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spk09: Ladies and gentlemen, thank you for standing by and welcome to the Planet Here Technologies third quarter 2020 earnings conference call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone keypad. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Rodney Nelson, Head of Investor Relations. Thank you. Please go ahead.
spk04: Thank you, Operator. Good afternoon, and welcome to Palantir's third quarter 2020 earnings call. We'll be discussing the results announced in our press release issued after the market closed and posted on our Investor Relations website. With me on the call today is Shyam Sankar, Chief Operating Officer, Dave Glazer, Chief Financial Officer, and Kevin Kawasaki, Global Head of Business Development. During the call, we will make statements regarding our business that may be considered forward-looking within applicable securities laws, including statements regarding our outlook for the fourth quarter and full year 2020, 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 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 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 a reconciliation of non-GAAP to comparable GAAP measures, is included in our press release issued today. Our press release, investor presentation, and SEC filings are available on our investor relations website at investors.palantir.com. With that, I'll turn it over to Sean.
spk00: Thank you, Rodney, and thanks, everyone, for joining us today. At Palantir, we build software platforms for institutions whose work is essential to our way of life. Those institutions must be able to function in times of stability as well as crisis and uncertainty. And to do so, they need software that works. We were founded in 2003 and started building software originally for the intelligence community in the United States to assist in counterterrorism investigations and operations. We later began working with commercial enterprises. We have two principal software platforms, Gotham and Foundry. Gotham, which is our first software platform, was constructed for analysts at defense and intelligence agencies. They were hunting for needles, not in one, but in thousands of haystacks. And they did not have the software they needed to do their jobs. In Iraq and Afghanistan, soldiers were mapping networks of insurgents and makers of roadside bombs by hand. Gotham enables users to identify patterns hidden deep within data sets, ranging from signals intelligence sources to reports from confidential informants. and it helps U.S. and allied military personnel respond to those threats. We later found that the challenges faced by commercial institutions when it came to working with data were fundamentally similar. Companies routinely struggled to manage, let alone generate alpha from, data involved in large projects. Foundry was built for them. The platform transforms the way in which organizations interact with information by creating a central operating system for their data. Our software is on the front line. And sometimes literally, that means so are we. Gotham's use has now extended beyond intelligence analysis into defense operations and mission planning. And Foundry is becoming the central operating system, not only for individual institutions, but entire industries. Turning to the third quarter, revenue grew 52% year over year, driven by continued expansion within our install base and initial wins at net new 2020 customers. we are distributing our platforms more efficiently than ever, as we generated adjusted gross margins of 81% and contribution margins of 56% in the third quarter. And Palantir has evolved significantly in the last several years, from the development of our second flagship platform, Foundry, to the acceleration in our government business, to the operating leverage from Apollo, our powerful continuous delivery infrastructure, which has assessed operating efficiencies in very heterogeneous environments. In many ways, our business is just getting started, and this is largely a function of the technology that we've developed over these years. And you can really see that based on what's happening in the field. Let me highlight a few wins. An energy super major was able to leverage our ERP suite an hour, and in just a few weeks, generate $57 million of cash savings, a meaningful contribution to working capital for a sector that is challenged in the pandemic. The customer has already identified an incremental $315 million in potential savings on top of that. And this project has created lasting changes in the way procurement will operate with a projected annualized savings of $1 billion. We also closed a five-year, $300 million renewal mid-pandemic with a large aerospace customer, further reinforcing Foundry as core infrastructure in the operating system of their business. Aerospace has been significantly challenged in the pandemic, and we see this as a long-term commitment to each other. This is the largest deal we have done in the commercial space, and we anticipate strong contribution margins from a customer of this scale and maturity. Another commercial example I'd like to focus on is a Q3 net new Fortune 100 U.S. consumer goods company. This customer needed immediate help understanding the impact COVID may have on its employees and its operational facilities. This company was dealing with a surge in positive COVID tests across its employee base and was scrambling to monitor the health and safety of its employees, but also the durability of its operations. Over the course of an eight-week pilot we started in July, Foundry allowed this customer to monitor potential infections, alert individuals at facilities where potential outbreaks were occurring, and quickly triage to limit the virus's spread. This solution allowed the customer to annotate CAD-based models of their facility with data integrated in our platform to track whether specific areas were particularly conducive to outbreaks or whether the spread was being driven by internal or external factors. This enabled the