Q2 2023 Palantir Technologies Inc Earnings Call
We 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 third 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 could cause them to differ materially from actual results.
Information concerning those risks is available in our earnings press release distributed after the market close today and in our SEC filings.
We undertake no obligation to update forward looking statements, except as required by law.
Further during the course of today's call, we will refer to certain adjusted financial measures. These.
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 our SEC filings are available on our Investor Relations website at investors <unk> Dot com over the course of the call we will refer to various <unk>.
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, Sean Thank our Chief Technology Officer, Dave Glaser, Chief Financial Officer, and Ryan Taylor, Chief revenue Officer, and Chief Legal Officer.
I'll now turn it over to Alex for opening remarks.
Welcome to our earnings.
We are at a unique period of passenger.
Through the course of the last 20 years rebuilt.
What is an arguably.
One of the most interesting impactful product offerings in the World P J foundry.
Our target selection platform Apollo.
Our goal at parent here.
<unk> to be the most impactful important software company in the world Okay.
Company transforming western institutions.
The underlying goal there was.
To make the west stronger and to make pound here. The most important software company in the world.
In a weird way in the last the last.
Couple months since we launched.
AIP since we had AIP con Ed we have seen the way in which technologies, we built that seem to be a moderate utility were built almost in anticipation of the AI Revolution, both algorithm attic enlarge language models.
And that conversion is remade pounds here.
Taking pounds here away from its terminal value being it made the world better by making our institutions and the west stronger more productive more efficient in some cases more deadly.
Two giving us the.
Aspiration.
And realistic perspective of being the most valuable enterprise software company in the World.
We see a market, especially in the U S, which is hungry for an ability to apply AI, both large English models and algorithms to.
Transform our businesses I believe this transformation will change the GDP of America and that Pelletier will participate in that in the delta between where the GDP is now and where or get to powered by unique technologies that.
Are almost exclusively being built in the United States and are being adopted more rapidly and more efficiently with more vigor of course, there are headwinds many of the people.
And companies, who have no product offer in or do not have the technical capabilities to build them or trying to slow down. This revolution for the obvious reason that they they're not participating in it and these tools are accelerating.
Innovation, so that if you're not participating at year literally standing still while everyone is accelerating and they're no longer luxury products in the way people thought having world class software was so buying foundry appeared to many institutions as well of course is the best product, but it's a it would reach.
Wire is to change how we function or change how we procure software by the way the large language model Revolution has changed powershares relationships institutions, because we were misaligned for years and years with I T. All globally, we were misaligned with the way in which we thought an enterprise should.
B Rudd.
But the way in which you actually can process large language models to get more exact more precise more operationally valuable insights. The way you can actually write them safely into your enterprise, meaning you can control your enterprise. The way you can turn them into logic that allows you to power your enterprise both in our read right.
Function with a governance that is mandated by law by ethics.
We provide.
Those ways of working are exactly the way as we always thought one would have to work, but before the delta was insufficient.
And then last not least theres no roadmap Pelletier is the world's best at no roadmap innovation products built for a world where things disintegrate and you actually need to do things and the way they would be done in the natural state, though in the natural state you would have something like foundry you would have an ontology would have AIP.
Institutions in America are going back to their natural state a state for which we've built products.
Especially in the U S. We you see this in pound here's numbers say why is that because we built products for the natural state of how an enterprise should work there.
That state is apparent to people because of the enormous power of the power to accelerate accelerate time change your business using large language models and therefore, it is something which people embrace we've now moved from B and that product our product our culture fits both efficiently and in a way that's Chris Matic.
Two, especially U S commercial institutions and also government institutions that are realistically aware of the dangers of adversaries, who are our cutting and exceedingly competent, especially at technology.
So this puts us in a remade transfer transform position, where we can the aspiration of powering.
Our most important institution was there's clearly nowhere nowhere near done so intelligence and defense.
Has gotten us to the point, where I think it is indisputable that pound here's our software in that space.
<unk> is the most important in the world now.
In it while continuing to focus on that we can focus on okay, but given that we've built these precursor technologies given that our product has moved from being nascent to having.
<unk> of users.
The AIP product given that we believe that the.
Reception to this is unlike anything we've seen in P. J foundry Apollo.
Target selection and given the receptivity of the market also not to mention that we have been profitable now we expect to be eligible for the S&P for several quarters, we've been profitable that we have over $3 billion in the bank that positions us to fulfill our new.
Our new aspiration that allows us to see in the future. How we would do that which is to simply be the most valuable enterprise software company in the world.
