 1,093,009 201,187 18 % Gross margin 81 % 77 % 4 % 80 % 78 % 2 % Cost of revenue for the three months ended September 30, 2023 increased by $0.3 million compared to the same period in 2022. The increase was primarily due to increases of $4.5 million in third-party cloud hosting services and $3.1 million in payroll and other payroll-related costs. These increases were partially offset by decreases of $4.3 million in field service representatives, hardware, and other direct costs, as well as $1.8 million in stock-based compensation expense and related expenses. Our gross margin for the three months ended September 30, 2023 increased from 77% for the same period in 2022 to 81% as a result of revenue growth outpacing costs of revenue. The primary cause of this growth rate variation was the decrease in stock-based compensation expense and timing of other direct costs in costs of revenue relative to total expense growth as compared to the prior year. Cost of revenue for the nine months ended September 30, 2023 increased by $18.2 million, or 6%, compared to the same period in 2022. The increase was primarily due to increases of $9.4 million in payroll and other payroll-related costs, $5.6 million in hardware costs, $4.7 million in third-party cloud hosting services costs, and $4.4 million in field service representatives. These increases were partially offset by a decrease of $7.2 million in stock-based compensation expense and related expenses. Our gross margin for the nine months ended September 30, 2023 increased from 78% for the same period in 2022 to 80% as a result of revenue growth outpacing costs of revenue. The primary cause of this growth rate variation was the decrease in stock-based compensation expense in costs of revenue relative to total expense growth as compared to the prior year. For additional information related to stock-based compensation expense, see the section titled “Stock-Based Compensation” below. Operating Expenses Three Months Ended September 30, Change Nine Months Ended September 30, Change 2023 2022 Amount % 2023 2022 Amount % Sales and marketing $ 176,373 $ 182,918 $ (6,545) (4) % $ 547,629 $ 512,278 $ 35,351 7 % Research and development 105,708 100,863 4,845 5 % 295,341 277,635 17,706 6 % General and administrative 128,173 148,679 (20,506) (14) % 397,054 446,471 (49,417) (11) % Total operating expenses $ 410,254 $ 432,460 $ (22,206) (5) % $ 1,240,024 $ 1,236,384 $ 3,640 — % Sales and Marketing Sales and marketing expenses decreased by $6.5 million, or 4%, for the three months ended September 30, 2023 compared to the same period in 2022. The decrease was primarily due to decreases of $7.2 million in stock-based compensation expense and related expenses and $4.3 million in marketing costs. These decreases were partially offset by an increase of $6.5 million in payroll and other payroll-related costs driven by increased headcount attributable to our sales and marketing function. Sales and marketing expenses increased by $35.4 million, or 7%, for the nine months ended September 30, 2023 compared to the same period in 2022. The increase was primarily due to increases of $51.2 million in payroll and other payroll-related costs and $17.2 million in travel and office-related costs driven by increased headcount attributable to our sales and marketing function. These increases were partially offset by decreases of $25.0 million in stock-based compensation expense and related expenses, and $14.8 million in marketing costs. For additional information related to stock-based compensation expense, see the section titled “Stock-Based Compensation” below. 32 Table of contents Research and Development Research and development expenses increased by $4.8 million, or 5%, for the three months ended September 30, 2023 compared to the same period in 2022. The increase was primarily due to increases of $3.5 million in third-party cloud hosting services and other IT costs and $2.5 million in payroll and other payroll-related costs driven by increased headcount attributable to our research and development function. These increases were partially offset by a decrease of $1.9 million in stock-based compensation expense and related expenses. Research and development expenses increased by $17.7 million, or 6%, for the nine months ended September 30, 2023 compared to the same period in 2022. The increase was primarily due to increases of $11.6 million in payroll and other payroll-related costs driven by increased headcount attributable to our research and development function, $8.7 million in third-party cloud hosting services and other IT costs, and $5.3 million in office-related costs. These increases were partially offset by a decrease of $9.1 million in stock-based compensation expense and related expenses. For additional information related to stock-based compensation expense, see the section titled “Stock-Based Compensation” below. General and Administrative General and administrative expenses decreased by $20.5 million, or 14%, for the three months ended September 30, 2023 compared to the same period in 2022. The decrease was primarily due to decreases of $9.3 million in stock-based compensation expense and related expenses and $8.2 million in travel-related costs. General and administrative expenses decreased by $49.4 million, or 11%, for the nine months ended September 30, 2023 compared to the same period in 2022. The decrease was primarily due to decreases of $39.3 million in stock-based compensation expense and related expenses, $24.6 million in professional service fees, and $7.7 million in travel-related costs. These decreases were partially offset by an increase of $15.4 million in payroll and other payroll-related costs. For additional information related to stock-based compensation expense, see the section titled “Stock-Based Compensation” below. Stock-Based Compensation Three Months Ended September 30, Change Nine Months Ended September 30, Change 2023 2022 Amount % 2023 2022 Amount % Cost of revenue $ 7,814 $ 10,525 $ (2,711) (26) % $ 24,995 $ 33,413 $ (8,418) (25) % Sales and marketing 39,290 48,824 (9,534) (20) % 116,956 147,501 (30,545) (21) % Research and development 21,952 25,113 (3,161) (13) % 65,068 76,996 (11,928) (15) % General and administrative 45,324 55,846 (10,522) (19) % 136,276 177,490 (41,214) (23) % Total stock-based compensation expense $ 114,380 $ 140,308 $ (25,928) (18) % $ 343,295 $ 435,400 $ (92,105) (21) % Stock-based compensation expenses decreased by $25.9 million and $92.1 million, or 18% and 21%, for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022. The decreases were driven by lower expense under the accelerated attribution method for RSUs granted prior to September 30, 2020, the date of our direct listing, during the three and nine months ended September 30, 2023 compared to the same periods in 2022, as well as lower expense due to options becoming fully vested and the cancellation of options and RSUs. Interest Income Three Months Ended September 30, Change Nine Months Ended September 30, Change 2023 2022 Amount 2023 2022 Amount Interest income $ 36,864 $ 5,540 $ 31,324 $ 88,027 $ 7,559 $ 80,468 Interest income increased by $31.3 million and $80.5 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022 primarily due to higher U.S. interest rates and an increase in our interest-bearing cash, cash equivalents, and short-term U.S. treasury securities. 