PALANTIR TECHNOLOGIES INC. 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 inthe 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 by 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 strategic investments pursuant to certain approved agreements ("Investment Agreements") to purchase shares of various entities, including special purpose acquisition companies and/or other privately-held or publicly-traded entities (each, an "Investee," and such purchases, the "Investments"). See further discussion in Note 4. Investments and Fair Value Measurements. 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 endedSeptember 30, 2022 , we generated$477.9 million in revenue, reflecting a 22% growth rate from the three months endedSeptember 30, 2021 , when we generated$392.1 million in revenue. For the nine months endedSeptember 30, 2022 , we generated$1.4 billion in revenue, reflecting a 26% growth rate from the nine months endedSeptember 30, 2021 , when we generated$1.1 billion in revenue. In the three months endedSeptember 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 three months endedSeptember 30, 2021 , we incurred losses from operations of$91.9 million , or generated adjusted income from operations of$116.1 million when excluding stock-based compensation and related employer payroll taxes. In the nine 21
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months endedSeptember 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 nine months endedSeptember 30, 2021 , our losses from operations were$352.1 million , or generated adjusted income from operations of$349.4 million when excluding stock-based compensation and related employer payroll taxes. In the three months endedSeptember 30, 2022 , our gross profit was$370.3 million , reflecting a gross margin of 77%, or 80% when excluding stock-based compensation. In the three months endedSeptember 30, 2021 , our gross profit was$305.3 million , reflecting a gross margin of 78%, or 82% when excluding stock-based compensation. In the nine months endedSeptember 30, 2022 , our gross profit was$1.1 billion , reflecting a gross margin of 78%, or 81% when excluding stock-based compensation. In the nine months endedSeptember 30, 2021 , our gross profit was$857.2 million , reflecting a gross margin of 77%, or 82% when excluding stock-based compensation. For more information about our adjusted income or loss 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 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 endedSeptember 30, 2022 , we had 337 customers, including companies in various commercial sectors and government agencies around the world. During the period endedSeptember 30, 2021 , we had 203 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 theU.S. Food and Drug Administration ,Centers for Disease Control and Prevention , andNational Institutes of Health are subsidiary agencies of theU.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 for the top twenty customers during the trailing twelve months endedSeptember 30, 2022 was$47.7 million , which grew 15% from an average of$41.3 million in revenue from the top twenty customers during the trailing twelve months endedSeptember 30, 2021 , 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 nine months endedSeptember 30, 2022 , 56% of our revenue came from government customers and 44% came from commercial customers. OurU.S. customers have been a meaningful source of revenue growth for our business. In the nine months endedSeptember 30, 2022 , we generated 62% of our revenue from customers inthe United States and the remaining 38% from non-U.S. customers. Revenue from ourU.S. customers during the trailing twelve months endedSeptember 30, 2022 was$1.1 billion , which grew 38% from the prior twelve-month period. We expect thatU.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
We have expanded 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.
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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 ongoing COVID-19 pandemic, the impact of the Russian invasion ofUkraine , inflationary pressures, and foreign currency fluctuations. 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.
COVID-19 Impact
As a result of the ongoing COVID-19 pandemic, 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 initially 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. We have reopened our offices and are allowing business travel to resume, while continuing to closely monitor developments around the evolving nature of the pandemic, and some of our employees continue to work remotely. 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, our travel and office-related expenditures have increased, and may continue to increase moving forward.
Russian Invasion of
We continue to closely monitor the impact of the Russian invasion ofUkraine 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 inRussia and none of our revenues came from sales to entities headquartered inRussia . InJune 2022 , our Chief Executive Officer,Alexander Karp , met with the President ofUkraine and other senior officials to discuss opening an office inUkraine and providing ongoing support. Our current operations related toUkraine 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
Our contracts with customers are primarily denominated inU.S. dollars. As a result, the general strengthening of theU.S. dollar relative to other major foreign currencies (primarily the Euro and British Pound Sterling) had an unfavorable impact on our revenues from certain non-U.S. customers; however, that impact for the three and nine months endedSeptember 30, 2022 was not material to our financial position or results of operations.