And we are a joyous for this moment.
And thank you for being with us today.
For the third consecutive quarter, our company achieved GAAP profitability and again maintained a GAAP operating income in Q2.
This is a testament to our steadfast focus and commitment to delivering results and impact for our partners all while innovating against the opportunities ahead.
Last quarter, we hosted AIP con, which convened over 150 unique organizations as we formally launched our new AIP product offering and customers demonstrated how we're partnering with them to unlock the value of AI.
For example, Jacobs engineering highlighted how AIP is enabling them to monitor current system conditions and conduct future infrastructure planning and real time versus the months of analysis. It would have taken previously similar.
Similarly, J D Power's Chief digital and Technology Officer asserted that the advantage comes not from the AI models, you can build but rather how you apply them to the data you have and deploy it into applications. This is where true value is created for our customers and where we stand poised to help.
The CEO of Novartis was recently interviewed on CNBC discussing our partnership in which we created an integrated data lake that they are now leveraging to move AI forward quickly within the company, which the CEO costs Novartis is quote fundamental advantage over its peers.
We launched AIP, just 10 weeks ago and already we're seeing unprecedented inbound interest AIP.
AIP is also opening expansion conversations with our largest longest tenured customers as the new capabilities are causing them to re imagine how they can use our software.
Looking at both existing and new customers AIP is the solution for organizations, who want to wield LLM securely in their enterprise.
We remain focused on aggressively capitalizing on this momentum by driving compounding growth of AIP usage.
As this fast moving market evolves and expands so too will we and it's just the beginning this increasing demand will be incremental to the results you see today.
Our U S commercial business continues to deliver outsized results.
With our rapidly growing customer count we are seeing the beginning of the network effects in the segment whether at events like AIP con through direct customer referrals to their network whereby leaders working with us in one organization, taking us with them to their next one we expect the expansion effect to be multiplicative.
At the same time, we're seeing success across many different industries.
In Q2, we closed deals in U S commercial and roughly 30 different industries, including across Pharmaceuticals energy consumer Staples utilities health care construction automotive transportation infrastructure. The list goes on and spans industries and institutions at the core of today's society.
While we see the breadth of our software spanning industries, we still have immense opportunity for growth both through expansion within these industries and growth in our existing customer relationships.
For example, we're beginning to see this growth come to fruition in both health care, and transportation, which grew 93% and 129% year over year respectively.
Foundry is being used at numerous health care facilities to generate near schedules and forecast patient placements among other applications.
For example, with foundry HCA now generates nurse schedules in one hour each month instead of 10 to 20, Tampa General has seen a 28% reduction in patient hold times and has reduced the time spent managing patient placements by 83% and Cleveland clinic has been able to accept an eight 5% increase in patient transfers from other.
In just four months since launch.
While we continue to increase our breadth and expansion across industries. We also continued to grow at our existing customers.
We had over two dozen U S commercial customers that brought in more than $1 million in revenue each during last quarter alone.
And we're seeing outsized growth from our newest customers, 54% of the U S. Commercial revenue excluding strategic commercial contracts is from customers that have started since the beginning of 2020, one with nearly all of the year over year growth coming from those same customers. We expect this trend to continue.
We are investing in pockets of momentum within our international commercial business, such as Japan, Korea, Canada, and the middle East among other target opportunities across the world.
For example through our go to market partnership Fujitsu has seen recent success Onboarding eight new large cap household named Japanese customers at the same time, we have seen AIP lead to expansion conversations with our largest long standing customers in Europe , all against the challenging backdrop of today's climate.
On the international government side, our UK government business was particularly strong in Q2 as a result of our work with organizations such as the NHS and U K Ministry of defence, including the Royal Navy.
Within our U S government business, while the revenue results in Q2 are disappointing they belie the long term strength of our business. We remain focused on converting significant deals in the pipeline and growing existing contracts through which we are core to the government mission.
In Q2, we secured a multi year contract award from the U S. Special operations command worth up to 463 million New contract awards for the air and space forces of $110 million and conversion of Army Research lab R&D funding to longer term work with coke homes, starting with income.
We believe in the criticality and meaningful impact our work is having in today's world events and its eventual monetization as well as the exceptional user impact we deliver at the same time, our U S government business can be lumpy and we continue to expect there to be near term uncertainty around timing of contract awards.
Turning back to the overall business. We are excited about our vast opportunities in the quarters ahead, we're already seen that AIP will be transformational for our customers and for our business. We look forward to continuing innovating at the forefront through this revolution.
