Palantir Technologies Inc. (NYSE:PLTR) Q4 2022 Earnings Call Transcript

Palantir Technologies Inc. (NYSE:PLTR) Q4 2022 Earnings Call Transcript February 13, 2023

Ana Soro: Good afternoon. I’m Ana Soro from Palantir’s finance team, and I’d like to welcome you to our Fourth Quarter 2022 Earnings Call. We’ll be discussing the results announced in our press release issued after the market closed and posted on our Investor Relations website. During the call, we will make statements regarding our business that may be considered forward-looking within applicable securities laws, including statements regarding our first quarter and fiscal 2023 results, 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 would cause them to differ materially from actual results.

Information concerning those risks is available in our earnings press release distributed after the market closed 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 reconciliation of non-GAAP to comparable GAAP measures, is included in our press release and investor presentation provided today. Our press release, investor presentation and SEC filings are available on our Investor Relations website at investors.palantir.com.

Over the course of the call, we will refer to various growth rates when discussing our business. These rates reflect year-over-year comparisons, unless otherwise stated. Joining me on today’s call are Alex Karp, Chief Executive Officer; Dave Glazer, Chief Financial Officer; and Ryan Taylor, Chief Revenue Officer and Chief Legal Officer. You’ll also be hearing from Shyam Sankar, our Chief Technology Officer, who prepared a few remarks, who could not join today’s call as he’s on the front lines with one of our customers. I’ll now turn it over to Alex for opening remarks.

Alex Karp: At Palantir, we have a tradition of talking about macro events philosophy. There would be a lot to talk about this year. I think for the first time, people have seen the impact of digitization of warfare and Palantir’s central role in the world. Leaving aside this, and I would love to talk more about it in the context of our earnings call, in the context of our interactions with the broader world, the transformations on the outside of the world brought to you by Palantir seem to be equally big on the inside. Palantir, for the first time, is GAAP profitable. I, in most of my discussions, talk about product, talk about product market fit, occasionally talk about revenue. And I’m often asked, well, if it’s so good, why aren’t you GAAP profitable?

We promised you GAAP profitability in 2025, which you thought would be in 2027 perhaps. We are now, in the last quarter, GAAP profitable, and we plan to be GAAP profitable in this year. Obviously, there’s a lot of questions around that, like how did we become GAAP profitable several years before anyone expected? What does it mean for our business? What does it mean that seemingly no tech company ever becomes GAAP profitable? Why is our company profitable? What sectors of the Company made it profitable? But for those of you who have been long-term supporters or even watchers of Palantir, the move from a company that was producing the most important products in the world to a company that is doing that in a profitable context is enormous, perhaps as big as our DPO.

And we’re proud of this because it gives us the strength and power to continue our march to support the world’s most institutions — port institutions. Thank you.

Ryan Taylor: As Alex highlighted, our company, after nearly two decades, achieved GAAP profitability for the first time last quarter. Our focus has been on building one of the most significant and durable software companies in the world. And our first profitable quarter after years of investment in our business represents the beginning of a new chapter in our company’s history. In Q4 2022, we generated $509 million in revenue, and we generated $79 million in cash from operations, marking our eighth consecutive quarter of positive cash from operations. While the technology industry as a whole has been facing one of the most challenging operating environments in years, we continue to deliver on our top line and bottom line results, in particular, our combined revenue growth and adjusted operating margin.

Our commercial business generated $215 million of revenue last quarter. While our U.S. commercial business slowed in the fourth quarter as a result of catch-up revenue in the prior quarter and contracting revenue from customers in our strategic investment program, we remain confident about our momentum and the opportunities ahead. We ended the quarter with 143 U.S. commercial customers, an increase of 79% year-over-year, and converted 13 pilots the most quarter to date set up our U.S. commercial business to reaccelerate in 2023. We are deploying increasingly focused go-to-market strategies, including in the health care, supply chain, manufacturing, energy, automotive and utility sectors. The number of deals closed in health care more than doubled in the last year.

We recently signed with several of the nation’s largest hospital systems, including Cleveland Clinic, Tampa General and one of the oldest teaching hospitals. Our momentum continues this year, having recently signed a deal with an American for-profit operator of over 2,400 health care sites. Together, these four hospital systems represent nearly 10% of the entire hospital system in the United States. In the supply chain sector, we began work at two of the largest Coca-Cola bottlers and distributors in both the U.S. and the EMEA region. And we were called into Toyota Material Handling, a forklift manufacturer and distributor, after executives learned of our comparable supply chain work at Komatsu. Cardinal Health also recently began using Foundry to deploy AI and ML to combine diagnosis and clinical data with real-time customer purchasing and consumption data for pharmaceutical products.

