Q1 2021 Palantir Technologies Inc Earnings Call
[music].
Welcome to Cowens years earnings call.
We will be discussing the results announced in our press release issued prior to today's call and for Richard.
For 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 outlook for the current quarter.
Other future periods managements expectations about our future financial and operational performance and other statements regarding our plans prospects and expectations.
These statements are not promises or guarantees and are subject to risks and uncertainties, which could cause them to differ materially from actual results.
Information concerning those risks is available in our earnings press release distributed prior to today's call and for S. E T filings.
Talented undertakes no obligation to update forward looking statements, except as required by law.
Further <unk>.
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 non as a substitute for or in isolation from GAAP measures.
Additional.
Information about these non-GAAP measures.
A reconciliation of non-GAAP to comparable GAAP measures is included in our press release and Investor presentation provided prior to today's call.
Palin tiers press release Investor presentation and.
S E T filings are available on talent tiers Investor Relations website at investors, Don palette tier dot com.
With that also.
I will turn it over to Rami.
Thanks, Jakob joining me on today's call are Sean Thank our Chief operating Officer, Dave Glaser, Chief Financial Officer, and Kevin Kawasaki Global head of business development.
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.
I'll turn the call over to Sean to get it started.
Thank you Rodney cut.
Cutting edge product and continued efficiencies in distribution drove exceptionally strong Q1 results adjusted free cash flow was $151 million for 44% margin and this is an increase of 441 million over the year ago quarter revenue was up 49% billings grew 248% RPI grew 129% we had.
76% growth in duration adjusted commercial deal value, we had an adjusted operating margin of 34% and our U S business across government and commercial continues to be on fire growing at 81%.
These results and for that matter future results wouldnt be possible without a relentless focus on product innovation. The area on most excited about is the development of Apollo for edge AI. This is demonstrated at the dug way proving ground in Utah. This past April just last month. This is live now we're pioneering approach that we call micro models just like.
<unk> on the basis of modern software architectures, we believe that micro models or how your operational on AI at scale for enduring advantage.
There is no place this is more true than in our U S. Government work on some of the hardest and most important problems facing our nation Apollo for edge AI is the next evolution to transform AI into alpha enabling customers to train manage and deploy multiple independently version chained models to the edge with ease.
Customers will have maximum flexibility to decompose attack into multiple models for each component can be improved and upgraded in isolation and subsequently dynamically chained together even at linked in that chain of running across multiple platforms from space to mud and across different sensors and shooters, making the sum of the parts greater than the whole.
This is operational AI in action at the edge. Its decision advantage delivered and we are seeing incredible interest ear from commercial customers to leverage the same innovation using AI models on the factory floor to augment human workers or more efficiently detecting wildfire risks from state to next generation of predictive maintenance occurring at the edge.
Onboard the airplane, while still in flight understand decide and act at the edge.
Turning to results.
Where the government response to the pandemic has been efficacious, we are seeing a commercial tailwind in the U S. In particular, we continue to generate exceptional results where revenue grew 83% in the U S government and 72% and commercial and we have a lot of headroom for growth in these markets. We only have a handful of fortune 500 customers and less than 110th of a percent.
[noise] of annual defense spending.
We have widening and are continuing to widen our capability to distribute our product, we see strength and forward looking indicators and customer interest since the beginning of February qualified commercial opportunities in the U S and the U K are up two and a half times.
Active commercial pilots across the business have more than doubled and opportunities across the U S and UK government continued to develop at pace. We added 11, new commercial customers and we also announced our partnership with MD Anderson and entropy.
And it's not just established industry players, where we are winning we are seeing opportunities for companies to build their digital infrastructure around foundry from day zero, where they can shave years off their ramps and mountains of risk off their roadmaps by cost efficiently standing on the shoulders of 15 years and more than $2 billion of R&D.
And we see this is the first salvo in expanding distribution of foundry to broader markets and a broader set of customers and.
In Q1, we entered into a partnership with William a revolutionary EV total transportation company that will use foundry to build an integrated business from the ground up incorporating design and engineering procurement testing production quality logistics and in service operations. We've also partnered with circuits.