Lastly on the back of our inaugural AIP Con in Q2, we're excited to share that we're hosting two additional events. The next AIP Con on September 14th and a new event. The software for government S. For T Summit on September 21st which is specifically designed for our government customers.
We look forward to sharing a recap of the events with you at future calls I'll now turn it over to shop.
Thanks, Ryan at AIP Com. This past June we introduced pallets yours AI platform, a core set of technologies designed to bring <unk> to your enterprise to supercharge and accelerate your experiences from integrating data and hydrating your ontology to building AI enabled applications and human agent teams with co pilots.
AIP enables you to deploy llm's anchored in your data on your private network and to safely orchestrate your enterprise with tools actions and other AI models.
All of this in a controlled governed and trusted AI operating system.
The accelerating pace of AI development continues to be our inspiring the key to capturing value is a fundamental recognition that we are dealing with something new and different the demand solving new integration and engineering challenges. It is in many ways easier to define an L. M by what it is not it is not algorithm.
Reasoning it is not human thought.
Algorithmic reasoning operates as a process, so well specified that theres no ambiguity in its execution like traditional code home.
Human thought is inherently creative and its previously most defining form natural language is inextricably wrought with ambiguity large language models occupy a middle ground between algorithmic reasoning in human thought they are fluent in natural language, yet they don't really understand what they say they are not good at executing algo.
That was yet they can be instructed in ordinary prose, there or something else non algorithmic compute.
LMS or statistics, not calculus, and the introduction of even one stochastic variable intuit deterministic system makes the entire system now stochastic at AIP Concho in September I'm going to unpack some of the foundational engineering challenges that we had solved to manage and harness the stochastic city of these models and to enable that.
The acceleration in our products.
We are focused on driving compounding usage across industries, the problems that matter haven't changed AIP and llm's radically accelerate the solutions. We are building on nearly 20 years of our products and experienced solving these problems across more than 50 industries and every function in the value chain only now doing it substantially fab.
Esther to name a few inner shift handoff copilot for HCA, our pharmacokinetics translation assistant for Novartis in inventory balance or co pilot for our plant based protein company, our supply chain co pilot for a major beverage company.
Our warranty claims copilot for U S. Auto manufacturer has made analysts twice as productive saving them three to four hours a day as J D. Power's CTO Bernardo said it AIP con the beauty of having foundry and AIP is that you can build this really really quickly. So we built this in a matter of days and iterate. It in a couple of weeks to.
The precision of calculus, and the power of statistics llm's need to be paired with algorithmic in software tools. For example models of forward inventory or an action registry to execute enterprise functions are rich semantic layer to define the proper grounding and crucial primitives like scenarios that allow llm's the stage changes on branches.
He is not only the best tool bench in this context. It is a tool factory that enables enterprises to quickly forged new bespoke tools in hours.
Llm's can't for example, calculate profitability or expected lead times, but they don't have to they need to have access to the software tools that can this is why AIP is positioned to deliver outcomes. So quickly it elegantly integrates llm's into the calculus of your enterprise to accelerate the workflows that matter.
Every week, we are releasing more features and expanding the AIP productivity suite of applications, which provide WYSIWYG. What you say is what you get experiences AIP builder allows you to build your data pipelines with natural semantics AAP terminal is the command line for your AI operating system, enabling you to dynamically wheeled your ontology tools and applications for AD.
Hock exploration and problem solving.
AAP logic enables you to build LLM backed functions with rich tool composition in its developer tool chain and AIP automate, let you turn those logic functions into agents co pilot then automation.
One more item in the sweet I want to highlight AIP assessed which accelerates all of today's uses and users of AIP, Gotham and foundry by providing health and helpers dynamically.
P assist is configured to be tool aware, so it knows not only everything from the product documentation. It also knows what actions they can take to manipulate the application state to actually resolve and advance the user's workflow. This supercharged our users and as a technology it should be available for any software to incorporate to supercharge their users and the SEC.
Half of this year, we anticipate accepting beta customers, who want to use AIP assist as a service offering in their own software.
Turning to Gotham the latest investments in garden performed accidentally at Centcom digital Falcon Oasis and other exercise across combatant commands, including global information dominance experiment series six.
We continue to invest in capabilities delivering the next level of deterrence through the AI enabled kill chain inclusive of an integrated coalition deterrent.
Theres a lot more to say here, but I'd, rather haidar strength and bide our time against the adversaries.
We continue to be very excited about Apollo.