Our international commercial business grew 11% year-over-year in the fourth quarter, including a multimillion dollar long-term strategic partnership with Crisis24, a GardaWorld Company, to deliver data-driven security and risk management, and a $50 million five-year expansion of our work with SOMPO Holdings, where Foundry is helping to improve security, health and well-being through digital transformation. Our government business overall saw growth across the board as well as we generated $293 million in revenue this past quarter, an increase of 23% year-over-year. Our U.S. government business saw continued growth in Q4, up 22% year-over-year, which reflects the strong contract activity in Q3. Likewise, our international government business was up 26% year-over-year, including the expansion of our work supporting pressing global events as well as the signing of Palantir’s enterprise agreement with Defence Digital, a consolidated effort on the part of the British military to modernize its software systems.

With the value of up to GBP75 million, we expect this agreement to further accelerate the growth of partnerships with defense and intelligence customers across the United Kingdom as well as our U.K. government business overall. This quarter’s GAAP profitability illustrates our commitment to fiscal responsibility through management and margins while expanding our business. We acknowledge the challenges ahead and remain strongly poised for long-term growth. I’ll now turn it over to Shyam.

Shyam Sankar: In 2022, our software foiled a plot to overthrow the German government, delivered $200 million of return to Tyson Foods, empowered companies through the energy crisis. Our momentum stems from the fact that we have built software that actually works, not software that’s easier to sell. We publicly announced Foundry 23 at Foundry Con 2 weeks ago. The cornerstone of our product vision is that your business is computable. But just because it’s computable doesn’t mean you know how to compute it. This requires an ontology. Ontology is link human insight with programmable controls, enabling your people to compute the parts of your business that really matter. For example, Tyson Foods implemented a model that determines the optimal allocation of inventories to trucks and distribution centers and automatically decisions that by calling back into their ERP systems, the ontology’s Webhooks.

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This work among the 20 use cases Tyson’s delivers in Foundry, delivered $200 million of value for them. Upgrading to S4 doesn’t do this. It doesn’t make your business better. Your planning tools and pricing platforms don’t talk to each other. ERP and MES systems don’t talk to each other. So employees escape to Excel sheets, and business logic is scattered across systems. That makes your business hard to understand and harder yet to change or improve. Our customers need software to connect and orchestrate their existing systems. Your business is computable. You need Foundry to compute it. This view and a focus on our ontology is driving our product developments through 2023. Turning to Apollo. Just because you know how to compute parts of your business doesn’t mean it’s valuable.

You need to complete the cycle of development, deployment and learning. Not only do you have to be able to push your logic out to the edge to the factory floor, to every connected node in your business. You need to be able to do it repeatedly. As technology companies seek to aggressively reduce cloud costs and eliminate DevOps headcount, Apollo provides the critical technology enabler that solves not only the CTO’s problem, but also the CFO’s problem. We’re also continuing to see traction with Fed Start, our Apollo-based offering, which enables customers to achieve FedRAMP authorization in record time and at a fraction of the cost while still reducing DevOps cost. For Middle Eastern, the Pacific and European theaters, Gotham is today the AI-driven operating system for defense.

Recent events have already proven the superiority of Gotham and AI-driven target detection and development. In 2023, we are focused on the continued development of Gotham against both targeting and fires across all domains from space to mud. A four deployed O3 recently wrote a python model using Gotham software development kit or Chad C2 in three hours to upgrade his units targeting and fires operation, a step change versus what was possible before. We’re proud of and thankful for the privilege of supporting this mission set. I’ll pass it to Dave to take us through the financials.

Dave Glazer: The fourth quarter of 2022 was a milestone quarter for us. For the first time in the Company’s history, we’ve achieved GAAP profitability. This was driven by our top line and bottom line outperformance, our continued management of stock-based compensation and fiscal discipline, the narrowing of losses from marketable securities and a gain from the acquisition of our Palantir Japan joint venture. On the back of that strength, we expect full year 2023 to be our first full year of GAAP profitability several years ahead of our original goal of GAAP profitability in 2025. Turning to our global top line results. We generated $1.91 billion in revenue in 2022, representing a growth rate of 24% year-over-year. In the fourth quarter of 2022, we generated $509 million in revenue, up 18% year-over-year and 6% sequentially.