We've always talked about golf and they said digital iron Nancy well. These guys. They are building the physical iron man fees.
Sarcos will leverage foundry for all of <unk>, well understood industrials and manufacturing use cases, but you can see on sarcode can leverage all the capabilities of Apollo for edge AI to push AI into their exoskeleton. This is Jarvis Tony Stark digital assistant but in real life.
These customers an even more prospects in our pipeline are at the forefront of the next major sea change in software architect Ing, an entire organization around a common operating picture deliver a connected company from the very beginning eliminating the change the siloed data assistant.
We are investing in innovation in the west backing companies with ambitious goals and executing on our ability to move down market and the fit is natural our software can radically accelerate production ramps and time to market and help these companies get to scale a dramatically shorter time horizon.
In parallel the momentum in our government business continues unabated first quarter government revenue increased 76% year over year fueled in large part by the 83% year over year growth, we generated in the U S. Government. We continue to play a critical role in helping governments respond to the pandemic and further our mission to become the central operating system for defense.
The scope of our government work is broadening on the back of cutting edge product like Apollo for edge, AI and investments and distributions in the first quarter. We were awarded a five year contract worth up to $90 million with the National Nuclear Security administration to provide D operating platform to safeguard America's nuclear stockpile of course, our nation's nuclear assets are of crucial importance.
The future of our nation and broader Western security and we are proud to partner on this.
As we look forward over the balance of the year, we continue to have tailwind as we pursue opportunities across both defense and civilian agencies in our government business in Q1, our software was leveraged in the global information dominance experiment, enabling all 11 D O D combatant command to generate globally integrated strategic decision advantage from Intel's.
<unk> operations logistics and supply data all advanced by AI.
This work dovetails with the strong pipeline, we see in our government business across a variety of defense initiatives and we expect deal activity to increase over the course of the year.
As we outlined in February our plans to increase distribution include building a direct sales force and we've made massive strides so far this year in the first quarter alone. We've made nearly 50 hires into our sales team and the pipeline to continue growing this team remains robust this puts us well on our way to achieving the goal of adding triple digit sales head count this year and applying.
Much more force behind our businesses momentum I mentioned earlier the growth of our customers and pilots are sales force combined with outreach events are generating more high quality opportunity, what's more customers are coming to us with a much deeper understanding of our product and the value. They unlocked to the point, where the first meeting today really now feels like the fourth or fifth meeting from a year ago the flywheel.
Turning faster.
In addition to our direct sales force expansion of channels is a critical element to our distribution strategy, we continue to pursue and invest in our channel partners across the spectrum from complementary software companies to system integrators and cloud providers across both the government and commercial segments.
We announced our IBM partnership last quarter. The pace here is tremendous we booked our first customers within 16 days of bringing the product to market. We believe there are significantly more opportunities with ISP partners and our future.
We have continued to develop our reach with system integrators developing targeted joint go to market and geographies industries and functional areas. Today 15 different S eyes are partnering with our customers to deliver work on our products.
We continue to view cloud providers as channels, we've seen a marked shift where cloud providers are integrating foundry into their reference architectures and core go to market activities at the end of the day you can either go to market with a market texture that theoretically solves a problem in for example, health care, but it never actually been deployed or you can take the architecture of the NHS used to execute one of the worlds.
Most of that will add scale vaccination programs or the architect for use by NIH and three C to integrate a huge amount of clinical data for our research on COVID-19 in record time. These are battle tested blueprint for success that drive outcomes for customers in days and importantly for the cloud providers drive a rapid amount of consumption very very quickly.
On the government side, we are seeing more and more traditional defense contractors buying into our architecture, both for internal production and manufacturing of large program at the same way that we would help day any manufacturer, but also to leverage our Apollo for edge AI architecture into their AI enabled platforms to extend the life of these platforms and to create software monetization for <unk>.
Themselves through a joint offering.
Really our successful channel partners across government and commercial are the ones that are realizing that theyre going to draft off our software is world class performance that has always met at the moment.
Blinding pace of both cutting edge product development and customer wins that drove these results. They are delivered because every habits unquestionable resolve in the face of adversity and categorical dedication to our customers and their mission.
