Ladies and gentlemen, thank you for standing by, and welcome to the Palantir Technologies Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Rodney Nelson, Head of Investor Relations. Thank you. Please go ahead.

Thank you, operator. Good afternoon, and welcome to Palantir's third quarter 2020 earnings call. We'll be discussing the results announced in our press release issued after the market close and posted on our Investor Relations website. With me on the call today is Shyam Sankar, Chief Operating Officer; Dave Glazer, Chief Financial Officer; and Kevin Kawasaki, Global Head of Business Development. During the call, we will make statements regarding our business that may be considered forward-looking within applicable securities laws, including statements regarding our outlook for the fourth quarter and full year 2020, management's expectations for our future financial and operational performance and other statements regarding our plans, prospects, and expectations. These statements are not promises or guarantees and are subject to risks and uncertainties, which could cause them to differ materially from actual results. Information concerning those risks is available in our earnings press release distributed after market close today and in our SEC filings. We undertake no obligation to update forward-looking statements, except as required by law. Further, during the course of today's call, we will refer to certain adjusted financial measures. These non-GAAP financial measures should be considered in addition to, not as a substitute for or in isolation from, GAAP measures. Additional information about these non-GAAP measures, including a reconciliation of non-GAAP to comparable GAAP measures, is included in our press release issued today. Our press release, investor presentation and SEC filings are available on our Investor Relations website at investors.palantir.com. With that, I'll turn it over to Shyam.

Thank you, Rodney, and thanks, everyone, for joining us today. At Palantir, we build software platforms for institutions whose work is essential to our way of life. Those institutions must be able to function in times of stability, as well as crisis and uncertainty. And to do so, they need software that works. We were founded in 2003 and started building software originally for the intelligence community in the United States to assist in counter terrorism investigations and operations. We later began working with commercial enterprises. We have two principal software platforms: Gotham and Foundry. Gotham, which is our first software platform, was constructed for analysts at defense and intelligence agencies. They were hunting for needles, not in one, but in thousands of haystacks. And they did not have the software they needed to do their jobs. In Iraq and Afghanistan, soldiers were mapping networks of insurgence and makers of roadside bombs by hand. Gotham enables users to identify patterns hidden deep within data sets, ranging from signals intelligence sources to reports from confidential informant, and it helps U.S. and allied military personnel respond to those threats. We later found that the challenges faced by commercial institutions when it came to working with data were fundamentally similar, companies routinely struggle to manage, let alone generate, alpha from data involved in large projects. Foundry was built for them. The platform transforms the way in which organizations interact with information by creating a central operating system for their data. Our software is on the front line. And sometimes literally, that means so are we. Gotham's use has now extended beyond intelligence analysis into defense operations and mission planning. And Foundry is becoming the central operating system, not only for individual institutions, but entire industries. Turning to the third quarter, revenue grew 52%…

Thanks, Shyam. I'll review our third quarter performance, followed by our outlook for the fourth quarter and full year 2020. Third quarter revenue was $289 million, up 52% year-over-year and over $9 million above the high end of the guidance we provided in connection with the direct listing. Average revenue per customer through the first nine months of this year was $5.8 million, up 38% versus the year ago period. Average revenue for top 20 customers grew 36% year-over-year through the first nine months of 2020, totaling $23.6 million. We are seeing greater diversification in our revenue base as our top 20 customers represented 61% of total revenue through the first nine months of 2020 compared with 68% in the year ago period. In the third quarter, we closed 15 deals of $5 million or more in total contract value, including 8 deals in excess of $10 million. Top line growth was driven by strong performance across each of our business segments. Third quarter commercial revenue grew 35% year-over-year to $127 million, driven by a combination of expansion with existing customers and increasing contributions from new customers. We also closed several large deals across our commercial portfolio in the third quarter, including a $300 million renewal in the aerospace industry and multiple wins, each over $5 million in the consumer, insurance, and financial services industries. Especially, in the midst of the pandemic, we continue to prioritize speed of delivery and value creation. While this can lead to lumpiness in our commercial revenue on a quarter-to-quarter basis due to contract timing, we are encouraged by the pipeline we see in our commercial business. Total government revenue rose 68% year-over-year to $163 million, driven primarily by growth in our U.S. government business. As Shyam mentioned, we signed several new government deals in…

[Operator Instructions] Our first question comes from Brent Thill with Jefferies. Your line is open.