customer to reach out to affected individuals and provide medical assistance. But also, the customer had a long-running project looking to extract more value out of its supply chain and ERP systems. The firm had invested hundreds of millions of dollars into these solutions, but was struggling to gain the promised economic and competitive advantage from that investment. The customer wanted to use our platform, which they came to appreciate in the context of COVID, to solve core and enduring challenges, specifically to build a real-time buying solution on top of existing investments to make optimized purchasing decisions, such as capitalizing on discounted raw materials when pricing anomalies occur. By leveraging various components and modules in Foundry, the customer is able to model a complete view of its supply chain, from upstream raw materials to downstream finished goods in a few weeks. This created hundreds of opportunities across the customer supply chain for optimization. We also signed a recent expansion with a top five pharmaceutical company. This firm, like many large pharma companies, is awash in data from thousands of clinical trials. But it's hard to draw conclusions across those trials as data is often siloed in disparate systems of record. Leveraging Foundry, this customer is able to link and interrogate data across more than 2,000 clinical trials, including symptoms, diagnoses, and treatments to unearth valuable findings. Again, across trials, not just in a single isolated study. Our software unlocks the ability to see patients' stories at a population level and answer key questions. such as how many patients suffer from a particular condition regardless of which trial they participated in. These insights will help the customer build hypotheses around biomarkers and progressions of certain diseases to optimize research and develop new therapies. Turning to our government segment, we continue to pursue our vision of powering U.S. and allied defense to fight current and future threats from space to mud, and in doing so, becoming the default operating system. We generated several new government wins in the third quarter, including a two-year, $91 million contract with the U.S. Army Research Lab. This customer will be employing both Foundry and Gotham to build out artificial intelligence and machine learning capabilities. Foundry was selected amongst 999 bids, and our platform will be used to integrate, manage, and prepare data for training AI models. Early related work here has shown promising results in delivering next-generation capabilities during a recent warfighter exercise. The Army has leveraged Vantage to great effect across various lines of efforts, from readiness to financial management. These wins illustrate our expanding partnership with the Army, and we're looking forward to pursuing future programs with both the Army and other branches of the military. In particular, I'd highlight the continued growth of opportunities that we see at U.S. Space Force and U.S. Air Force, which we are investing in. Our work serving healthcare agencies domestically and abroad continues to deliver results. We were selected by NIH's National Center for Advancing Translational Sciences, or NCATS, for a $36 million contract supporting secure scientific platforms environment. NCATS is using Foundry for integration, management, security, and analysis across various initiatives supported by the platform, which include cancer and COVID-19 research. Foundry is powering N3C Unite, which is the largest COVID-19 clinical data asset in the world, with over 1 million patients across more than 30 hospitals, all assembled in Foundry in a few weeks. Foundry is also the infrastructure supporting the complex supply chain and logistics for Operation Warp Speed. And this builds on our existing work at CDC, HHS, the NCI, and FDA. And it intersects with our commercial work, helping retail pharmacies and drug companies coordinate plans and logistics to successfully deliver vaccines to the population. In the UK, Foundry has been powering NHS England's response to the pandemic, including the allocation and distribution of more than 2.7 billion items of PPE and other critical equipment. I'd highlight that the President of Colombia recently released a video showing his country's response to the pandemic and the role both Palantir and Amazon Web Services played in rapidly deploying the infrastructure used to manage the situation. This engagement was sourced by Amazon, one of our channel partners. Importantly, we can already see how the pandemic is leading to lasting and systemic transformation of healthcare in various countries. We have a unique opportunity to power the holistic digital transformation of these organizations with significant improvement in the health and safety of their citizens. It may have started with COVID, but it's not going to end there as the pandemic has revealed a broad swath of challenges and opportunities these institutions are rising to meet. And taken together with our commercial healthcare work, we believe these developments will have far-reaching positive implications for the future of healthcare. And we have the opportunity to be at the center of it. Before turning it over to Dave, to take us through the numbers, I wanted to touch on our R&D roadmap. We believe the investments we are making will enable us to drive significant increases in the number of customers that we can acquire and continue to improve our time to value. Our latest R&D investments include enabling our solutions to be fully modular, a take what you want, build on what you have approach for the enterprise. We will be hosting product deep dive for investors in the next month or two. So be on the lookout for an announcement coming soon about these sessions. We're going to showcase how our customers use our platform across industries and across problem spaces, including defense, healthcare, supply chain, and more. We'll also discuss the latest technical development, our roadmap, and upcoming R&D investments. I'll pass it over to Dave.