See the section titled "Risk Factors" included elsewhere in this Quarterly
Report on Form 10-Q, and in the Annual Report on Form 10-K for the year ended
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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. 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 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 withU.S. generally accepted accounting principles ("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 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 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 employer payroll taxes related to stock-based compensation as it is difficult to predict and outside of our control.
Our definitions may differ from the definitions used by other companies and therefore comparability may be limited. In addition, other companies may not publish these or similar metrics. Further, these metrics have certain limitations, as they do not include the impact of certain expenses that are reflected in our condensed consolidated 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 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.
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Contribution Margin
The following table provides a reconciliation of contribution margin for the three and nine months endedSeptember 30, 2022 and 2021 (in thousands, except percentages): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Loss from operations$ (62,191) $
(91,941)
75,750 59,844 200,639 180,335
General and administrative expenses (1) 92,833 71,145 268,981 207,006
Total stock-based compensation expense 140,308 184,835 435,400 611,308
Total contribution $ 246,700 $ 223,883 $ 761,645 $ 646,546
Contribution margin 52 % 57 % 55 % 58 %
----(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 endedSeptember 30, 2022 and 2021 (in thousands, except percentages): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Gross profit$ 370,269 $ 305,342 $ 1,093,009 $ 857,181 Add: stock-based compensation 10,525 14,860 33,413 54,866 Gross profit, excluding stock-based compensation$ 380,794 $ 320,202 $ 1,126,422 $ 912,047 Gross margin, excluding stock-based compensation 80 % 82 % 81 % 82 %
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
Three Months Ended September 30 ,
Nine Months Ended
2022 2021 2022 2021
Loss from operations $ (62,191) $ (91,941) $ (143,375) $ (352,103)
Add: stock-based compensation 140,308 184,835 435,400 611,308
Add: employer payroll taxes related to
stock-based compensation 3,133 23,215 14,464 90,214
Adjusted income from operations
Components of Results of Operations
Revenue
We generate revenue from the sale of subscriptions to access our software in our
hosted environment with 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.
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Palantir Cloud
Our Palantir Cloud subscriptions grant customers the right to access the software functionality in a hosted environment controlled byPalantir 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 thePalantir services to the customer.
Sales of our software subscriptions grant customers the right to use functional intellectual property, either on their internal hardware infrastructure or on their own cloud instance, over the contractual term and are also sold together with stand-ready O&M services. 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 ourOn-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 orOn-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.
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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 facility.
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
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.
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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,
2022 2021 2022 2021
Revenue $ 477,880 $ 392,146 $ 1,397,247 $ 1,109,022
Cost of revenue (1) 107,611 86,804 304,238 251,841
Gross profit 370,269 305,342 1,093,009 857,181
Operating expenses:
Sales and marketing (1) 182,918 153,443 512,278 451,919
Research and development (1) 100,863 94,316 277,635 303,311
General and administrative (1) 148,679 149,524 446,471 454,054
Total operating expenses 432,460 397,283 1,236,384 1,209,284
Loss from operations (62,191) (91,941) (143,375) (352,103)
Interest income 5,540 379 7,559 1,127
Interest expense (1,082) (609) (2,346) (3,039)
Other income (expense), net (65,046) (8,528) (260,714) (11,297)
Loss before provision for income taxes (122,779) (100,699) (398,876) (365,312)
Provision for (benefit from) income
taxes 1,096 1,438 5,707 (1,121)
Net loss $ (123,875) $ (102,137) $ (404,583) $ (364,191)
----(1) Includes stock-based compensation expense.