Good afternoon. The government business has shown incredible strength this year. I think many are curious about how you think about the pipeline and the residual kind of carryover from the government business, and maybe if you could also address a big investor concern around the administration change. If that happens, does that have any impact on what you guys see in the government pipeline? Thank you.

Thank you, Brent. Yes, the government business had a great quarter. I'd say both segments are performing quite well. We're excited about the pipeline of the government business. Of course, there's the contract that we just closed with the U.S. Army. There's a number of big capture pursuits in the pipeline, things that we've mentioned previously, opportunities like DCGS, Capability Drop 2. There's a lot more behind that, that we expect. There are a couple of more programs of record that we're up for potentially in 2021. And we're investing far beyond just the Army, Space Force, the Navy, Air Force, so very robust pipeline, but that's just DoD. Like honestly, there's been enormous acceleration for a part of a business that was pretty small 18 months ago in health care. The work that we've done with the FDA, CDC, HHS, the NIH has really accelerated. And it's created enormous opportunities for us. And while many of those opportunities certainly accelerated because of COVID, it may have started there, it's very clear it's not going to end there. We're seeing opportunities for large systemic transformation in health care in the U.S. but also abroad, COVID-exposed opportunities for improvement, and I think governments are going to invest there. And in terms of your other question around administration change. Look, for the 17 years that we've been around, we've served every administration in the U.S. We've worked with five administrations in the U.K., four administrations in France and two in Germany. Our users and the folks who buy our software, they've worked with many more because they are actually career civil servants. And so, we don't expect any change really as a result of this.

Great. Thank you.

Our next question comes from [Mark Randy] with Morgan Stanley. Your line is open.

This is actually Keith Weiss in for [Mark]. Looking at the metrics on sort of the new customers that were acquired in the first nine months is up 175% year-on-year. Really impressive new customer adds. Can you talk to us a little bit about how much of that comes from sort of the ramping efforts and building out the direct sales force? So is that starting to have a positive impact? And maybe if you could help us, kind of mark-to-market, where are you with that effort in terms of like sales teams or whatnot? And how you expect that to roll out on a going-forward basis? And then maybe just one on operating margins. Really nice sort of uplift in operating margins this year, even though you're building out the direct sales force, can you drill down a little bit more and help us understand kind of where those expense savings come from? And how much of that is going to be kind of – you guys aren't traveling as much this year because of the COVID environment and we should expect that to come back into the income statement on a go-forward basis?

Great. Thanks, Keith. So first, the – what we're doing with the account-based sales force. So we've talked a bit about this. We've been building the team starting with really the beginning of last year. And in hindsight, I think our main mistake was that we should have done more. It's worked very well for us last year and into this year. So, we're increasing this effort. We've talked about tripling our total headcount there today, a fairly small part of the company. So, we're going to continue to invest here because it's working. And you can see some of the results in some of our general categories or new accounts that we've closed this year, accounts in the Acquire phase, growing revenue and the Expand and Scale phases really performing. But what's really working here, I think, is a little bit more of a technology and a product story. Our speed to value for customers is getting much faster. And there are many reasons, but I'm going to highlight two. First is Foundry modules and software-defined data integration. Shyam talked briefly about a customer mentioned earlier that started using our ERP suite. And they've already saved over $50 million, and they were able to use the software in just a few hours. And this is important to highlight because what used to take weeks of complex data integration and ontology building can now be automated. And this is because of the advancements we've made in software-defined data integration. And that was an example in sort of the large industrial complex, a consumer goods company used that same ERP suite, connected it to our Vertex Foundry module to simulate their supply chain, and it's now helping them run their business more efficiently. So, the same thing here. The software is really driving more of the work. That means time to value is faster and that equals more efficient sales. And by the way, I guess, this recent example was actually sourced by one of our more recent account salespeople. So, big congrats to you and – that team out there. You guys all know who you are. So, these advancements are big opportunities for sales teams. There are also opportunities for channel partners who seem to be very excited about this. That's the Foundry modules. And we haven't talked a lot about channel partners, but I suspect we will in future periods. And so then I'll hand it back to Dave for the conversation about the operating margin.