spk01: Thanks, Sean. I'll review our third quarter performance, followed by our outlook for the fourth quarter and full year of 2020. Third quarter revenue was $289 million, up 52% year-over-year and over $9 million above the high end of the guidance we provided in connection with the direct listing. Average revenue per customer through the first nine months of this year was $5.8 million, up 38% versus the year-ago period. Average revenue per top 20 customer grew 36% year-over-year through the first nine months of 2020 totaling $23.6 million. We are seeing greater diversification in our revenue base as our top 20 customers represented 61% of total revenue through the first nine months of 2020, compared with 68% in the year-ago period. In the third quarter, we closed 15 deals of $5 million or more in total contract value, including eight deals in excess of $10 million. Top-line growth was driven by strong performance across each of our business segments. Third quarter commercial revenue grew 35% year-over-year to $127 million, driven by a combination of expansion with existing customers and increasing contributions from new customers. We also closed several large deals across our commercial portfolio in the third quarter, including a $300 million renewal in the aerospace industry and multiple wins, each over $5 million in the consumer, insurance, and financial services industries. Especially in the midst of the pandemic, we continue to prioritize speed of delivery and value creation. While this can lead to lumpiness in our commercial revenue on a quarter-to-quarter basis due to contract timing, we are encouraged by the pipeline we see in our commercial business. Total government revenue rose 68% year-over-year to $163 million, driven primarily by growth in our U.S. government business. As Sean mentioned, we signed several new government deals in the third quarter, including a two-year contract with the U.S. Army Research Laboratory, an IDIQ award with the National Center for Advancing Translational Sciences, and several wins in our international government business as well. At the end of the third quarter, our government deal value, including contracted amounts and contractual options, totaled $1.3 billion. I will next discuss our margins and expenses on an adjusted basis, which excludes stock-based compensation. We generated adjusted gross margin of 81% in the third quarter, up 1,100 basis points year over year, and reflecting enhanced automation in the delivery and maintenance of our software platforms, as well as reduced cloud hosting expenses. Contribution margin rose to 56% in the third quarter, up roughly 100 basis points sequentially, and compared to 15% contribution margin in the year-ago quarter, which demonstrates the increased scale and efficiency of our three-phase business model. Now I'm going to turn to operating expenses. For the third quarter, operating expenses were $235 million. Additionally, in the third quarter, we incurred roughly $54 million in expenses related to our direct listing and $18 million in employer payroll taxes related to stock-based compensation. Excluding these expenses, total third quarter adjusted operating expenses would have been $164 million. Sales and marketing expense was $71 million, or 25% of revenue. down from 54% of revenue in the year-ago quarter, all while growing our direct sales force. The operating leverage in sales and marketing is a result of more efficient customer acquisition and more rapid scaling of our customers through our three-phase business model and reductions in travel and office expenses. We expect to continue investing in broadening our customer acquisition efforts, including growing our account-based sales force and developing channel partnerships. Research and development expense was $57 million, or 20% of revenue, down from 32% in the year-ago quarter. As delivery and maintenance of our platforms have become more automated, we are realizing greater efficiencies in developing new features and functionality across each of our core platforms, including the modularization effort Sean discussed, allowing us to reap savings in areas such as travel and related IT expenses. We do plan to continue to grow headcount and expect R&D expenses to grow in absolute dollars moving forward. G&A expense was $107 million or 37% of revenue compared with 32% of revenue in a prior year period. This includes $54 million in expenses related to our direct listing. Excluding expenses related to the direct listing and employer payroll taxes related to stock-based compensation, G&A expenses would have been $49 million or 17% of revenue. Third quarter operating loss