Thank you all commentary.
A final note while restarting is on our mind the vicissitudes of the pandemic and continuing to respond is where our hearts are I want to reiterate that we stand ready to help as always any country or company at any states. There are many reasons an industry that still face existential crises in overcoming the pandemic and re forging their operations in this.
New reality.
We stand ready to help and you know.
With that I'll turn it over to day to take us through the financials.
Thanks, Sean I'll now review, our first quarter performance, followed by our outlook.
Cutting edge products and increase efficiencies and distribution drove an exceptionally strong Q1 results.
We generated revenue growth of 49% during Q1 revenue to $341 million adjust.
Adjusted operating income increased to $117 million, representing a margin of 34%.
And adjusted free cash flow increased to $151 million, representing a margin of 44% and a $441 million improvement from Q1 2020.
This is backed by strong first quarter billings of $362 million of 248% year over year.
Looking at our revenue performance, our total first quarter revenue growth was 49% ahead of our prior guidance of 45%.
The combination of 49% revenue growth and 44% adjusted free cash flow margin is indicative of the unique underlying unit economics of our business.
Our U S business ended the first quarter with nearly $800 million annualized revenue run rate as total first quarter U S revenue increased 81%, representing 72% U S commercial growth and 83% U S government growth.
Looking at revenue by segment first quarter government revenue was $208 million of 76%.
U S government revenue increased 83% year over year in the first quarter and international government revenue increased 57% year over year.
We expect this momentum to continue as we have a significant pipeline of government deals building in Q2 and beyond that we believe will fuel durable elevated growth in our government segment.
First quarter commercial segment revenue totaled $133 million up 19% year over year.
And we are seeing particular strength in the U S. As U S commercial revenue increased 72% year over year.
In addition to that revenue growth. We're also seeing substantial increases in leads and new opportunities and we've more than doubled the number of active pilots in our commercial business since February.
Abroad, and particularly in Europe, we are seeing more muted commercial growth in countries that are still facing significant health and economic challenges stemming from the pinned on it but as Shawn mentioned, we are continuing to invest in these regions to assist in their recovery and we expect our business will accelerate as these regions recover.
In the first quarter, we closed 15 deals 5 million or more in total contract value, including six deals were $10 million or more.
We ended the first quarter with total remaining two value of $2 8 billion up 40% year over year remaining performance obligation was $626 million at the end of the first quarter up 129% year over year.
Average contract duration was three seven years up from three six years at the end of 2020.
These results are particularly strong when considering government customers entered into shorter than usual contracts in 2022 accelerate procurement as they responded to the COVID-19 crisis moving through 2020. One we expect these yields to renew and expand which we believe will create tailwind for both duration and deal value.
First quarter trailing 12 month revenue per customer increased 29% year over year to $8 1 million.
First quarter trailing 12 month revenue per top 20 customers increased 34% year over year to $36 1 million and represented 60% of trailing 12 months revenue compared with 65% in the year ago period.
As we move through 2021 and beyond increased distribution across multiple channels, especially into new market segments, such as middle market and Smbs, we expect average revenue per customer growth to taper, reflecting a broadening customer base.
Next I'll discuss our margins and expenses on an adjusted basis, which excludes stock based compensation.
First quarter adjusted gross margin was 83 per cent of 800 basis points versus the year ago period.
Contribution margin was 60% up 1900 basis points versus a year ago period.
First quarter income from operations, excluding stock based compensation and related employer payroll taxes was $117 million, representing adjusted operating margin of 34% significantly ahead of our prior guidance of 23 per cent.
In the first quarter, we generated $151 million and adjusted free cash flow, representing adjusted free cash flow margin of 44%.
As we continue to invest in our sales team, we expect related expenses to increase over the course of the year as these new heads come on board.
With over $2 3 billion in cash on the balance sheet and strong free cash flow on Q1, we paid down our outstanding debt in early April and expanded the availability under our revolver by 200 million for a total capacity of $400 million all of which remains undrawn.
This provides us with substantial flexibility to pursue investment initiatives in support of our long term growth targets.