We generated $1.16 billion in total U.S. revenue in 2022, representing a growth rate of 32% over the year ago period. In the fourth quarter of 2022, U.S. revenue grew 19% year-over-year to $302 million. Overall, net dollar retention was 115%. Customer count grew 55% year-over-year and 9% quarter-over-quarter. Revenue from our existing customers continues to expand. Fourth quarter trailing 12-month revenue from our top 20 customers increased 13% year-over-year to $49 million per customer. Now moving on to our commercial segment. In 2022, our overall commercial revenue grew 29% year-over-year to $834 million. In the fourth quarter of 2022, our commercial revenue grew 11% year-over-year and 6% sequentially. Commercial revenue from strategic investment contracts was $20 million in the fourth quarter.

We anticipate commercial revenue from these customers to be between $15 million to $17 million in the first quarter of 2023 compared to $39 million in the first quarter of 2022. Our full year U.S. commercial revenue grew 67% year-over-year to $335 million. In the fourth quarter of 2022, U.S. commercial revenue grew 12% year-over-year to $77 million but was down sequentially as we saw headwinds from catch-up revenue in the prior quarter as well as a decline of revenue from customers in our strategic investment program given the outsized impact of the macro environment on these customers. Our U.S. commercial customer count grew 79% year-over-year and 8% quarter-over-quarter, marking the eighth consecutive quarter of sequential growth. In the fourth quarter of 2022, our international commercial business grew 11% year-over-year and 19% sequentially driven by new deals in APAC, Canada and Europe.

Turning to our government segment. In 2022, our government business grew 19% year-over-year to $1.07 billion. And in the fourth quarter of 2022, our government business grew 23% year-over-year to $293 million. We generated $826 million in U.S. government revenue in 2022, representing a growth rate of 22% year-over-year. In the fourth quarter of 2022, we generated $225 million in U.S. government revenue, representing a growth rate of 22% year-over-year and 8% sequentially. The sequential growth was driven by the commencement of certain U.S. government deals we announced last quarter. Fourth quarter billings were $387 million. Full year billings were $1.8 billion, up 21% year-over-year. TCV booked in the fourth quarter was $392 million. Full year TCV bookings was $2.7 billion, up 4% year-over-year.

We ended 2022 with $3.7 billion in total remaining deal value and $973 million in remaining performance obligations. As a reminder, RPO is primarily comprised of our commercial business as it does not take into account contracts with an initial term of less than 12 months and contractual obligations that fall beyond termination for convenience clauses, both of which are common in our government business. Both remaining deal value and remaining performance obligations faced headwinds from the macroeconomic impact on customers from the strategic investment program. As a result, the total remaining deal value and the total value of our commercial contracts from our strategic investment program was down $262 million since last quarter as we continue to review the financial condition of these businesses.

We’ll continue to monitor the impact as the year progresses. Turning to margin and expense. Adjusted gross margin, which excludes stock-based compensation expense, was 81% for the year and 82% for the quarter. Full year 2022 adjusted expenses, when excluding stock-based compensation and related employer payroll taxes, were $1.5 billion. Fourth quarter adjusted expenses were $394 million, down roughly 1% sequentially, reflecting measures we took in quarter to manage discretionary spending and our focus on efficiencies. Full year 2022 adjusted income from operations, which excludes stock-based compensation and related employer payroll taxes, was $421 million. Fourth quarter adjusted income from operations was $114 million, representing an adjusted operating margin of 22%, 600 basis points ahead of our prior guidance.

The significant beat on our adjusted income from operations guidance was driven by cost savings from our R&D efforts and disciplined spend management as well as moderated net headcount additions in the fourth quarter. The fourth quarter of 2022 was our strongest GAAP operating income quarter ever as we move closer to breakeven with an operating loss of $18 million. This is a testament to our disciplined spending amid the macro uncertainty as well as the normalization of our stock-based compensation expense overhang since becoming a public company. Stock-based compensation expense was down $38 million in the fourth quarter compared to the year ago period and down $213 million compared to the year ago period. As we look ahead to 2023, we will continue to exercise spend discipline across the Company, pace hiring while continuing to invest in high priority areas, including in our product offerings, building out our go-to-market strategy and technical roles.

In addition to GAAP profitability for full year 2023, we anticipate improvement in our GAAP operating income margins over the course of the year. Fourth quarter GAAP net income was $31 million. This was a result of a strong GAAP operating quarter in addition to $13 million of investment income from our balance sheet, narrowing of losses on marketable securities to $11 million and a $44 million gain from the acquisition of our Palantir Japan joint venture. But it’s not just our GAAP profitability and operating performance that I’m excited about. Our combined revenue growth and adjusted operating margin was 40% in the fourth quarter and 46% in full year 2022, our third consecutive full year in excess of the Rule of 40 and a score that we will continue to strive to achieve throughout 2023.