Thanks, Kevin. So I'll sort of just revisit our long-term targets for margins, retargeting adjusted gross margin of [35%] plus contribution margin by 70% plus and adjusted operating margin of 35% plus. In terms of adjusted operating margin – adjusted operating income, we raised our 2020 full year guidance to $133 million at the mid-point. And when you're looking at sort of our adjusted operating income, you can see that COVID accelerated a lot of change across the company. And this is – it really resulted us in leveraging a lot of our previous R&D investments in things like Apollo. And so while there was a lot of change that happened with COVID, and you're going to see a lot of that sticking, but with that said, we're going to continue to invest. As Kevin talked about, we're going to continue to invest in our direct sales force, continue to build out products, sort of like Apollo, continue to get that operating leverage. And we'll continue to see top line growth continue to outpace expense growth.

[Operator Instructions] Our next question comes from Alex Zukin with RBC. Your line is open.

Hi guys, thanks for taking my questions and congrats on a great first quarter. You mentioned a little bit about modularizing the platform componentry and something that you're going to talk about in here in the short – in the near term, can you talk about what kind of motion is that going to unlock? Why you're doing that now? What do you – and where do you expect that to have a bigger impact on commercial or federal sales? And then just a financial question. If we think – remind us a little bit about the seasonality of the business. And as we look to next year around top line growth specifically, how should we think about revenue linearity, specifically maybe 4Q to 1Q and then beyond?

Great. Thanks, Alex. So, just to back up a little bit, thinking about Foundry here, we've built this – over the last five years we've built this end-to-end platform. And we've been investing significantly in the R&D to do that. And so – and that really paid off. In the first three weeks of COVID, we started 83 new engagements. And we could do that because we had a solution that customers could start using in a matter of a few hours that can solve scaled problems in an end-to-end sort of way. And that has a premium in a crisis, and crisis have always been a tailwind for our business, whether it's the global financial crisis or ISIS attacks in Europe in 2015 and 2016 or the present-day pandemic. But we also recognize that many customers have made investments in IT capabilities that they are more or less happy with. And so by modularizing the offering, we're able to let them take what they need from the offering, but then build on what they already have. And that allows us to have a kind of a more nuanced land and expand motion over time. It changes the offering in a way that you can -- you have more flexibility on the price point and how you – it gives you a new way of going to market with channel partners. So, we think it actually opens up a lot of opportunities. Customers are pretty excited about that. We've seen opportunities to leverage those modules already with new customer and the new – at both – and on the pipeline side, but even new customers where we're actually implementing and converting. And yes, I think that it's – and I also – I guess, the last part of your question, I would expect to see this both in government and commercial.

And I'll touch base a little bit on the guidance for 2021. So, 93% of our customers – or 93% of our revenue is from existing customers, recurring and growing. So, we're very focused on bringing on new accounts because that creates a starting point for this land and expand dynamic, but again, 93% coming from existing customers, recurring and growing. A little bit more – a few more numbers there, I think, are important to focus on. Average revenue per customer through the first nine months of this year grew 38%, compared to last year. Average revenue for our top 20 customers grew 36%, compared to last year. And for both these numbers, still three months to go here. We've also reduced our customer concentration. Our top 20 customers are going from 68% of our total revenue to 61% of the total revenue through the first nine months of 2020. Touching just briefly on the seasonality question, I think it's important. One thing you might be pointing out and focused on is that we had a very strong fourth quarter in 2019. It was about 20% sequential growth. So what you're seeing a little bit here in 2020 is that smoothing out a little bit. And so – and what you've also seen is our guidance raising a little bit to 44% for the full year.

