Q3 2020 Palantir Technologies Inc Earnings Call
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Technologies' third quarter 2020, <unk> earnings conference call at this time, all participants are in a listen only mode. After the speakers presentation. There will be a question and answer session ask a question. During the session you will need to press star one on your telephone keypad. Please be advised that todays conference is being recorded if you require any further.
Justin Please press Star zero.
I would now like to hand, the conference over to your speaker today.
Hi, Nelson and head of Investor Relations. Thank you. Please go ahead.
Thank you operator, good afternoon, and welcome to volunteers third quarter 2020 earnings call, we'll be discussing the results announced in our press release issued after the market close.
I suppose and posted on our Investor Relations website.
With me on the call today, Sean Thank our Chief operating Officer, Dave Slater, Chief Financial Officer, and Kevin Calix Hockey 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.
Full year 2020, management's expectations for future financial and operational performance and other statements regarding our plans prospects 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.
Both 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.
Formation 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 Dot volunteer dotcom with that I will turn it over to Sean.
Thank you Rodney and thanks.
Thank everyone for joining us today.
At Talenti rebuild software platforms for institution, whose work is essential to our way of life.
Those institutions must be able to function in times of stability as well as crisis in 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 counterterrorism investigations in operation.
We later began working with commercial enterprises.
We have two principal software platform Gotham and foundry.
Got them, which is our first offer buffer.
Weve constructed for analysts at defense and intelligence agencies.
They were hunting.
For needle if not in one but in thousands of haystack.
And they did not have the software they needed to do their jobs.
In Iraq, and Afghanistan soldiers Remapping networks of insurgents in makers of roadside bombs by hand.
Gotham enables users to identify pattern hid deep within datasets ranging from signals intelligence.
This is Jay reports from combinational informant and it helps us and Allied military personnel respond to the threat.
We later found that the challenges faced by commercial institutions. When it came to working with data were fundamentally similar companies routinely struggled to manage let alone generate alpha from data involved in large projects.
Foundry was built for them the platform transformed the way in which organizations interact with information by creating a central operating system for their data.
Our software is on frontline and sometimes literally that means so are we.
Condoms use has now extended beyond intelligence analysis into defense operations and mission planning inbound.
Foundry is becoming the central operating system, not only for individual institutions, but entire industry.
Turning to the third quarter.
Revenue grew 52% year over year, driven by continued expansion within our installed base and initial wins at net new 2020 customers we.
We are distributing our platforms more efficiently than ever.
As we generated adjusted gross margins of 81% and contribution margin of 56% in the third quarter.
In Hunter's evolved significantly in the last several years from the development of our second flagship platform foundry to the acceleration in our government business to the operating leverage from Apollo are powerful.
Tenuous delivery infrastructure, which he the SAS operating efficiencies in very heterogeneous environment.
In many ways. Our business is just getting started and this is largely a function of the technology that weve developed over these years.
And you can really see that based on what's happening in the field, let me highlight a few wins.
In energy Super.
A major was able to leverage our ERP suite and our.
And just a few weeks generate $57 million of cash savings a meaningful contribution to working capital for a sector that is challenging the pandemic.
The customer has already identified an incremental $215 million in potential savings on top of that and this project has created lasting changes and the.
Our chairman will operate with a projected annualized savings of $1 billion.
We also closed a five year $300 million renewal mid pandemic with a large aerospace customer further reinforcing foundry as core infrastructure in the operating system of their business.
Aerospace has been significantly challenge.
The pandemic and we see this is a long term commitment to each other.
This is a large deal we have done in commercial space and we anticipate strong contribution margins from a customer at this scale maturity.
Another commercial example, I'd like to focus on is a Q3 net new fortune 100, U.S. consumer goods company.
Discuss.
Customer needed immediate help understanding the impact Cobiz may have on its employees and its operational facility is.
The company was dealing with a surge in positive coded pet across its employee base and was scrambling to monitor the health and safety of its employees, but also the durability of operation.
Over the course of an eight week pilot we started in July.
Andrea allow these customers to monitor potential infection alerted individual that facilities for potential outbreaks were occurring in quickly try to limit the viruses Brett.
This solution allows the customer to annotate CAD based models of their facility with data integrated in our platform to track whether specific areas were particularly conducive to outbreaks orthovisc.
Ed was being driven by internal external factors.
This enabled the customer to reach out to the affected individuals and provide medical assistance.