Full year adjusted earnings per share was $0.06, and GAAP earnings per share was negative $0.18. Fourth quarter adjusted earnings per share was $0.04, and GAAP earnings per share was $0.01, marking our first quarter of positive GAAP EPS. In the fourth quarter of 2022, we generated $79 million in cash from operations, representing a margin of 15% and our eighth consecutive quarter of positive cash from operations. For the full year 2022, we generated $224 million in cash flow from operations, representing a 12% margin. We ended the fourth quarter with $2.6 billion in cash and cash equivalents, and no debt. We retain access to additional equity up to $950 million through our $500 million revolving credit facility and $450 million delayed draw term loan facility, both of which remain entirely undrawn.

Now turning to our outlook. For Q1 2023, we expect revenue of between $503 million and $507 million and adjusted income from operations of $91 million to $95 million. For full year 2023, we expect revenue of between $2.18 billion and $2.23 billion, adjusted income from operations of between $481 million to $531 million and GAAP net income. Before opening the call up for questions, I’d like to take a moment to thank Jeff Buckley, our outgoing Chief Accounting Officer, for his contributions to Palantir. Jeff has been an incredible leader and a member of our team on the journey from a private company to a public company. We announced a few weeks ago that he’d be stepping down after the filing of our 10-K, and we’re grateful that he will be staying on with us after to help with a seamless transition.

We’re excited to promote Heather Planishek to the role and look forward to continuing to build on both Jeff’s and the team’s successes. With that, I’ll turn it over to Ana to start the Q&A.

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Q&A Session

A – Ana Soro: Thanks, Dave. We’ll begin with a few questions from our shareholders before we open up the call. The top question is all related to GAAP profitability, with the number one question from Abraham who asks, when is Palantir going to become profitable?

Alex Karp: Well, we’re profitable, and we were profitable this year on a year basis. I think — because if you look at the questions that come to us and just the questions I get from clients and others, one of the main questions we’ve gotten in public and in private is, well, we know the products are transformational. We’ve seen them in the context of anti-terrorism, especially in Europe. We’ve seen them in the context of pandemic and now in the context of changing the course of history in Eastern Europe. But if it’s so powerful and so good, why aren’t you profitable? And I think we took this question a lot more seriously than I think people on the outside realize precisely because there are literally thousands and thousands of users and, at this point, countries, that depend on our product for the survival.

And while many of us watching this are obviously highly attenuate to share price, the people whose lives depend on our product have been very dependent on us and want to know that our financial stability now and in the future is guaranteed. So this has been much more of a priority to get us to this place. I’m happy that we have long-term supporters and shareholders that are interested in this, and we will continue to be profitable this year. And so, it’s just a major achievement for Palantir. I think another reason the question gets asked is because seemingly, no tech companies ever become GAAP profitable. And that does call into question the underlying value of their products. Yes. With that, next question.

Ana Soro: Thanks, Alex. We also received a few questions on Chat GPT and AI. How does Palantir differentiate and compete with other AI software solutions and demonstrate the return on investment for potential clients?

Alex Karp: There’s been a lot of talk about recent events in consumer Internet and open AI, and incredible technologies that have been brought to bear. I think the biggest event in digitalization AI is actually on the battlefield. Palantir took over basically nonpublic programs when the rest of Silicon Valley at the time was very interested in not working with the military, potentially also opening offices in adversarial countries. At the time, AI was a joke, and most people purveying it were partially purveying some form of a PowerPoint bordering on fraud. And so we had a lot of thought going into this and spent the last five years building the core infrastructure that you would need to power and train AI algorithms. The proof in the pudding is simply look at events in Eastern Europe.

And so every country in the world is looking how to do it. But what’s super interesting in the consumer context is the technologies we built that will allow you to do AI in private networks, institutions and enterprises, have precursor technologies that will take other companies four or five years to build. For example, how do you do AI in a regulated context? Look at a lot of our clients, they’re almost all regulated in one form or another. Oil and gas is regulated. Hospitals are regulated. Health care is regulated. Manufacturers is regulated. You can’t just run an algorithm on a private network the same way you could on a non-regulated public network. And then there’s security issues, there’s transparency issues. In the war context, how do you know if the AI made the decision?