It continues to be a massive lever for passenger internally as well as a big market opportunity over the last few years Apollo has allowed us to scale up internally for managing 15 high side stacks to 82 without scaling our team in.
In the market as more defense startups are born with a surge of VC investment in the space. We believe Apollo stands as the fastest and cheapest path to delivering new capabilities for regulated in a credit environment and in Q2, we started seeing demand from the government itself as a customer U S. G customers want to move existing services, they manage into fed start to reduce their.
One operating risk and compliance burden.
In closing, we just wrapped up our annual hack week right. After this call I'll be binge watching all of the submissions from the teams internally I'm very much looking forward to further acceleration of our roadmap from compelling new ideas.
I'll turn it over to Dave to walk through the financials.
Thanks, Sean the second quarter of 2023 was exceptionally strong.
We're proud to report our third consecutive quarter of GAAP profitability and second consecutive quarter of GAAP operating profitability generating 28 million of net income and $10 million of operating income whose.
This also marked the third consecutive quarter of expanding adjusted operating margins highlighting the operating leverage in our business. We surpassed the high end of our guidance for both revenue and adjusted income from operations. Yet again, we also achieved a significant revenue milestone surpassing 2 billion in revenue on a trailing 12 month basis for the first time, we remain.
Committed to driving profitable growth and we reaffirm our expectation of GAAP profitability in each quarter of this year, which would make us eligible for inclusion in the S&P 500, following our Q3 results.
Turning to our global top line results, we generated $533 million in revenue of 13% year over year, and 2% sequentially exceeding the high end of the range of our prior guidance, excluding the impact of revenue from strategic commercial contracts total revenue grew 16% year over year and 5% sequentially revenue.
From our largest customers continues to expand trailing 12 month revenue per customer from our top 20 customers increased 15% year over year to $53 million per customer.
<unk> count grew 38% year over year, and 8% sequentially to 421 customers demonstrating the momentum in our ability to onboard and convert new customers.
Now moving to our commercial segment.
Second quarter commercial revenue grew 10% year over year and declined 2% sequentially to $232 million of challenging sequential compare as anticipated due to a 14 million decline in revenue from strategic commercial contracts, excluding the impact from strategic commercial contracts commercial revenue grew 19% year over year and 5% sequentially.
U S commercial revenue in the second quarter grew 20% year over year and declined 4% sequentially to $103 million excluding.
Excluding revenue from strategic commercial contracts U S. Commercial revenue grew 37% year over year and 7% sequentially. A result that is even more impressive when compounded with a 24% sequential growth we saw last quarter.
Our U S commercial customer count grew 35% year over year, and 4% sequentially, marking the 10th consecutive quarter of sequential growth. This highlights the velocity, we are seeing in our U S. Commercial business, we were driving significant new customer wins and expansions.
Our international commercial business grew 4% year over year to $129 million and remained flat sequentially.
Relative to the U S. We continue to see more muted growth with European commercial enterprises, although there remain targeted opportunities of growth internationally.
Revenue from strategic commercial contracts was $19 million compared to 33 million in the prior quarter, we expect third quarter revenue to decline to between $14 million to $16 million and we anticipate fourth quarter revenue from these customers to continue to trend down.
For the full year, we expect revenue from these customers view approximately 3% of total full year revenue.
Turning to our government segment.
Government revenue grew 15% year over year, and 4% sequentially to $302 million.
U S government revenue grew 10% year over year and declined 2% sequentially to $225 million.
While we acknowledge that there are uncertainties associated with the timing of contract expansions and renewals, we maintain a strong pipeline of opportunities and remain confident in the growth of our U S government business, particularly as USG TCP bookings grew 111% sequentially.
The National government revenue grew 31% year over year, and 29% sequentially to $76 million. The reacceleration in our international government business was driven by our U K government work for our government business generally sees fluctuations due to the nature of funding and contract cycles. We remain confident that our work with the UK government will continue to expand over the long term.
Turning to bookings T C V booked with $642 million of 62% sequentially.
Billings was $603 million of 52% year over year.
We ended the second quarter with $3 4 billion in total remaining deal value of $968 million in remaining performance obligations.
As a reminder, our P. O 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 causes both of which are common in most of our government business.
Turning to margin and expense adjusted gross margin, which excludes stock based compensation expense was 81% for the quarter adjust.
Adjusted income from operations, which excludes stock based compensation expense and related employer payroll taxes was $135 million, representing an adjusted operating margin of 25% 200 basis points ahead of the high end of our prior guidance and marking the third consecutive quarter of expanding adjusted operating margins.