But also the customer had a long running project looking to extract more value out of its supply chain and ERP systems.
The permit invested hundreds of millions of dollars into these solutions, but whats.
Is struggling to gain the promised economic and competitive advantage from that investment.
The customer wanted to use our platform, which they came to appreciate in the context, because it sort of core and enduring challenges.
Specifically to build a real time buying solution on top of existing investments to make optimized purchasing decisions such as capitalizing.
On discounted raw materials and pricing anomalies occur.
By leveraging various components and modules and foundry the customers able to model a complete view of its supply chain from upstream raw materials to downstream finished goods in a few weeks.
This created hundreds of opportunities across the customer supply chain for optimization.
We also signed a recent expansion with the top five pharmaceutical company. This from like many large pharma companies is a wash in data from thousands of clinical trial, but it's hard to draw conclusions across those trials as stated often silent in disparate systems of record.
Leveraging foundry this customer is able to link and interrogate data across more than 2000.
Thousand clinical trials, including symptoms diagnoses and treatment to unearth valuable finding.
Again across trials not just in a single isolated study.
Our software unlocked the ability to see patient story that a population level and enter key question that is how many patients suffer from a particular condition, regardless of which trial they participated in.
These events.
It will help the customer got hypotheses around biomarkers and progressions that certain diseases to optimize research and develop new therapies.
Turning to our government segment, we continue to pursue our vision of powering U.S. and Allied defense, Despite current and future threats from space to mud and in doing so becoming the default operating system.
We generated several new government wins in the third quarter, including a two year $91 million contract with the US Army Research lab. This.
This customer will be employing both foundry and got them to build out artificial intelligence and machine learning capabilities.
Calendar with selected amongst 999 bids and our platform will be.
Used to integrate manage and prepare data for training AI models.
Early related work here has shown promising results and delivering next generation capabilities during a recent warfighter exercise.
The army is leveraged vantage to great effect across various lines of efforts from readiness to financial management. These.
When illustrate our expanding partnership with the army and we're looking forward to pursuing future programs with both the army and other branches of the military in particular I'd highlight the continued growth of opportunities that we see at U.S. spaceport than Us Air Force.
Which we are investing in.
Our work serving healthcare agent.
Domestically and abroad continues to deliver results. We were selected by NIH is national center for advancing translational sciences or end cap.
For a $36 million contract supported secure scientific platforms environment.
Encana is using foundry for integration management security and analysis across various initiatives supported by the platform.
Which include cancer and Koby 19 research.
Foundry is powering and Threec ignite, which is the largest COVID-19 clinical data asset in the world with over 1 million patients across more than 30 hospitals, all assembled and foundry in a few weeks.
Foundries also the infrastructure supporting the complex supply chain and logistics for.
Operational warp speed.
And this builds on our existing work at CDC HHS, the npis and at EEI.
And intersect with our commercial work, helping retail pharmacies and drug companies coordinate plant and logistics to successfully deliver vaccines to the population.
In the UK foundries and powers.
During NHS, England response, the pandemic, including the allocation and distribution of more than 2.7 billion items that ERP and other critical equipment.
I'd highlight that the president of Columbia recently released a video showing his country's respond to the pandemic and the rule those talent here and Amazon Web services played in rapidly deploying the IND.
For our structure used to manage the situation there.
This engagement with source by Amazon one of our channel partners.
Importantly, we can already see how the pandemic is leading a lasting in systemic transformation of healthcare in various countries. We.
We have a unique opportunity to power the holistic digital transformation of these organizations with significant.
For improvement in the health and safety of their citizens.
It may have started with Kobe, but it's not going to end there as the pandemic has revealed a broad swath of challenges and opportunities. These institutions are rising to meet.
And taken together with our commercial health care work. We believe these developments will have far reaching positive implications for the future of health care.
Because we have the opportunity to get the center of it.
Before turning it over to Dave to take us through the numbers I wanted to touch on our R&D roadmap. We believe the investments, we're making will enable us to drive significant increases in the number of customers that we can acquire and continue to improve our time to value.
Our latest R&D investments include enable.
Our solutions to be fully modular a take what you want to build on what you have approach for the enterprise.
We will be hosting product deep dive for investors in the next month or two so be on the lookout for an announcement coming soon about the session.
We're going to showcase how our customers use our platform across industries and across problem.
Land basis, including defense healthcare supply chain and more we'll also discuss the latest technical development, our roadmap and upcoming R&D investments.