For our Q2 revenue guidance, we expect year over year revenue growth of 43 per cent or $360 million and we expect adjusted operating margin of 23 per cent for the quarter.
<unk> for the full year 2021, we are raising our adjusted free cash flow guidance from breakeven to in excess of $150 million on the strength of our first quarter.
Could you to execute the guidance strategy set forth by our CEO, Alex Karp and our year end 2020 earnings call with regard to long term revenue guidance, we are providing and will continue to provide revenue guidance of greater than 30 per cent for this year and the next four years at each earnings call.
And with that I'll turn it over Rodney for Q&A.
Great. Thanks, Dave So we'll begin Q&A with questions from our $1 5 million shareholders submitted through Sag and channel I'll start with you on this first one Avi he asks for the company intend to turn a profit in 2021 or keep using the current resources to expand.
First of all congrats on having a dedicated on question.
There are two numbers that we focus on that first is adjusted free cash flow, which really is the business is the ability to generate money to generate cash and the other is adjusted operating income, which is a measure of profitability excluding stock based comp primarily.
On cash flow, we had a swing of $441 million from deposit generating $151 million of positive cash flow of 44% adjusted cash flow market.
This shows the businesses underlying financial strength.
On operating income, we had a 34% margin.
Demonstrating a software company debt.
Is efficiently distributing product and shows tons and tons of product growth.
Not to mention were one point shy of our long term target that we established around the timing of it.
So it really shows that we can hit that.
And so if you look at these two day together, we're proving the profitability and cash generation potential.
Sometimes it's software people talk about the rule of 40 as some of your adjusted free cash flow margin in some of your revenue growth to be greater than 40 right.
Well for us at 49% revenue growth in Q1, 44% adjusted free cash flow margin Thats 93 that puts us incredibly rarefied air.
We're in the top three software companies.
But I think actually the most important thing is to realize that we're just at the beginning we only have a handful of fortune 500 company.
We are just starting to move down market for medium sized enterprises or government revenue is less than 10 basis points.
10th of a percentage of U S defense spending we have so much exciting product vision to Investor day, just a huge market to go after in the most prudent thing to do is to invest aggressively to go after and that's what we're doing we arent focused on profitability. We are focused on growth we're focused on generating in excess of $4 billion on revenue in 2025 as Alex outlined.
This year.
Great. Thanks, Sean I'll stick with you on this next one we've gotten a few questions around the announcement from the investments that we've announced for <unk>.
<unk> balance are choosing to invest in companies such as volume and startups robotics can you speak to the motivation behind the decisions and if investors can anticipate future corresponding investments how do you view risk investment size and potential return.
Thanks Jackson for the question.
As I mentioned throughout the call. We are relentlessly focused on increasing distributions and here, we see a unique opportunity with ambitious company to invest in both compelling management teams and compelling businesses and to partner with them on using our software from day zero. These are folks that are focused on winning there is no.
Entrenched bureaucracy that wants to build their own toy line solution a day.
It's really understand the value of buying the best operating system for their enterprise shaving year and mountains of risk off their roadmap.
That's not even to make mention of all the money they would've otherwise wasted buying traditionally siloed systems from CRM to ERP and manufacturing execution system Tech.
Homegrown many market overall, we think this is a really compelling opportunity to accelerate our business to accelerate our distribution into debt on our customers.
Great and maybe one more for you Sean before going on the rest of the group.
Geoffrey T asks what are your plans to compete with Microsoft in the coming quarters.
Thanks Jeffrey.
Don't compete with Microsoft or other software vendors or system integrator, we compete against our customer we compete against our customers' desire to build their own bespoke solutions.
Is build versus buy and you aren't actually buying with Microsoft for these other vendors that I mean with Microsoft remember bombers famous meet developers developers developers or with AWS look at their product market. It's about bill it'll better build faster build on AWS. The same for GTP and with just an integrator by definition Youre building.
And yes, that's a challenge because our software shamanism means that we built something radically in the future holistic approach and stunning in its results, but it's also something that comes across as those heterodox to the high priest of IV and their reference architecture.