These results demonstrate our ability to drive revenue growth, while efficiently managing costs with second quarter adjusted expense of 398 million up only 9% year over year and down sequentially. We continue to manage expense growth primarily by driving leverage in G&A capitalizing on cloud efficiencies and calibrating, our head count investments in key strategic areas of growth.
Consistent with prior years, we expect to see an increase in expenses in the third quarter as we onboard our new Grad cohort of World class Technical talent.
As we've stated over the past few quarters, we are fiercely committed to sustained GAAP profitability.
On the back of three consecutive quarters of GAAP net income and expanding operating margins, we are increasing investments in resources dedicated to our new product AIP, while at the same time, increasing our full year adjusted income from operations guidance to in excess of $576 million, an increase of $45 million above the midpoint of our prior range.
Looking ahead to the second half of the year, we remain focus on calibrating expenses growth below revenue growth, even as we increase investment in resources to AIP and invest in specific geographies around the world.
We generated income from operations of $10 million, our second consecutive quarter of GAAP operating income.
We continue to manage our stock based compensation as mentioned last quarter, we expect it to trend up through the back half of the year. However, we remain laser focused on GAAP net income and operating profitability.
As we think about equity compensation and aligning it to shareholder value. We are in the process of linking future employee equity compensation to the success of AIP.
Turning to net income GAAP net income was 28 million, our third consecutive quarter of GAAP profitability.
Adjusted earnings per share was five and GAAP earnings per share was one cent.
Additionally, our combined revenue growth and adjusted operating margin was 38% we expect to return to executing an access of the rule of 40 for the second half of the year.
Turning to our cash flow we.
We generated $96 million and adjusted free cash flow, representing a margin of 18% and $90 million in cash from operations representing margin of 17% through the first half of the year, we generated $285 million and adjusted free cash flow representing margin of 27%.
We ended the second quarter with $3 1 billion in cash cash equivalents and short term U S Treasury bills.
We retain access to additional liquidity of up to $500 million through our revolving credit facility, which remains entirely undrawn.
Now turning to our outlook.
For Q3, 2023 we expect revenue of between 553 and $557 million adjust.
Adjusted income from operations of between 135, and $139 million and GAAP net income.
For full year 2023, we are raising our revenue guidance to an excess of two point to one 2 billion. We are raising our adjusted income from operations guidance to in excess of $576 million and we continue to expect GAAP net income in each quarter.
On the back of our third consecutive quarter of GAAP profitability $285 million and adjusted free cash flow in the first half of the year and over $3 1 billion on our balance sheet.
Board of directors has authorized a stock repurchase program of up to $1 billion.
This program reflects our conviction and the trajectory of our business and the value we see in our stock with that I'll turn it over to Anna to start the Q&A.
Thanks, Dave will begin with a few questions my shareholders before we open up the call. My first question is from garage, who asks what are some of the AI advantage of pound here has that none of the other companies can compete with.
I'll take that one pounders optimally positioned for AI, because the value is going to increase to the incumbents.
It's going to accrete to the people who own the workflow on the software. So in our case, it's not just the customers that we do have today, it's our ability to acquire future customers. It's the 20 years of experience that we have solving the problems that matter. The problems that you should be solving with L. O M haven't changed at the same problems should be solving before you had <unk> in the two decades of experience, we have and the knowledge of applying it means that we can solve those problems.
Angela more quickly in other words, we built the infrastructure the infrastructure you really need for L. M to be valuable in your enterprise. If you want to write profits are not poems with them.
And I think one way you can think about this is <unk> XL like the the alarms are gonna make XL more valuable and useful they're not going to replace XL. The <unk> that we've been building with our customers in the field in the last 10 weeks I've been out there with our customers we deployed over 15 co pilots.
Time to value here is truly incredible it's accelerating everything that we've been doing here. So I feel really good about the positioning there and because we've been roughly two decades ahead, it's given us a lot of lead to think about the next ridge line of technical problems, a lot of which I hope to share at AAP cotton too, but to preview one of them. It's really the K L. O M kernel no I talked earlier.
In the remarks about how L. O M. R. R. R statistics in our calculus there like these stochastic Mad scientist why on Earth would you ask a question of one L. M. When you could ask K L O EMS and I think that really honors the fundamental reality that you need a committee here that there isn't an answer to this or stochastic question.
There are answers, especially when you don't have price and you can use this to actually wheel. These LMS.
For decisive operational advantage and the enterprise when you have this sort of framework. So stay tuned September AIP gone too will talk more about this.