I will pass it over to Dave.
Thanks, Sean.
Ill 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 per top 20 customer grew 36% year over year for the first nine months of 2020 totaling $23.6 million.
We are seeing greater diversification in our revenue base as your 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 the king deals of $5 million or more in total contract value, including eight 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 three.
$800 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.
This due to contract timing, we are encouraged by the pipeline, we see in our commercial business.
Total government revenue grew 68% year over year to $163 million, driven primarily by growth in our us government business.
Joel mentioned, we signed several new government deals in the third quarter, including a two year.
Contract with the US Army Research laboratory and I get to work with the National Center for advancing translational sciences, and several wins in our international government business as well.
At the end of the third quarter, our government deal value, including contracted amounts and contractual options.
Year ago $1.3 billion.
I will now discuss our margins and expenses on an adjusted basis, which excludes stock based compensation.
We generated adjusted gross margin of 81% in the third quarter.
Up 1100 basis points year over year and.
The enhanced automation in the delivery and maintenance of our software platforms as well as reduced cloud hosting expenses.
Contribution margin rose to 56% in the third quarter up roughly 100 basis points sequentially and compared to 15% contribution margin in the year ago quarter.
Reflect which demonstrates the increased scale and efficiency of our three phase business model.
Now I'm going to turn to operating expenses for.
For the third quarter operating expenses were 235 million. Additionally, in the third quarter, we incurred roughly $54 million in expenses related to our direct wissing and.
$18 million in employer payroll taxes related to stock based compensation.
Excluding these expenses total third quarter adjusted operating expenses would have been 164 million.
Sales and marketing expense was $71 million or 25% of revenue down from 54% of revenue.
In the year ago quarter, all while growing our direct salesforce.
The operating leverage in sales and marketing is the result of more efficient customer acquisition and more rapid scaling of our customers through our three phase business model and reductions in travel and office expenses.
We expect to continue investing.
In broadening our customer acquisition efforts, including growing our account base salesforce and developing channel partnerships.
Research and development expense was 57 million or 20% of revenue down from 32% in the year ago quarter.
As delivery and maintenance of our platforms.
Have become more automated we're realizing greater efficiencies in developing new features and functionality across each of our core platforms, including the modularization effort, Sean discussed, allowing us to reap savings in areas, such as travel and related expenses.
We do plan to continue to grow headcount and expect R&D expenses to.
So in absolute dollars moving forward.
DNA expense was $107 million or 37% of revenue compared with 32% of revenue in the prior year period. This includes $54 million in expenses related to our direct listening.
Excluding expenses related to the direct listening and.
Your employer payroll taxes related to stock based compensation.
Gionee expenses would have been $49 million or 17% of revenue.
Third quarter operating loss, excluding stock based compensation was $1 million.
After excluding expenses related to our direct sourcing and employers.
Your payroll taxes related stock based compensation third quarter adjusted operating income was $73 million roughly $11 million ahead of the high end of our prior guidance range.
We ended the quarter with total contract liabilities of $622 million prior.
Prior to 2020, we.
And into multi year upfront payments from our customers leading to significant growth in customer deposits and often our cash collections were greater than revenue in any given year.
As a result, many customers have already paid for 2020 in prior years, which explains the negative cash. So we have seen through the first.
For two months.
We expect this to begin to normalize over the course of 2021 as we move away from multi year upfront payments and we expect free cash flow margin will converge with adjusted operating margin overtime.
We continue to have strong visibility into future revenues across our customer base as our.
Nice contract duration as of September Thirtyth increased to 3.6 years up from 3.5 years as of June Thirtyth.
We raised roughly 500 million primarily stemming from equity investments made by our partner Sompo Holdings, which closed in June and July.
We reduced our total outstanding debt by roughly one.
Several million dollars in the third quarter.
As of September Thirtyth remaining debt is comprised of $200 million term loan under our credit facility and we also have a $200 million undrawn revolver available to us.
We ended the third quarter with $1.8 billion in cash and cash equivalents.
Looking at the business through the lens of our three based model, we continue to see strong progress at each stage.
As a reminder, we core customers at the end of each year into one of three distinct phases.
Acquired face customers our customers, we have engaged in the pilot phase often at little or no cost to them which of general.
Hundred it is less than $100000 in revenue not here.
Fan base customers are those generating greater than $100000 in revenue in that year, and we invested significantly to scale that customer and grow revenue quickly, resulting in negative contribution margins in the period. Finally, we defined scale based customers as those generating.