excluding stock-based compensation was $1 million. After excluding expenses related to our direct listing and employer payroll taxes related to stock-based compensation, third quarter adjusted operating income was $73 million, roughly $11 million ahead of the high end of our prior guidance range. We ended the quarter with total contract liabilities of $622 million. Prior to 2020, we pursued multi-year upfront payments from our customers, leading to significant growth in customer deposits, and often our cash collections were greater than revenue in any given year. As a result, many customers have already paid for 2020 in prior years, which explains the negative cash flow we have seen through the first nine months. We expect this to begin to normalize over the course of 2021 as we move away from multi-year upfront payments, and we expect free cash flow margin will converge with adjusted operating margin over time. We continue to have strong visibility into future revenues across our customer base as average contract duration as of September 30th increased to 3.6 years up from 3.5 years as of June 30th. We raised roughly $500 million, primarily stemming from equity investments made by our partner, Sampo Holdings, which closed in June and July. We reduced our total outstanding debt by roughly $100 million in the third quarter. As of September 30th, remaining debt is comprised of a $200 million term loan under our credit facility, and we also have a $200 million undrawn revolver available to us. We ended the third quarter with $1.8 billion in cash and cash equivalents. Looking at the business through the lens of our three-phase model, we continue to see strong progress at each stage. As a reminder, we cohort customers at the end of each year into one of three distinct phases. Acquire-phase customers are customers we have engaged in the pilot phase, often at little or no cost to them, which have generated less than $100,000 in revenue in that year. Expand-phase customers are those generating greater than $100,000 in revenue in that year. and we invest significantly to scale that customer and grow revenue quickly, resulting in negative contribution margins in the period. Finally, we define scale-based customers as those generating greater than $100,000 in revenue in-year, as well as positive contribution margins, exhibiting self-sufficient usage and growth with our platforms. Acquire-based customers generated $41 million in revenue through the first nine months of the year, while contribution from this cohort of customers is rapidly approaching break-even with a contribution loss of only $4.2 million, a testament to the speed and efficiency with which we're deploying our software and helping our early-stage customers solve critical problems. This compares to just $19 million in revenue through the first six months of the year, with a contribution loss of $13.9 million. In addition, through the first nine months of 2020, we generated $23 million in revenue from new customers that we have acquired in-year, meaning these are customers that have not yet been classified to one of our three-phase customer cohorts. This compares with $8.3 million through the first nine months of 2019 and represents nearly 200% year-over-year growth. This is a testament to the speed and efficiency of our platforms and go to market as we shrink time to value for our customers and accelerate customers from pilot to conversion. Taken together with continued revenue growth from our acquired phase customers, we believe the rapid growth in revenue from new customers creates a strong basis for future growth to augment the consistent expansion we are generating from our install base of customers in the expand and scale phases. Turning to the expand phase, we continue to demonstrate strong growth as our customers drive increased adoption of our software to yield greater value. Expand phase customers generated $254 million in revenue in the first nine months of the year, with contribution margin for these customers at 41%. This is up from $161 million and contribution margin of 35% through the first six months of 2020. and a significant advancement from $176.3 million in revenue and negative contribution margin of 43% from the same accounts in full year 2019. Finally, we continue to see strong contribution margin from our scale-based customers. These customers generated $452 million in revenue in the first nine months of the year with a contribution margin of 69%. compared with $296 million in revenue and contribution margin of 68% through the first half of 2020. Turning to our outlook, we are raising our full-year 2020 revenue guidance to a range of $1.7 billion to $1.7 billion, up from $1.5 billion to $1.6 billion previously, and representing year-over-year growth of 44%. We are also increasing full-year adjusted operating income guidance to a range of $130 million to $136 million, which excludes stock-based compensation and related employer payroll taxes, as well as direct listing related costs. For the fourth quarter, we expect revenue in a range of $299 to $301 million, representing year-over-year growth of 30% to 31%, given our exceptionally strong Q4 2019 revenue. We expect fourth quarter adjusted operating income of $44 to $50 million, which excludes stock-based compensation and related employer payroll taxes. For the full year 2021, we remain encouraged by the pace of growth we are seeing in our subscription base and the acceleration we are seeing in revenue from acquired phase and new customers that provide a solid foundation for future growth. As a result, we continue to expect full-year 2021 year-over-year revenue growth to be greater than 30%. With that, we'll open up the call for Q&A.
spk09: As a reminder, to ask a question, you need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile a Q&A roster. And please limit yourself to one question to allow time for other participants to ask their questions. Our first question comes from Brent Bill with Jefferies. Your line is open.
spk06: Good afternoon. The government business has shown incredible strength this year. I think many are curious about how you think about the pipeline and the residual kind of carryover from the government business. And maybe you could also address that. a big investor concern around the administration change. If that happens, does that have any impact on what you guys see in the government pipeline? Thank you.
spk00: Thank you, Brent. Yeah, the government business had a great quarter. I'd say both segments are performing quite well. We're excited about the pipeline of the government business. Of course, there's the contract that we just closed with the U.S. Army. There's a number of big capture pursuits in the pipeline, things that we've mentioned previously, opportunities like DSIGs, capability drop-to. There's a lot more behind that that we expect. There are a couple more programs of record that we're up for potentially in 2021, and we're investing far beyond just the Army, Space Force, the Navy, Air Force, so very robust pipeline. But that's just DOD. Honestly, there's been enormous acceleration for a part of a business that was pretty small 18 months ago in health care, the work that we've done with the FDA, CDC, HHS, the NIH has really accelerated, and it's created enormous opportunities for us. And while many of those opportunities certainly accelerated because of COVID, you know, it may have started there. It's very clear it's not going to end there. We're seeing opportunities for large systemic transformation in healthcare in the U.S., but also abroad. You know, COVID exposed opportunities for improvement, and I think governments are going to invest there. And in terms of your other question around administration change, look, for the 17 years that we've been around, we've served every administration in the U.S. We've worked with five administrations in the U.K., four administrations in France, and two in Germany. Our users and the folks who buy our software, they've worked with many more because they are actually career civil servants. And so we don't expect any change, really, as a result of this.
spk06: Great. Thank you.
spk09: Our next question comes from Mark Landy with Martin Stanley. Your line is open.
spk07: This is actually Keith Weiss in for Mark. Looking at the metrics on sort of the new customers that were acquired in the first nine months, that's up 175% year on year, really impressive new customer ads. Can you talk to us a little bit about how much of that comes from sort of the ramping efforts and building out the direct sales force so that that's starting to have a positive impact? And maybe if you could help us kind of mark the market, where are you with that effort in terms of like sales teams or whatnot and how you expect that to roll out on a going forward basis? And then maybe just one on operating margins. Really nice sort of uplift in operating margins this year, even though you're building out the direct sales force. Can you drill down a little bit more and help us understand kind of where those expense savings come from and how much of that is going to be kind of like you guys aren't traveling as much this year because of the COVID environment, and we should expect that to come back into the income statement on a go-forward basis?