Thanks, Sean Our next question is from Patrick who asks how is the use of AI and ml and benefited the sales cycle are you finding less resistance from internal it departments has it brought more awareness to pollen gear product inflation. Okay. Thanks, Patrick So as I mentioned, we launched AIP just 10 weeks ago, we're already seen unprecedented interest both from <unk>.
Top of funnel of new customers and from existing customers, who are looking to expand with the AARP offering you.
You've heard examples of very real momentum and engagement in impact, we're having with it from Jacobs Engineering J D powers Novartis among others to name a few and what we're seeing is with the emergence of <unk> AI capabilities operators and organizations are looking at ways to deploy those within their organizations effectively against their missions and do so safely and secure.
Early and we are that solution, we have the product to do that and we have 20 years of experience deploying our products in the enterprise and being able to do that safely and securely so while sometimes in the past. We may have had misaligned with idea departments now we're fully aligned with what they're trying to achieve so in short we're seeing sales cycles shorten we're expecting that to.
To continue and accelerate and we're going to run it at full speed and the.
Look we we.
Especially in the U S market, we were in it for lots of reason misaligned with our clients we have built products.
Both foundry.
And the ontology branching and lots of ideas of how to manage large scale datasets and then algorithm reclassify Chet.
Setting but in reality.
There was a resistance to how we believed an enterprise should work.
And if you look at what Tom is saying and what Ryan is saying, what you're what you're really seeing is American industry. Now is done five six iterations often within technologies with fixed sale force sales forces that kind of had been supported by the venture capitalists community capital community and quite frankly by analysts looking for models they understood.
We built a company that no one understood. We went deep one technology. That's foundry, we went deep on the logical extension of that which is all these precursor technologies that that we've now begun building into AIP and that we went deep against the playbook and in fact, the playbook now does not exist.
The playbook that is being built looks exactly like the products that are a reflection of our culture and that's just an insurmountable advantage and we are very focused on taking advantage of it.
Thanks, Brian and Alex our next question's from IMO, who asks how are you balancing investments for long term growth, while also delivering the profit and performance needed to keep shareholders confident in investing.
Because we are.
We are.
And I think one example of this is we delivered on GAAP profitability two years before.
Before people thought it was coming and if you look at the last three quarters, we have three consecutive quarters of GAAP profitability, we've not guided to Q3 and Q4 of <unk>.
GAAP profitability, we're here with $3 1 billion on the balance sheet and we're doing this all while we're investing heavily in AIP and we're really doing that across the company both with money both with resources and we're very focused on well I mean, we delivered profitability years ahead of time why do we care about profitability, we care about profitability because we power some of.
The most important enterprises in the world They care that we're on steady footing, we care about it because it shows people that we are serious we care about it because it positions us to be.
On indexes like S&P that show that we are one of the leading industries in the world. We believe in ourselves, which is why we authorized a buyback to align with this belief and ourself, our belief with profitability aligns with our.
Desire to be on the S&P, we are going to invest in ourselves and not as a small scale in the billion $2 billion range.
And so profitability stability move to S&P move too.
A company that is reflects what we will be which we believe is the most important enterprise software company in the world and these are all very much linked.
Thank you Beth our next question is from Jesse who asks I know you guys are pushing for 5% of defense spending to go to software. How has this been received by policymakers and the defense community.
We spend a lot of time talking to various parts of the U S and Allied defense communities and there's quite frankly, a very varied views on this our view is software.
That's actually used for important purposes, both commercial and noncommercial has certain attributes most likely built in America. It's most like it is built and the product.
The context of our product and its been sold commercially it is imperative for our country to move to a robot at well presumption that the institutions that defend us by a certain portion of software that is a product more likely not built in America and that somebody is actually bought it. Besides some large program.
And it's surprising how many people agree with us we're a long way off from getting this done but as our adversary has become more aggressive as people come to terms with the fact that many of the things. They may have learned in college that we're gonna all regress to a state of loving one another are not coming to pass and in fact, our adversaries view that as a laffey of laughable ferry.
Now that we believe in at our own expense people are getting more serious when people get more serious they stop wanting fantasies about how you build software fantasies about how you implemented fantasies about youre going to hire 10000 people and give it to somebody that a company that has never built a product that's ever worked and they but is that happening fast enough no Luckily for us.
S and hopefully for our country and the west people are getting much more serious just because of events that you see happening around us.
If you have any additions.
Well said.
Thanks, Alex Our next question is from Jos <unk>, who asks what's the latest from potential S&P 500 inclusion.