Generator than $100000 in revenue in year as well as positive contribution margins exhibiting self sufficient usage and growth with our platforms.
Acquire based customers generated $41 million in revenue through the first nine months of the year, while contribution from this cohort of customers is rapidly approaching great.
And even with a contribution loss of only $4.2 million, a testament to the speed and efficiency with which we're deploying our software and helping our early stage customers. So critical problems.
This compares to just $19 million in revenue through the first six months of the year with a contribution loss of $13.9 million.
In addition through the first nine months of 2020, we generated $23 million in revenue from new customers that we have acquired in year, meaning these are customers that have not yet a classified to one of our three based customer cohorts.
This compares with $8.3 million through the first nine months of 2019 and risk.
Represents nearly 200% year over year growth.
This is a testament to the speed and efficiency of our platforms and go to market as we shrink time to value for our customers and accelerate customers from pilot to conversion.
Taken together with continued revenue growth from our acquired based customers.
We believe the rapid growth in revenue from new customers creates a strong basis for future growth to augment the consistent expansion, we are generating from our installed base of customers in the expand and scale basis.
Turning to the expense base, we continue to demonstrate strong growth as our customers drive increased awareness.
Ration of our software to yield greater value.
Fan based customers generated $254 million in revenue in the first nine months of the year the contribution margin for these customers at 41%. This.
This is up from $161 million and contribution margin of 35% through the first six months.
By 2020.
And a significant advancement from $176.3 million in revenue and negative contribution margin of 43% from the same accounts in full year 2019.
Finally, we continue to see strong contribution margin from our scale phase customers. These customers.
Bruce generated $452 million in revenue in the first nine months of the year with a contribution margin of 69% compared with 296 million in revenue and contribution margin of 68% through the first half of 2020.
Turning to our outlook, we are raising our full year two.
2020 revenue guidance to a range of 1 billion 72 billion 72 up from 1 billion 52 billion 60, previously and representing year over year growth, but 44%.
We are also increasing full year adjusted operating income guidance to a range of 130 million to $136 million, which exclude.
Includes stock based compensation and related employer payroll taxes as well as direct listing related costs.
For the fourth quarter, we expect revenue in a range of $299 million to $301 million representing year over year growth of 30% to 31% given ARX.
Additionally, strong Q4 2019 revenue.
We expect fourth quarter, adjusted operating income of $44 million to $50 million, which excludes stock based compensation and related employer payroll taxes.
For the full year 2021, we remain encouraged by the pace of.
We are seeing in our subscription base and the acceleration we're seeing in revenue from acquired fees and new customers that provide a solid foundation for future growth.
As a result, we continue to expect full year 2021 year over year revenue growth to be greater than 30%.
With that we'll open up the call.
For today.
As a reminder to ask the question you need to press star one on your telephone guidance.
Question for Tom is asking please standby annually from Follicular roster.
And Jason is question one question to allow time for other.
Just ask your question.
Our first question comes from Brent Thill with Jefferies. Your line is open.
Hi, good afternoon. The government business has shown incredible strength. This year I think many are curious about how you think about the pipeline and.
Digital kind of care carryover from from the government business and maybe if you could also address.
A big Investor.
Concern or around the administration change if that happens does that have any impact on on what you guys seeing in the government pipeline. Thank you.
Thank you Brian.
Yes. The government. It has had a great quarter I'd say both segments are performing quite well. We're excited about the pipeline of government business of course, there's the the contract that we just close with the U.S. Army.
There is a number of big capture proceeds in the pipeline.
Saying that we've mentioned previously opportunities like DC eggs capability drop too.
There's a lot more behind that that we expect a couple more programs of record that were up for potentially in 2021.
And we're investing far beyond just the army space for us.
Navy Air Force.
So very robust pipeline, but thats just like honestly that there has been enormous accelerate.
And for part of the business that was pretty small 18 months ago in healthcare the work that we've done with the FDA CDC HHS.
The NIH has really accelerated.
And it created enormous opportunities for us and while many of those opportunities certainly accelerated because of covance.
It may have started there.
Great very clear, it's not going to end there, we're seeing opportunities for large systemic transformation in healthcare in the us but also abroad.
Cobiz 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 administrator.
It's been in the us.
We've worked with five administrations in the UK core.
Core administrations in France, and two in Germany, we.
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.
This.
Great. Thank you.
Okay.