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,
2022 2021 2022 2021
Revenue 100 % 100 % 100 % 100 %
Cost of revenue 23 22 22 23
Gross margin 77 78 78 77
Operating expenses:
Sales and marketing 38 39 36 41
Research and development 21 24 20 27
General and administrative 31 38 32 41
Total operating expenses 90 101 88 109
Loss from operations (13) (23) (10) (32)
Interest income 1 - - -
Interest expense - - - -
Other income (expense), net (14) (3) (19) (1)
Loss before provision for (benefit
from) income taxes (26) (26) (29) (33)
Provision for (benefit from) income
taxes - - - -
Net loss (26) % (26) % (29) % (33) %
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Comparison of the Three and Nine Months Ended
Revenue
Three Months Ended September 30, Change Nine Months Ended September 30, Change
2022 2021 Amount % 2022 2021 Amount %
Revenue:
Government $ 273,834 $ 217,836 $ 55,998 26 % $ 778,622 $ 658,375 $ 120,247 18 %
Commercial 204,046 174,310 29,736 17 % 618,625 450,647 167,978 37 %
Total revenue $ 477,880 $ 392,146 $ 85,734 22 % $ 1,397,247 $ 1,109,022 $ 288,225 26 %
Revenue increased by $85.7 million , or 22%, for the three months ended September
30, 2022 compared to the same period in 2021. Revenue from government customers
increased by $56.0 million , or 26%, for the three months ended September 30,
2022 compared to the same period in 2021, primarily from customers in the United
States . Revenue from U.S. government customers was $208.9 million for the three
months ended September 30, 2022 compared to $170.1 million for the same period
in 2021. Of the total increase in revenue from government customers, $48.7
million was from government customers existing as of December 31, 2021 .
Generally, increases in revenue from our existing customers are related to
increased adoption of our products and services within their organizations.
Revenue from commercial customers increased by $29.7 million , or 17%, for the
three months ended September 30, 2022 compared to the same period in 2021. Of
the increase, $26.1 million was from new customers as of December 31, 2021 , of
which $5.2 million was revenue from customers with which we have entered into
concurrent Investment Agreements. For additional information, see Note 4.
Investments and Fair Value Measurements in our condensed consolidated financial
statements included elsewhere in this Quarterly Report on Form 10-Q.
Revenue increased by $288.2 million , or 26%, for the nine months ended September
30, 2022 compared to the same period in 2021. Revenue from government customers
increased by $120.2 million , or 18%, for the nine months ended September 30,
2022 compared to the same period in 2021, primarily from customers in the United
States . Revenue from U.S. government customers was $601.6 million for the nine
months ended September 30, 2022 compared to $493.6 million for the same period
in 2021. Of the total increase in revenue from government customers, $106.7
million was from government customers existing as of December 31, 2021 . Revenue
from commercial customers increased by $168.0 million , or 37%, for the nine
months ended September 30, 2022 compared to the same period in 2021. Of the
increase, $103.7 million was from existing customers as of December 31, 2021 , of
which $53.6 million was revenue from customers with which we have entered into
concurrent Investment Agreements. For additional information, see Note 4.
Investments and Fair Value Measurements in our condensed consolidated financial
statements included elsewhere in this Quarterly Report on Form 10-Q. Generally,
increases in revenue from our existing customers are related to increased
adoption of our products and services within their organizations.
Cost of Revenue and Gross Profit
Three Months Ended September 30, Change Nine Months Ended September 30, Change
2022 2021 Amount % 2022 2021 Amount %
Cost of revenue $ 107,611 $ 86,804 $ 20,807 24 % $ 304,238 $ 251,841 $ 52,397 21 %
Gross profit 370,269 305,342 64,927 21 % 1,093,009 857,181 235,828 28 %
Gross margin 77 % 78 % (1) % 78 % 77 % 1 %
Cost of revenue for the three months ended September 30, 2022 increased by
$20.8 million , or 24%, compared to the same period in 2021. The increase was
primarily due to increases of $12.6 million in field service representatives and
other direct deployment costs mainly related to new projects, $5.3 million in
third-party cloud hosting services driven by increased usage from customer
growth and expansion, and $4.5 million in payroll and other payroll-related
costs as a result of increased headcount attributable to our cost of revenue
function. These increases were partially offset by a decrease of $5.9 million in
stock-based compensation expense and related expenses. For additional
information, see the section titled Stock-Based Compensation below.