But the proof is in the pudding, Linda pandemic hit and tour through our health system heat supply chain. The orthodoxy failed to deliver anything ameliorate boundary and Gotham delivered revolutionary capabilities and jaw Droppingly short periods of time.
Our battle tested and I mean that literally are battle tested architecture is competing against DIY market.
And the pace, we are innovating at continues to put distance between us and the next best alternative from archetypes that allow you to replace a year of custom integration with a few quick over a few hours to Apollo for SJI that allows you to deliver the most sophisticated operational AI that is frankly, just a few steps <unk> guidance and as I.
Mentioned earlier, we see the cloud providers in particular, starting to incorporate these battle tested architectures into their go to market motion and their offerings to their customers precisely because sterling undifferentiated Lego blocks isn't enough.
Great. Thanks, Sean on Kevin I'll come to you with this next one is kind of in a similar vein do not as asks do you see power are becoming as crucial and impactful as Microsoft office for businesses.
When do you expect to reach that kind of adoption.
Thanks for the question.
People should expect more from the modern operating.
For our customers, particularly in a time of great need for the most crucial and the most impactful software for any type of debt.
Our users arent just in the entre for on the front line on the factory floor at an airport doctors on <unk>.
Zone people use our product for their day to day job their day to day mission.
I think about a nursing home worker in Japan, who's caring for an aging population and needs to deliver preventative care.
Workers at an airline routing thousands of flights for last year needing to find parking for thousands of aircrafts.
One of our customers is fighting wildfires in California.
Fire risk expert doing on the ground infection with foundry.
The United States and the United Kingdom government are running two of the most successful vaccination program in the world and.
And both are using foundry.
In the UK.
Thousands of users from physician to administrators, nearly 2500 vaccination for nearly $44 million vaccine.
Every vaccine order.
Allocated track and delivered in foundry.
In the United States 257 million vaccines over 1600 dataset.
50 States 14 jurisdiction pharmacies manufacturers foundry is the place for the federal government to understand vaccine supply and distribution chain from manufacturing to the Jack.
Our product.
Help our customers win.
Which is what is required of the modern operating system.
Thanks, Kevin.
Come back to you on this next one Johann asks your recent partnership with for Ses and on before with Airbus shows your ability to work with that manufacturing clients is there any plan to develop that sector even further.
Thank you Johan.
For the loop manufacturing is a huge focus for us.
The area of deep deep strength historically.
Just look at Chrysler every factory in North America on the factory for it you will find boundary of into manage quality in real time manufacturing with chemical companies mining energy suppliers across ecosystem than automotive aerospace I'll announce a new customer auto manufacturing with Peugeot.
Cutting edge product architectures that deliver rapid value in managing working capital procurement production demand forecast for supply chain management quality logistics, all the whole chain around manufacturing and I'd call out companies like Lilly, even tacos again that are going to build their operations around foundry from day zero using foundry for.
For ERP CRM manufacturing execution for quality and much more.
On our value here.
Beyond manufacturing into sales and after sales, turning Iot and telemetry data into real value not only for the Oems for the manufacturers, but for their suppliers and their customers.
Great Dave I'll come to you on this next question we've gotten a few along these lines Brian L asks could you ever see pound tier, having bitcoin or any other type of crypto currency on its balance sheet.
Brian Thanks for the question. The short answer is yes, we're thinking about it when we begin discussing internally, particularly for the balance sheet.
Cash at quarter end, including $151 million.
Free cash flow for Q1, so it's definitely on the table from a treasury protected as well as other investments if you look across a range.
On the other side of that in terms of accepting for Cohen from our customers. We do accept it on warranty Rubin for critical care.
Great. Thanks, Dave.
Sean I'm coming back to your question about our work in health care. Conrad asks this foundry if a presence in the early stage drug discovery and compound identification non clinical trial data of a molecular properties, especially as pharma moves from small molecules to biologics.
Thanks, Conrad Yes, our life science work is growing very quickly and we are absolutely working on the drug discovery and I'd highlight our work with the NCI National Cancer Institute and the National Center for advancing translational Sciences at NIH, where we are doing lots of preclinical work a small sliver, which is actually made public through public <unk>.