Our next question comes from.
Mark Landy with Morgan Stanley Your line is open.
Hi, This is actually Keith Weiss in for remark.
Looking at the metrics.
Based on sort of the new customers that were acquired in the first nine months, that's 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 in building out the direct sales force is that starting to have a positive impact and maybe if you could help.
Just kind of mark to market, where are you would that effort.
In terms of like sales teams or what not and how you expect that to roll out on a going forward basis, and then maybe just one on on operating margins.
Really nice sort of uplift in operating margins this year, even though you're building out the direct salesforce 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 cold environment, and we should expect that to come back into the income statement on a go forward basis.
Great. Thanks, Keith.
So first on.
The.
We're doing 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 stake 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.
Playing our total head count there today 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 that we've closed this year accounts in the acquire phase growing.
The new and the expand and scale phases really outperforming, but what's what's really working here I.
I think it's a little bit more of a technology and a product story.
Our speed to value for customers is getting much fast.
Rather.
And there are many reasons, but im going to highlight too.
First is foundry module.
And the software defined data integration.
We Sean talk briefly about a customer I mentioned earlier that started using our ERP suite.
And they've already saved over $50 million.
And they are 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.
Hi, Fi and data integration.
And that was an example in sort of the large industrial complex.
A consumer goods company.
Use that same ERP suite.
Connected it to our Virtex foundry module to stimulate their supply chain and its now helping them run their business.
Business more efficiently.
So the same thing here that you know the software is really driving more of the work that mean time to value faster and that equals more efficient sale.
By the way I guess this recent example was actually sourced by one of our more real.
[music].
Account salespeople, so big congrats to you on that.
That team out there you guys. All know who you are so these advancements are big opportunities for sales team. 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.
But I suspect we will in future periods.
And so then.
Got it back to Dave for the company, but the operating margins.
Thanks, Kevin.
So also just revisit our long term targets.
For.
For margins returning adjusted gross margin.
The 5% plus contribution margin of 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.
You.
$133 million.
The mid point.
And when you're looking at.
Sort of.
Our adjusted operating income you can see the coated.
It accelerated a lot of change across the company.
And is it really was.
Start us in leveraging a lot of our previous R&D investments things like Apollo and so while there was a lot of change that happened with Covance and you're going to see a lot of that seeking.
And but with that said, we're going to continue to invest.
As Kevin talked about we continue to invest in our direct Salesforce continue.
Also to build out our products sort of like Apollo continue to get that operating leverage on.
And we will continue to see top line growth continue to.
I will pay six months ago.
Yes.
Again, if you would like to ask the question.
Star one on your telephone our next question comes from Alec people with RBC. Your line is open.
Hey, 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 Youre going to talk about in.
In here in the 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 pump.
Thanks, Lyne growth specifically, how should we think about revenue linearity, specifically, maybe fourq you to one Q and then beyond.
Great. Thanks, Alex so.
Just to backup a little bit thinking about foundry here. We've built this over the last five years, we've built it end to end platform.
And we have been investing significantly in the R&D to do that and so.
And that really paid off in the first three weeks of Cobiz. We started 83, new engagements and we can do that because we had a solution that customers could start using in a matter of a few hours that consult scaled problems in an end to end sort of way and that has.
You mean I'm in a crisis and crises have always been a tailwind for our business, whether it's the global financial crisis or the tax in Europe, and 15 or 16 or the present day pandemic, but we also recognize that many customers have made investments in IP capabilities that they are more or less happy with and so by Modularizing.
Moving the offering were 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 nuance land and expand motion overtime. It changes the offering in a way that you can you have more flexibility on the price point and how you.
Pretty 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 in the news at both and on the pipeline side, but even new customers were actually implementing and converting.
And.
Yes, I think that it's I and I also I guess the last part of your question I would expect to see that those in government and commercial.
At all touch base, a little bit on the.
On the on the guidance for 2021.
So 93%.
If our customers are 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 the land and expand dynamic, but again, 93% coming from existing customers recurring and growing.
A little bit more.
Fewer and fewer 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.
Two last year and up for both these numbers.
As you know still three month 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.
[music].
Turning just briefly on the seasonality question I think its important one thing you might be pointing out and focused on is that we had.
Very strong.
Fourth quarter in 2019.
About 20% sequential growth.
So what you're seeing a little bit here in 2000.
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 Goldman Sachs Your line.
Okay.