Our gross margin for the three months ended September 30, 2022 decreased from
78% for the same period in 2021 to 77% as a result of increased costs to support
new deployments and company growth, including field service representatives and
payroll costs, growing at a higher rate than revenue.
Cost of revenue for the nine months ended September 30, 2022 increased by
$52.4 million , or 21%, compared to the same period in 2021. The increase was
primarily due to increases of $30.7 million in third-party cloud hosting
services driven by increased usage from customer growth and expansion, $25.3
million in field service representatives and other direct deployment
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costs mainly related to new projects, and$11.6 million in payroll and other payroll-related costs as a result of increased headcount attributable to our cost of revenue function. These increases were partially offset by a decrease of$25.8 million in stock-based compensation expense and related expenses. For additional information, see the section titled Stock-Based Compensation below. Our gross margin for the nine months endedSeptember 30, 2022 increased from 77% for the same period in 2021 to 78% as a result of increased efficiencies in supporting revenue growth at our customer deployments, for example from making investments in our platforms as well as a lower rate of increase in cost of revenue partially driven by a decrease in stock-based compensation expense. Operating Expenses Three Months Ended September 30, Change Nine Months Ended September 30, Change 2022 2021 Amount % 2022 2021 Amount % Sales and marketing$ 182,918 $ 153,443 $ 29,475 19 % $ 512,278$ 451,919 $ 60,359 13 % Research and development 100,863 94,316 6,547 7 % 277,635 303,311 (25,676) (8) % General and administrative 148,679 149,524 (845) (1) % 446,471 454,054 (7,583) (2) % Total operating expenses$ 432,460 $ 397,283 $ 35,177 9 %$ 1,236,384 $ 1,209,284 $ 27,100 2 % Sales and Marketing Sales and marketing expenses increased by$29.5 million , or 19%, for the three months endedSeptember 30, 2022 compared to the same period in 2021. The increase was primarily due to increases of$28.2 million in payroll and other payroll-related costs driven by increased headcount attributable to our sales and marketing function and$12.0 million in travel and office-related costs as employees increasingly return to offices. These increases were partially offset by a decrease of$17.3 million in stock-based compensation expense and related expenses. For additional information, see the section titled Stock-Based Compensation below. Sales and marketing expenses increased by$60.4 million , or 13%, for the nine months endedSeptember 30, 2022 compared to the same period in 2021. The increase was primarily due to increases of$56.3 million in payroll and other payroll-related costs driven by increased headcount attributable to our sales and marketing function,$27.0 million in travel and office-related costs as employees increasingly return to offices, and$24.2 million in marketing and advertising expenses. These increases were partially offset by a decrease of$60.0 million in stock-based compensation expense and related expenses. For additional information, see the section titled Stock-Based Compensation below.
Research and Development
Research and development expenses increased by$6.5 million , or 7%, for the three months endedSeptember 30, 2022 compared to the same period in 2021. The increase was primarily due to increases of$10.6 million in payroll and other payroll-related costs driven by increased headcount attributable to our research and development function; and$6.2 million in third-party cloud hosting services driven by increased usage to support customer growth and expansion, other IT costs to support company growth, and office-related expenses primarily due to the increasing return of employees to offices. These increases were partially offset by a decrease of$12.3 million in stock-based compensation expense and related expenses. For additional information, see the section titled Stock-Based Compensation below. Research and development expenses decreased by$25.7 million , or 8%, for the nine months endedSeptember 30, 2022 compared to the same period in 2021. The decrease was primarily due to a decrease of$60.2 million in stock-based compensation expense and related expenses. For additional information, see the section titled Stock-Based Compensation below. This decrease was partially offset by increases of$17.0 million in payroll and other payroll-related costs driven by increased headcount attributable to our research and development function,$8.6 million in travel and office-related costs as employees increasingly return to offices, and$8.0 million in third-party cloud hosting services driven by increased usage to support customer growth and expansion, as well as other IT costs to support company growth.