For calendar year and commentary on our listed coauthors, you can check out some of these from past that goes on.
Our work with MD Anderson.
And the innocent spans not only obviously clinical but also preclinical work that we're doing but more head on directly to drug discovery I'm proud to announce these partnership for deployment sciences, but we will work across their portfolio on drug discovery and development and if you know anything about ROI that they've invested a lot in computational approaches for Governor February.
With cellular therapy, we're going to help accelerate science around their breakthrough cell based therapies.
And a cutting edge biotech for.
Focused on translating condensate biology intimated.
Great. Thanks, Sean.
Kevin I'll come to you on this next one question about the go to market Jackson K asks how his talents who are planning to expand downstream to medium sized businesses from demo day on the kickoff of Doubleclick has pounds youre seeing an increase in interest from smaller companies and if not how can balance or better demonstrated value for these businesses.
I mean short answer is yes, we signed up a number of great small medium size businesses region, and I expect to see more on it because we're widening our distributions.
Big Big driver of our Q1 results at 72% commercial growth in the United States and whats contributing to the revenue guidance for Q2 is our increasing efficiencies of distributions our sales cycle is speeding up.
On demo day on Doubleclick, demonstrating our product publicly generates interest from all over large global multinational tuning in across their vast organization smaller local regional companies turning into learn for tuning into learn how foundry can provide an edge for their business too.
And this generates activity, we mentioned that our qualified pipeline has increased by two five times in the U S and UK.
Active commercial pilot across the business on more than doubled.
And I think one of the most.
One of the most exciting thing is that our shareholders are showing up in customer meetings of the $1 5 million individual shareholders. Some are calling.
So they could bring foundry do their day to day job.
Great Kevin I'll stick with you. The next question is on a similar vein Christopher T asks with the recent announcement of talented go into offered software tech companies for free Alice balance Youre getting this information out to fortune 500 companies. It accounts are reaching out to individual companies or are they waiting for are we waiting for companies to come to us.
Thanks for this question.
Bose this is.
This is an opportunity to get the information out there over the over this last year. Many of the most successful responses to the pandemic relied on effective data access through foundry.
The purpose of calendar unlock is to make foundry available for those who need it.
Remember about a year ago. When we were at the beginning stages of COVID-19, we knew we knew that pound you can make a huge impact, but we needed to help people learn that.
So we began calling on colony, we called for.
City State local government Hospital University research centers, just to let them know that we have a technology that can help.
I remember dialing into a state government.
And finally after several call finding the one person who is essentially trying to bring together data for the entire state with nothing more than a spreadsheet and a whiteboard.
Sitting in a war room, she was trying to figure out answers to critical question, how many hospital beds to be half how long until we run out how many ventilators along with a lap how do I get PPE to health workers.
And we're proud to say that this person had the power of foundry within hours.
And that is what were offering here with unlock.
Great. So Sean on its next question zooming out a little bit Jose asks what is counter as long term identity, but it'd be a data and AI company or will try to be the leader in many parts of the tech industry.
Thanks for the day well.
We aspire to be the most important software company in the world and someone's day with that we're well on our way we help countries to current and respond to threats from totalitarian regime, we'll prevent tariff from destroying our way of life, we enhance the protection of data <unk> and civil liberties to prevent the reaction to tariffs from destroying our way to play we help government managed public health.
And broadly we have health organizations respond to the various shocks that would otherwise have been debt free and we do this with completely unique software.
Andre is an operating system for the modern enterprise Gotham ex defense. These are generational shift from capabilities and approach personal computing with stock and timing before the standardization of the right operating similar.
Similarly enterprises art and art guidance without the right modern enterprise operating.
They are either ground and a collection of siloed applications or just being sold a bunch of Lego blocks in a do it yourself dream personal computer hobbyist tried to make their own operating systems to that.
That worked out.
Alice sometimes debt where software Shannon we have this track record of seeing around the corner and building what the world needs before the need is obvious.
When the ability to even have a perceived need field mythical and its precedent when it meets a moment and you're going to see this again with Apollo for SJI.