33 Table of contents Interest Expense Three Months Ended September 30, Change Nine Months Ended September 30, Change 2023 2022 Amount 2023 2022 Amount Interest expense $ (742) $ (1,082) $ 340 $ (3,334) $ (2,346) $ (988) There was no material change in interest expense for the three and nine months ended September 30, 2023 compared to the same periods in 2022. Other Income (Expense), Net Three Months Ended September 30, Change Nine Months Ended September 30, Change 2023 2022 Amount 2023 2022 Amount Other income (expense), net $ 3,864 $ (65,046) $ 68,910 $ (8,021) $ (260,714) $ 252,693 Other income (expense), net changed by $68.9 million and $252.7 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022 primarily due to the net decrease in losses from our shares held in equity securities. Provision for Income Taxes Three Months Ended September 30, Change Nine Months Ended September 30, Change 2023 2022 Amount 2023 2022 Amount Provision for income taxes $ 6,530 $ 1,096 $ 5,434 $ 10,382 $ 5,707 $ 4,675 The provision for income taxes increased by $5.4 million and $4.7 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022 primarily related to higher foreign income taxes as the result of higher foreign taxable income and higher withholding taxes in the current year. Liquidity and Capital Resources We generated positive cash flow from operations for the nine months ended September 30, 2023. We had cash and cash equivalents and short-term U.S. treasury securities totaling $3.3 billion available as of September 30, 2023. We believe that cash flows generated from operations, cash, cash equivalents, marketable securities, available funds, and access to financing sources, including our 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. We have historically generated significant losses from our operations as reflected in our condensed consolidated balance sheets and we expect cash flows from operations may fluctuate for the foreseeable future. Historically, we have financed our operations primarily through the sale of our equity securities, including proceeds from option exercises, and payments received from our customers. As of September 30, 2023, our accumulated deficit balance was $5.7 billion, and our principal sources of liquidity were cash and cash equivalents and short-term U.S. treasury securities totaling $3.3 billion. As of September 30, 2023, we had no outstanding debt balances and available and undrawn revolving commitments of $500.0 million under our credit facility. For more information, see Note 6. Debt in our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. 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, we may enter into future arrangements to acquire or invest in businesses, products, services, strategic partnerships, and technologies; additionally, we may repurchase shares of our Class A common stock from time to time under our Share Repurchase Program. 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. For additional information on our Share 34 Table of contents Repurchase Program, see Note 8. Stockholders’ Equity in our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. The following table summarizes our cash flows for the periods indicated (in thousands): Nine Months Ended September 30, 2023 2022 Net cash provided by (used in): Operating activities $ 411,011 $ 144,974 Investing activities (2,141,954) (118,508) Financing activities 167,607 71,839 Effect of foreign exchange on cash, cash equivalents, and restricted cash (2,113) (12,470) Net increase in cash, cash equivalents, and restricted cash $ (1,565,449) $ 85,835 Operating Activities Net cash provided by operating activities was $411.0 million and $145.0 million for the nine months ended September 30, 2023 and 2022, respectively. The increase was primarily driven by timing of the receipt of payments from our customers and timing of payments to vendors. Investing Activities Net cash used in investing activities was $2.1 billion and $118.5 million for the nine months ended September 30, 2023 and 2022, respectively. The increase in cash used in investing activities was primarily due to purchases of marketable securities, primarily comprised of U.S. treasury securities, offset by proceeds from sales and redemptions of marketable securities. Financing Activities Net cash provided by financing activities was $167.6 million and $71.8 million for the nine months ended September 30, 2023 and 2022, respectively, each of which primarily consisted of proceeds from the exercise of common stock options. Contractual Obligations and Commitments Our contractual obligations and commitments primarily consist of operating lease commitments for our facilities and non-cancelable purchase commitments related to third-party cloud hosting services. For additional information, refer to Note 7. Commitments and Contingencies to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Except as already disclosed in Note 7. Commitments and Contingencies in our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, there has been no material change in our contractual obligations and commitments other than in the ordinary course of business since our fiscal year ended December 31, 2022. See our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the Securities and Exchange Commission (“SEC”) on February 21, 2023, for additional information regarding the Company’s contractual obligations. 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, 2022, which was filed with the SEC on February 21, 2023, except as described in Note 2. Significant Accounting Policies to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. 35 Table of contents Recent Accounting Pronouncements For information on recently issued accounting pronouncements, if any, refer to Note 2. Significant Accounting Policies in our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.