General and Administrative
General and administrative expenses decreased by$0.8 million , or 1%, for the three months endedSeptember 30, 2022 compared to the same period in 2021. The decrease was primarily due to a decrease of$29.0 million in stock-based compensation expense and related expenses. For additional information, see the section titled Stock-Based Compensation below. This decrease was partially offset by increases of$14.8 million in travel and office-related costs as employees increasingly return to offices and$8.6 million in payroll and other payroll-related costs driven by increased headcount attributable to our general and administrative functions. 30
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General and administrative expenses decreased by$7.6 million , or 2%, for the nine months endedSeptember 30, 2022 compared to the same period in 2021. The decrease was primarily due to a decrease of$85.6 million in stock-based compensation expense and related expenses. For additional information, see the section titled Stock-Based Compensation below. This decrease was partially offset by increases of$34.1 million in travel and office-related costs as employees increasingly return to offices,$21.9 million in professional service fees mainly related to legal and financial services,$13.4 million in payroll and other payroll-related costs driven by increased headcount attributable to our general and administrative functions, and$5.3 million in third-party cloud hosting services driven by increased usage and other IT costs to support company growth. Stock-Based Compensation Three Months Ended September 30, Change Nine Months Ended September 30, Change 2022 2021 Amount % 2022 2021 Amount % Cost of revenue$ 10,525 $ 14,860 $ (4,335) (29) %$ 33,413 $ 54,866 $ (21,453) (39) % Sales and marketing 48,824 57,124 (8,300) (15) % 147,501 186,418 (38,917) (21) % Research and development 25,113 34,472 (9,359) (27) % 76,996 122,976 (45,980) (37) % General and administrative 55,846 78,379 (22,533) (29) % 177,490 247,048 (69,558) (28) % Total stock-based compensation expense$ 140,308 $ 184,835 $ (44,527) (24) %$ 435,400 $ 611,308 $ (175,908) (29) % Stock-based compensation expenses decreased by$44.5 million , or 24%, for the three months endedSeptember 30, 2022 compared to the same period in 2021. The decrease was primarily driven by forfeitures and lower expense under the accelerated attribution method for RSUs granted prior toSeptember 30, 2020 , the date of our direct listing, during the three months endedSeptember 30, 2022 compared to the same period in 2021, partially offset by an increase related to awards granted afterSeptember 30, 2021 . Stock-based compensation expenses decreased by$175.9 million , or 29%, for the nine months endedSeptember 30, 2022 compared to the same period in 2021. The decrease was primarily driven by forfeitures and lower expense under the accelerated attribution method for RSUs granted prior toSeptember 30, 2020 , the date of our direct listing, during the nine months endedSeptember 30, 2022 compared to the same period in 2021, partially offset by an increase related to awards granted afterSeptember 30, 2021 .
Interest Income
Three Months Ended September Nine Months Ended
30, Change September 30, Change
2022 2021 Amount 2022 2021 Amount
Interest income $ 5,540 $ 379 $ 5,161 $ 7,559 $ 1,127 $ 6,432
Interest income increased by $5.2 million for the three months ended September
30, 2022 compared to the same period in 2021 primarily due to an increase in
U.S. interest rates on interest earned from our cash, cash equivalents, and
restricted cash.
Interest income increased by $6.4 million for the nine months ended September
30, 2022 compared to the same period in 2021 primarily due to an increase in
U.S. interest rates on interest earned from our cash, cash equivalents, and
restricted cash.
Interest Expense
Three Months Ended September Nine Months Ended
30, Change September 30, Change
2022 2021 Amount 2022 2021 Amount
Interest expense $ (1,082) $ (609) $ (473) $ (2,346) $ (3,039) $ 693
Interest expense increased by $0.5 million for the three months ended September
30, 2022 compared to the same period in 2021 primarily due to amortization of
upfront debt issuance costs.