Great Dave I'll come to you with this next one Luis asks can you expand on accounts of your stock based compensation, we would further dilute the total share that accompanied by increasing flow each quarter and how much longer will significantly impact EPS.
We have very low dilution, we're moving on a fully diluted share count. So far this year our share fully diluted share count has increased less than two transfer.
Really really low.
With respect to SBC it will normalize over the next couple of years as we're working through the outstanding overhang and at the same time.
Couple that with a top line growth.
We continue to make progress towards GAAP profitability.
I would just add that obviously everything that is right here. The 20 basis point shows the discipline with which we are managing dilution.
Zoom out for a second here like why do we have stock based comp from firstly.
Equity is key fundamental investor employee alignment that we want and frankly, you should want employees working their asses off with a long.
Unemployed and providing them opportunities to share and meaningful upside in the company in order to maximize your shareholder value.
Paris.
Jason Thanks for taking my questions and nice pop for a referenced will go on balance here, but first off our one of our largest stockholders.
Two large option grants that are expiring at the end of December.
And from when he goes and exercising these options. It can create a very very large knoxville entre to exercise and holding share as a result, you've seen tax motivated sales as well as from any corresponding exercises for share that you will continue to book.
And even after that we will continue to be one of our largest customers.
We're interested in the degree you can check on our filings from on more detailed book.
Great job on I'll come to you with this next on before we open up the call. Emil asks experienced accounts. Your software appears more often now on job postings would you consider creating courses or tutorials on how to use your software access to of course, we'd give an incentive for the employees to request the software for their companies could you comment on that.
Thanks Neil.
The number of job postings for roles that require counter experienced growing every day and that has really accelerated now that we have 15 large system integrators, who are hiring training and building practices around foundry and we've built robust training to enable the system integrators to build $1 billion lines of businesses around foundry.
But to your question, we want to do even more here, especially where it can help with restarting economies and returning to full on plan. So we're planning to make foundry training available three to veterans of U S and Allied militaries to all of our individual shareholders into anyone who is unemployed in the markets that we operate it we are really excited about it and we hope that it will.
A meaningful contribution for restarting and reopening so stay tuned for more details around this in the coming weeks.
Great Operator, we will open up the call for Q&A.
Okay. Thank you if anybody would like to ask a question. Please press star one on your telephone keypad. Your first question comes from Chris Merwin from Goldman Sachs. Your line is open.
Alright, thanks, so much for taking my question and congrats on the quarter here.
Wanted to ask about the commercial business it looks like growth improved from from last quarter are still below 20%, but I know theres a lot that you've been working on there, including the modulators Asian foundry and wanted to hear how that was resonating with customers and then just the second part of the question would be around the customer add it looks like you added 11, new customers on the commercial side of the quarter did most of that come from.
IBM or Theres three other direct sales force.
Great. Thanks, Thanks, Craig.
Yes, the commercial business is gaining more momentum as we as you mentioned it grew 72% in the U S. On what we're seeing is where economies are opening it's just incredible traction there.
We've hired 50 sales so from the last quarter Youre, starting to see that translate through in terms of activity two and a half time.
The number of qualified opportunities in the U S and the UK double the number of commercial pilot the product investments that we've made around modulation and archetypes. Those are what are translating also into increased activity is what's fueling our ability to do.
Actually more pilots here.
The channel strategy is also helping net source more customers.
IBM partnership generated its first deal within 16 days of being launched there so lots of momentum there a place that we'll continue investing in.
Overall, we're quite excited we continue to win deals in Europe for NPS.
Lillian and Europe, Jujo Engie, a bunch of a bunch of momentum there and as Europe starts to open and manage through the pandemic. We're also expecting the same sort of tailwind that we've seen in the U S.
Europe.
Thanks for that.
And your next question will come from prior team for Barak Chen from Jefferies. Your line is open.
Okay. Thanks for <unk> at Jefferies.
On the government business, there's a lot of questions about the sustainable strength post COVID-19 and what Youre seeing I think you've said in the past that COVID-19 has opened the door to many conversations but there is a considerable amount of long tail to that and if you could just talk to what youre seeing.
As you look out thank you.