The latest is.
We expect to be eligible after we report Q3, and so we're proud to say, we're less than a quarter away.
From eligibility Motorola.
Thanks, Dave. Our next question is from Sony who asks can you elaborate on current capital allocation priorities.
Absolutely so.
Sony We have delivered three consecutive quarters of GAAP profitability looking at the first half of the year $285 million and adjusted free cash flow.
Close to almost $1 billion since we've gone public.
AIP is going to be a transformative you've talked you've heard Alex talked about the scale that we think can be we've talked about reorienting. The company around it earlier I spoke about how are you orienting our compensation about it.
You can find that GAAP profitability strong cash flow AIP. The board just authorized a $1 billion stock buyback.
Which aligns with our goal of S&P 500 inclusion.
We are very focused on investing in ourselves is we're not as focused on acquiring other companies. We believe we have the right products and or we will build them. So we are investing in what we do what we believe are the best in the world.
Very little interest in products, we see on the market and so it's really an investment in ourselves and our talent through changing the compensation and our ability to retain people by making sure. We're focused on our mission that is crazy important to us in the world and showing our beliefs, our belief with actual real attendees.
And are running like Hell.
Thank you. Our next question is from Dan with Wedbush, Dan. Please turn on your camera and then you'll receive a prompt on mute your line.
Hello.
Yes. Thank you.
Sure.
Great call.
And just a phenomenal inside that you provided I guess my question would be when it comes to IP what surprised you.
And the team and then there was the last 10 weeks has it surprised you just what we've seen from customers just how dramatic.
Sort of a surge of interest has been.
Sharp should also talk about this but what has very much surprised me is the way in which American institutions have metabolized the lessons of the last software wave. So they have a much deeper understanding of what the problem would be that you would solve.
And the operators.
So the people actually running the business.
In America realized the determinant variable for changing their margins changing their profit and outmaneuvering their competition is.
Is AI.
And so then you have the dynamic with the board. The board is insisting on governance the operators are insisting on adoption.
This is very very different than anything I've ever seen typically with software and events intervention intervention from the outside you've got to convince the CIO The board doesn't care and the operator is focused on business metrics.
Here the operators are saying I know for example, I was dealing with a large I was talking to one of the largest transporters of people in the world and the operator is saying, Okay. I know we have a problem with churn I know we have a problem with logistics. These problems can only be solved algorithm anticly, but I can't.
Solve them unless they have a governance structure that allows me to solve them because my board will go nuts.
That is basically a shape of a problem only we can solve.
This this is happening all over America various problems like this I'll give you. Another example, one of the advantages of AI is that if you want to do manufacturing. So you want to do joint Japanese manufacturing in America, you're actually having to use Japanese methodologies with American workers tier four is not impossible.
<unk> AI can actually allow you to manage the internal dynamics of your workforce. So you get the Japanese culture with American workers in the U S.
And this is this is just absolutely game changing for our country and why is it that now there are other countries, but Europe here is is really going to struggle, but other countries. Why is this game changing particularly for America because it allows us to do manufacturing at a level, we typically could not do and use cases that we were not.
<unk> allows us to change the margins allows us to do it safely.
It realigned the institution so now the person the operator and the CEO are very focused on a use case that will change the share price is.
Very unusual for institutions to be fully aligned unless someone shooting at you.
So the only estrogen I've ever seen that are fully aligned literally someone is shooting at you and even then the person is often like why can't I buy this from my cousin.
Right.
Iteratively special operator kicks in.
This is a completely different moment.
And then I'll say something else Tim.
Typically at this moment, we'd be captured by non incumbents people early stage early stage companies, but the market is moving too quickly the barriers to get inside these companies are still there and then the other incumbents.
Some of them are very interesting, but most of them just don't build products.
They they do not they are their companies with thin beautiful companies. They do things, we cant do but they don't really have many engineers. The engineers have been there for 50 years. They have huge sales forces they cannot build something that's relevant and if they could it's going to take years and theres nothing to acquire.
Not for sale.
And on the ground working with customers I would just add that the ambition has gone way up people expect the software to work day. So what do I expect that this offer I'm getting from my T organization has gone up then the ambition of their own use cases, what do I want to accomplish with this offer has gone way up that's create a lot of white space to go after and then when you can deliver 15 co pilot.
And nine weeks. It you just get so much more pull on that the other part that's been rewarding as like we no longer spend time talking about why do you need an ontology, we don't even have to use that word anymore. Because it's intuitive. It's an art it's obvious the infrastructure, we've built and how that enables you to actually accomplish these ambitious use cases. So it's just been a huge tailwind for us.