Interest expense decreased by $0.7 million for the nine months ended September
30, 2022 compared to the same period in 2021 primarily due to the full repayment
of the outstanding debt balance during the second quarter of 2021.
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Other Income (Expense), Net
Three Months Ended September Nine Months Ended
30, Change September 30, Change
2022 2021 Amount 2022 2021 Amount
Other income (expense), net $ (65,046) $ (8,528) $ (56,518) $ (260,714) $ (11,297) $ (249,417) Other income (expense), net changed by
Other income (expense), net changed by
Provision for (Benefit From) Income Taxes
Three Months Ended September Nine Months Ended
30, Change September 30, Change
2022 2021 Amount 2022 2021 Amount
Provision for (benefit from)
income taxes $ 1,096 $ 1,438 $ (342) $ 5,707 $ (1,121) $ 6,828
Provision for income taxes decreased by $0.3 million for the three months ended
September 30, 2022 compared to the same period in 2021 primarily due to the
absence in the current period of the revaluation of our U.K. deferred tax assets
as a result of a change in the U.K. corporate tax rate enacted in June 2021 .
Provision for income taxes increased by $6.8 million for the nine months ended
September 30, 2022 compared to a benefit from income taxes the same period in
2021 primarily due to the absence in the current period of the revaluation of
our U.K. deferred tax assets as a result of a change in the U.K. corporate tax
rate enacted in June 2021 .
Liquidity and Capital Resources
We generated positive cash flow from operations for the nine months endedSeptember 30, 2022 . We had$2.4 billion in cash and cash equivalents available as ofSeptember 30, 2022 . We believe that cash flows generated from operations, cash, cash equivalents, available funds, and access to financing sources, including our revolving credit facility and delayed draw term loan ("DDTL") 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 generated significant losses from our operations as reflected in our condensed consolidated balance sheets and we expect cash flow from operations may fluctuate between positive and negative 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
As ofSeptember 30, 2022 , we had no outstanding debt balances and additional available and undrawn revolving and DDTL commitments of$950.0 million under our credit agreement. DuringJuly 2022 , we amended our credit agreement, which provided for, among other things, a new incremental DDTL facility in an aggregate principal amount of up to$450.0 million , upon the terms and conditions set forth in the credit agreement. The DDTL facility is available to draw upon throughJuly 1, 2023 and any drawn amounts will mature onMarch 31, 2027 . The DDTL facility, together with our existing revolving credit facility with an aggregate principal amount of up to$500.0 million , provides for total revolving and DDTL commitments of up to$950.0 million available to draw to fund working capital and general corporate expenditures. No amounts were drawn as of the date of this Quarterly Report on Form 10-Q. 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. 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. 32
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The following table summarizes our cash flows for the periods indicated (in
thousands):
Nine Months Ended September 30,
2022 2021
Net cash provided by (used in):
Operating activities $ 144,974 $ 240,424
Investing activities (118,508) (216,039)
Financing activities 71,839 274,282Effect of foreign exchange on cash, cash equivalents, and restricted cash
(12,470) (3,638)
Net increase in cash, cash equivalents, and restricted
cash $ 85,835 $ 295,029
Operating Activities
Net cash provided by operating activities was
Investing Activities
Net cash used in investing activities was$118.5 million and$216.0 million for the nine months endedSeptember 30, 2022 and 2021, respectively. The decrease in cash used in investing activities was primarily a result of reducing our purchases of alternative investments and marketable securities, as well as selling or redeeming certain marketable securities.
Financing Activities
Net cash provided by financing activities was$71.8 million and$274.3 million for the nine months endedSeptember 30, 2022 and 2021, respectively, each of which primarily consisted of proceeds from the exercise of common stock options offset by the principal payments on borrowings of$200.0 million made during the nine months endedSeptember 30, 2021 .
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 endedDecember 31, 2021 . See our Annual Report on Form 10-K for the year endedDecember 31, 2021 , which was filed with theSEC onFebruary 24, 2022 , 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
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.
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