Thanks, Brent Thats, absolutely right. There are a lot of things that got started as a result of COVID-19, but many other things were not related to COVID-19 response per se. It's really the fact that something had to be delivered it has had to work in days. It showed many of the customers where they are but so custom build approach was just never going to get there in <unk>.
Allowed them to mark to market, whether a faster by solution was going to work and so we've seen that across the business of course for work with the National Nuclear Security administration is not directly COVID-19 related at all.
It certainly accelerated by this we've seen work across health.
Healthcare.
Civilian agencies accelerate inside the U S and outside of the U S.
<unk> also seen debt.
The pipeline is continuing to build there we're expecting a lot of defense related activity to build over the back half of the year on into next year, we participated in the global information dominance experiment with.
With 11 combat command.
That was not even visible during the current context of COVID-19 here. So quite excited about the pace at which do you think you're building and if you think about Apollo for edge AI.
Most of the capabilities, we're looking at it they didn't even exist around the kind of the listing like the pace at which we're innovating on the product is probably one of the most exciting paint for that is what is creating these opportunities that are compounding.
Again, if anybody would like to ask a question. Please press star one on your telephone Keypad. Your next question comes from Keith Weiss from Morgan Stanley. Your line is open.
Excellent. Thank you.
Alright. Thank you guys for taking the question and very nice quarter, especially with the new commercial customer adds.
A question on the margin side of equation and.
How we should be thinking about the expense growth throughout the remainder of the year.
David.
You did close to underpin for over $150 million per capsule in Q1, youre guiding for that figure for the full year, how should we use that for sort of guide our expectations on how salt opex.
Cost brand throughout the year.
And how should we think about debt on a go forward based on what the investment philosophy. If you will behind volunteer over the next couple of years as you looked at sustained at 30% plus growth.
Absolutely absolutely.
As you noted you had a very strong quarter for.
Net revenue growth, 44% adjusted free cash flow margin and 30 for adjusted operating margin is theres nothing noteworthy to call out on the expense on it.
On the top line would be non peak contributed their overall super pleased with the results. It shows the underlying unit economics.
Looking ahead to Q2, very strong revenue guidance to 43% growth coupled out with 22% operating margin while at the same time, we're really going to be investing into the business value.
Sales hires investments around sales team continued investment from the product and RG, one on what Sean talked about and we're going to be focused on reopening. We think it's really important to get the company back in the offices to get people together and focused on on on culture.
And your next question will come from Alex Gibson from most your line is open.
Hey, guys. Thanks for taking the question.
Wanted to ask clearly the confidence.
On the commercial revenue growth is high given the rep hiring that you guys are putting up can you talk about the divergence in pilots in the commercial sector versus for the stated revenue growth.
When will those pilots convert to revenues how visible is that conversion timeline et cetera.
Yes.
Yes, we are quite excited by the teeth debt, which are hires are being being accomplished the ramp that we're seeing for those hires are also seeing good.
Aggregate flywheel acceleration, where the ramps are getting faster the activity converting into revenue is getting faster.
Generally I would agree we are feeling very bullish and we're seeing that there.
The pilots themselves are compressing in terms of how long, they're taking because of the investments made on product margin realization archetype.
These allow us to restructure the pilot in a way that's something that would have taken us three months before is now a week or less.
A lot more capacity and cost efficiently distribute the product accomplish these pilot.
And in terms of revenue crank here and so we're seeing very high return to the sales force for building, we want to keep doing more here look for that to accelerate even further in the back half of the year.
And the the conversion, but we're really happy with it I think when I just think about the two and a half ex qualified pipeline thats been created through February one and then I think about the doubling of the pilot.
We're seeing about a third of those have already turned into something and so as we build a bigger and bigger pipeline here. We're feeling good about how that funnel is flowing through and.
If you combine that with the additional product investments from roadmap that we're executing on.
We have every reason to believe that we're going to continue to see acceleration across all these dimensions.
That's great for the end of our audience Q&A session I'll turn the call back over for closing remarks.
Thank you all for joining us we're excited about the quarter. Thank you for waking up early.
We'll talk to you all soon.
Thanks for everyone. This will conclude today's conference call you may now disconnect.
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