Thanks, Alex and Sean our next question's from Mariano with Bank of America Marianna. Please turn on your camera and then you'll receive a prompt on mute your line.
Through and everyone.
Very nicely. So my question is going to be about AIP, you mentioned more than 100 organizations using it right now how are you thinking about ratio and timing of our merchant and.
And second on the other conversations we're having with like lot like 300, plus organizations. How many of those are willing to you said on a foundry platform versus their own.
You want to take this.
Sure so the under the way, it's a pleasure to see you.
Finally.
We're in the phase right now, where we're very focused on driving compounding usage of this it's like you know we've done this with Gotham and we've done this with Gaia with foundry with Apollo and.
What we're excited to see that we have over 5000 monthly users. The users are growing 50% month over month, obviously, we've been doing this for 10 weeks now that it's quite a bit in the enterprise for the pace that were going out here I think.
Lets look and see what happens in the next few months here, but we don't think it's going to be too long to kind of turn that corner.
What was can you remind me the second part of your question.
People, who don't have foundry, how does that work.
I think that the real focus on the AAP product strategy is to make sure that you can use AIP without Gotham foundry or Apollo and that to the extent you see the value in these things you're going to pull them along with you know I think that's where ontology has been most useful in both context, we've deployed operational workflows on classified network using this technology in real world exercises that.
The only accomplishable because they are standing on a decade of this well until I ontologize data and the kind of enterprise tools that they have for war fighting to accomplish those use cases. So when you look at the time to value. It helps them solve for their use case. The other part that I would point out is people then see the value of bringing their own tools to bear when I think about the work we're doing at farmer Mac.
Companies and many of the AI models that they've already built this actually helps them close that last mile where they feel like look we have these exquisite models. We have these libraries, how do we actually connected to the business case of driving drug development more quickly and then you see these sort of hybrid architectures emerging where you have AIP foundry you have their homegrown systems working quite harmonious.
Lee against the ambitious problem.
So I think that's been pretty productive and I think the good part about this because it's so generative right. Now is is that there is no reference architecture, you're not you're not getting caught up in kind of academic questions of how should we design. This thing people are forging that and figuring that out relative to what works and delivers value. Let me just refine that a little bit we rebuilt. This original project a product our first product cash off the ground.
This famous and in a very small market called clandestine services and that project for product P. J did something really interesting. It de facto taught the world. What the use case is that you would need to solve and then provided the product that salt it.
And that's exactly what we're doing with AIP. So you do have an advantage if you're already a foundry because we've already kind of pre taught you where the road is going to go but right now to Sean's point in point I made earlier is there is no roadmap the product is actually teaching people what the roadmap would look like that doesn't mean, everyone will by AI.
By the way, it's up a lot of people say, okay, well I need these 15 things I need what chums, calling intelligence the ability to interact with L. M I needed ability to take that out in and turn it into logic I need an ability to run that on my enterprise safely I need all these things and I want to spend some folks some people, who say I want to spend $500 million building that because I want to own it.
A lot of those people will fail some will succeed a lots of the other people will buy it from pound here, but we are de facto teaching people.
The quote unquote roadmap of the way the World will look and the problems you have to solve and it teaches them because you can show it live in action.
And that's what's going on in the market and that gets to when we actually monetize. This we will monetize pound here is guilty of many things people thinking that he thought we were insane. Some people think ammo collected some analysts think that I am talking something they've never heard of.
Often right.
We have no problem monetizing, we make $2 $9 million per commercial customer across the world. We will figure out how to monetize that first we're teaching the market. What it is we're getting people on board. We're showing people that these are the kind of problems you'll have to solve if you want to engage in actually making money as opposed to writing neat poetry that that may be <unk>.
Sorry to your enterprise and your board wont, let you install anyway and then we will allow people then we will charge for that.
Thank you Bella Alex as early as we have a lot of investors on the line are there any other thoughts you'd like to share before me on the call.
Well as usual I'd like to thank our you know.
Many of our supporters our clients who've seen this transport for transformation and supported it who are adopting AIP.
The talented <unk> team, which goes through the vicissitudes of of our our shifts and now it's fully aligned on building AIP.
Our retail investors, who I think have been way ahead of everyone else and understanding the product actually testing it looking at it calling customers.
And in general the Spirit of American innovation from which we are profiting and thank you for your time.
That concludes the Q&A for today's call.
Attack.
Okay.