Our next question comes from Chris Merwin with Goldman Sachs. Your line is open.

Okay, thanks very much for taking my question. I wanted to ask about the commercial business. It looks like it grew 35% in the quarter, which I think was well above the growth rate you had for last year. I know you had a very significant $300 million renewal in the quarter. Was that the main driver of the acceleration? Or was it the other wins that you called out as well? And how should we be thinking about the sustainability of that higher growth rate for the commercial business in the near term here? Thanks.

Yes. It's been a great couple of quarters on the commercial side here. I think the drivers are really a diversified set of new deals that if you we look at the renewal here, that's really looking at 2021 revenue and beyond. So, we should look at that towards future periods. And so the work we've done with the U.S. consumer goods company, the work that we've done with other manufacturing companies, U.S. and abroad, the work that we've done in Japan, all of these things are building into the commercial business. And we expect to continue to close deals in this area. One thing we are leaning into significantly, as the second wave of the pandemic seems to be upon us here, is helping our customers and so we're very aggressive about getting started, working immediately. We can deploy our solution within hours and can have a meaningful impact on the durability of their operation within hours to days. And so we're leaning in very hard to doing that and figuring out the specifics around payment and timing and all that stuff later. It's a great opportunity for Foundry to really be the core operating system that delivers in a big moment. It's what we spent the last five years investing our R&D in, and the software is there to meet that moment.

Great. And maybe just a follow-up on the commercial as well. I think you touched on it briefly before, but I wanted to ask about how the sales motion is evolving. I know there's a lot of use cases for commercial, a growing number of use cases for commercial, but in terms of making these customers aware of the power of the platform, is that really going to be a direct sales effort? Or could we see some more investments in growing the partner ecosystem just given, I'm sure, the complexity that the issues that a lot of the commercial customers are facing? Thanks.

Sure. So the direct sales force is – we're continuing to invest in doing quite well there. I think it's a little early here, but we're sort of feeling somewhat optimistic about the early work with some of the channel partners. We've seen some early success. I think we'll be talking more about that going forward. And I think particularly in the commercial market, it's certainly true that the more we do, and oftentimes just the faster we do it, it opens up a lot more opportunities for us. And it's something that you'll hear more about with Foundry modules, is that the customer is really able to have sort of much more opinion, not only on how they use Foundry, but what specific pieces of Foundry they would like to use. So, instead of being required to use the full Foundry stack, the customer can now choose only the part they need, so they can build on what else it is that they have. And that gives us a lot of flexibility. It gives us flexibility on pricing, but also, it does open this big, Shyam, mentioned sort of window for channel partners who seem to be quite excited about that. So, look to hear more about Foundry modules. We plan to show as much of this as we're able to in the upcoming presentations.

Our next question comes from Brad Zelnick with Credit Suisse. Your line is open.

Great. Thanks so much and congrats to you all on a nice strong quarter out of the gate. My one question is actually pretty simple. I just wanted to ask about contract duration, which I think you disclosed at 3.6 years this quarter. Maybe you can comment on how that's trended year-on-year and how you expect that might trend forward into calendar 2021.