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 last year. I know you had a very significant $300 million renewal in the quarter was that the main driver of the acceleration or is that was that 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 in the near term here. Thanks.
Yes, it's been a 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 look at the renewal here, that's really looking at 20.
Well, one revenue and beyond so.
So we should look at that towards future period.
And so the 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.
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.
21 hours to days and so we're leaning and 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 for foundry to really be a core operating system that delivers.
And a big moment, it's what we spent the last five years investing our R&D and this offer is there to meet that moment.
Great and maybe just a follow up on on the commercial as well.
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 growing number of use cases for for commercial but in terms of making these customers are 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 that I'm sure the complexity that.
The issues that a lot of the commercial customers are facing thanks.
Sure. So the the direct sales force and we're continuing to invest invest then.
Doing quite well there I think it's a little early.
Sure, but I 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 about that going forward and particularly the commercial market. It is certainly true that the more we do and oftentimes as the faster we do it.
Here is a lot more opportunities for us anyway.
I think something that Youve here, you'll hear more about with foundry module is that the customer.
It's 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.
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 the big.
So I mentioned sort of window for channel partners, who seem to be quite.
Quite excited about that so look to hear more about foundry modules, we plan to show.
So this as were able to in the upcoming presentations.
Our.
Our next question comes from.
Your line is open.
Great. Thanks, so much and congrats to you all in a nice strong quarter out of the gate.
My My one question is actually pretty simple I just wanted to ask about contract duration, which I think you disclosed the 3.6 years. This quarter, maybe maybe you can comment on how thats.
Trended year on year, and and how you expect that might trend forward into into calendar 21.
So.
Pretty happy with sort of getting additional.
Visibility on the revenue here I think when we're thinking about 2020.
The one that were really sort of looking at the the portion.
And success, we're having with.
With the breakdown of the other three paid model.
And when we looked at just new customers that we've acquired in year.
That group has grown.
Nearly 200%.
Dave mentioned this compared to last year the acquire phase.
It's 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 men.
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 in the growth of the acquire Andy.
And the new account basis. So these are kind of the early land portion going into our model here.
Many expand phase accounts.
And we did 254 million through the first nine months of the year and those accounts at a 41% contribution margin. So for some context. This same group did a $176 million and a negative contribution margin of negative 43% in 2019.
So that 44% growth.
Already for this year and we still three months ago.
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.
Last portion I think you know should focus on is.
The scale paid customers scale phase accounts generated $452 million of revenue.
Through the first nine months of 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 myth in the performance of the contribution margin in both expand and acquire phases. So it looks like we will see growth in the scale category.
Again, if you would like to ask a question Thats Star one on your telephone.
Our next question comes from Colorado with Citi. Your line is open.
Hey, Thanks, so much for taking my question, Sean I wanted to ask a couple of questions to you and I thought it was pretty interesting one of your comments on I'm, just saying that you wish you invested faster sooner in the direct salesforce.
And I guess.
I'm curious you know now that you've you've kind of been able to look at the successful investments just how are you thinking about growing overall head count.
From here I think the original target was for somewhat muted head count growth.
In 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 with the foundry modules. How are you thinking about growing head count going forward and then I just had a quick follow up on on the foundry modules, how how do you think that kind of changes to the competitive.
Environment for you guys do you think you're going to be kind.
Going up against some of these data.
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, Alex So on the first question.
I think we.
What we're very confident that had topline will continue to grow much faster than operating expenses. You are right. If we find opportunities to invest were going to take them, but right now I'd reiterate what were kind of expecting around four or so percent head count growth.
The.
One of the things that 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 does it actually whats happening were actually doing more sales and marketing, but we're just much more efficient and 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 when they'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 that competitive landscape.
We think there are a couple of things that we.
We are doing on the modules lease that we keep hearing from customers that are really unique I think customers will continue to take those.
The important part here is.
Working with the customer defined what investments they really believe in that they've already made ensuring that the.
Architecture that were putting forth fits with their plans their roadmap going forward.
Sure. So I think of it much less as a competitive situation in terms of what customers evaluating this best of breed tools 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.
Thats going to help us win a lot more it's going to help direct salesforce.
More effective it means that channel partners have a proposition that they can succeed with both because it will integrate with their existing offerings that 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.
The question I will now turn the call back over to the planning to 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.
Saying that that we see from them all the time and it's so inspiring.
They don't 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 to thank you guys. So much. Thank you all.
This concludes today's conference call you may now disconnect.
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