So, we're pretty happy with sort of getting additional visibility on the revenue here. I think when we're thinking about 2021 then we're really sort of looking at the portion and success we're having with the breakdown of the three-phase model. And when we looked at just new customers that we've acquired in a year, that group has grown nearly 200%, Dave mentioned this compared to last year. The Acquire phase has grown over 100% just the last three months. And the interesting thing about the Acquire phase is that there are a lot more accounts in here that are not yet customers. In other words, there are many accounts that are in Pilot phase that we believe will grow over time into the Expand and Scale phases, and you're seeing some of this in the growth of the Acquire and the new account phases. So, these are kind of the early land portion going into our model here. The Expand phase accounts, we did $254 million through the first nine months of the year, and those accounts did a 41% contribution margin. So, for some context, this same group did $176 million and a negative contribution margin of negative 43% in 2019. So that's 44% growth already for this year, and we still have three months to go. And again, worth kind of focusing on here, this account group went from negative 43% contribution margin to positive 41%, while growing revenue at this rate. And then the last portion, I think, should focus on is the Scale phase customers. Scale phase accounts generated $452 million of revenue through the first nine months of the year, contribution margin of just below 70%. At the limit, we think all accounts should be in the Scale phase, and that Scale phase should grow. And we're seeing this in the performance of the contribution margin in both the Expand and Acquire phases. So, it looks like we will see growth in the scale category.

[Operator Instructions] Our next question comes from Tyler Radke with Citi. Your line is open.

Hey, thanks so much for taking my question. Shyam, I wanted to ask a couple of questions to you, and I thought it was pretty interesting, one of your comments on just saying that you wish you'd invested faster or sooner in the direct sales force. And I guess, I'm curious now that you've kind of been able to look at the successful investments, just how are you thinking about growing overall headcount from here. I think the original target was for somewhat muted headcount growth in 2020, I think, maybe 4% to 5%, but given some of the successes and some of the things you're investing in with the Foundry modules, how are you thinking about growing headcount going forward? And then just had a quick follow-up on the Foundry modules, how do you think that kind of changes the competitive environment for you guys? Do you think you're going to be kind of going up against some of these data and analytics point tools and kind of the best-of-breed vendors there? Maybe just give us a sense for how that changes your competitive landscape as well. Thank you.

Yes. On the first question – thanks, Tyler. So, on the first question, I think we were – what we're very confident is that top line will continue to grow much faster than operating expenses. You're right, if we find opportunities to invest, we're going to take them. But right now, I'd reiterate what we're kind of expecting around 4% or so headcount growth. One of the things that's in there that kind of might make that 4% seem low, but it's actually – we're getting so much more efficient, right? What we've been able to do with our sales and marketing spend, and even though we're hiring into our direct sales force here, in some sense, it looks like sales and marketing is going down, which isn't actually what's happening. We're actually doing more sales and marketing, but we're just much more efficient at delivering it based on the investments we made around Apollo and software-defined data integration. And so, I think we're getting just a big benefit from there. We're able to do a lot more with the same humans that we do have. And so, we're seeing some of that benefit. And in terms of Foundry modules in a competitive landscape, we think there are a couple of things that we're doing on the modules, at least that we keep hearing from customers that are really unique. I think customers will continue to pick those. The important part here is working with the customer to find what investments they really believe in that they've already made, ensuring that the architecture that we're putting forth fits with their plans, their road map going forward. And so I think of it much less as a competitive situation in terms of what the customer is evaluating this best-of-breed tool versus that tool. It's really about, look, I have things I'm happy with. I really believe in your solution, but I want to be able to leverage the investments I've already made. And that's going to help us win a lot more. It's going to help the direct sales force to be more effective. It means that channel partners have a proposition that they can succeed with, both because it will integrate with their existing offerings. But because also the channel has to do less to really get this to work for the customer in terms of their enterprise architecture planning.

Ladies and gentlemen, we have reached the end of the allotted time for questions. I will now turn the call back over to the Palantir management for closing remarks.

Well, thank you all so much for joining us for our first quarterly conference call. We hope to have many more with this group here. I would like to end by just thanking all of our employees, past and present. It's the commitment to do the hard thing that we see from them all the time, and it's so inspiring. They built this company over years and years of hard work. And when the crisis came, when the pandemic came, they were ready. They met their moment. So thank you guys so much. Thank you all.

This concludes today's conference call. You may now disconnect.