spk03: Great. Thanks, Keith. So first, what we're doing with the account-based sales force. So we've talked a bit about this. We've been building this team starting with really the beginning of last year. And In hindsight, I think our main mistake was that we should have done more. It's worked very well for us last year and into this year. So we're increasing this effort. We've talked about tripling our total headcount there today, a fairly small part of the company. So we're going to continue to invest here because it's working. And you can see some of the results in some of our general categories, our new accounts that we've closed this year, accounts in the acquire phase, growing revenue, and the expand and scale phases really performing. But what's really working here I think is a little bit more of a technology and a product story. Speed to value for customers is getting much faster. And there are many reasons, but I'm going to highlight two. First is foundry modules and software-defined data integration. So we, Sean talked briefly about a customer mentioned earlier that started using our ERP suite. And they've already saved over $50 million. And they were able to use the software in just a few hours. And this is important to highlight because what used to take weeks of complex data integration and ontology building can now be automated. And this is because of the advancements we've made in software-defined data integration. And that was an example in sort of the large industrial complex. A consumer goods company used that same ERP suite. connected it to our Vertex Foundry module to simulate their supply chain. And it's now helping them run their business more efficiently. So the same thing here. The software is really driving more of the work. That means time to value is faster. And that equals more efficient sales. By the way, I guess this recent example was actually sourced by one of our more recent account salespeople. So big congrats to you and that team out there. You guys all know who you are. So these advancements are big opportunities for sales teams. They're also opportunities for channel partners who seem to be very excited about this. That's the Foundry modules. And we haven't talked a lot about channel partners, but I suspect we will in future periods. And so then I'll hand it back to Dave for the conversation about the operating margin.
spk01: Thanks, Kevin. So also just revisit our long-term targets for margins. We're targeting adjusted gross margin of 85% plus contribution margin of 70% plus and adjusted operating margin of 35% plus. In terms of adjusted operating margin, excuse me, adjusted operating income, we raised our 2020 full year guidance to $133 million at the midpoint. And when you're looking at sort of our just operating income, you can see that COVID accelerated a lot of change across the company. And it really resulted us in leveraging a lot of our previous R&D investments, things like Apollo. And so while there was a lot of change that happened with COVID, and you're going to see a lot of that sticking. But with that said, we're going to continue to invest. As Kevin talked about, we're going to continue to invest in our direct sales force, continue to build out products like Apollo, continue to get that operating leverage, and we'll continue to see top-line growth continue to outpace expense growth.
spk09: Again, if you would like to ask a question, press star 1 on your telephone. Our next question comes from Alex Lutzen with RBC, and your line is open.
spk02: Hey, guys. Thanks for taking my questions, and congrats on a great first quarter. You mentioned a little bit about modularizing the platform componentry and something that you're going to talk about in here in the short, in the near term. Can you talk about what kind of motion is that going to unlock, why you're doing that now, and where do you expect that to have a bigger impact on commercial or federal sales? And then just a financial question, if we think – remind us a little bit about the seasonality of the business, and as we look to next year around top-line growth specifically, how should we think about revenue linearity, specifically maybe 4Q to 1Q and then beyond?
spk00: Great. Thanks, Alex. So – Just to back up a little bit, thinking about Foundry here, we've built this over the last five years, we've built this end-to-end platform, and we've been investing significantly in the R&D to do that. And that really paid off. In the first three weeks of COVID, we started 83 new engagements. And we could do that because we had a solution that customers could start using in a matter of a few hours that could solve scaled problems in an end-to-end sort of way. And that has a premium in a crisis, and crises have always been a tailwind for our business, whether it's the global financial crisis or ISIS attacks in Europe in 15 and 16 or the present-day pandemic. But we also recognize that many customers have made investments in IT capabilities that they are more or less happy with. And so by modularizing the offering, we're able to let them take what they need from the offering but then build on what they already have. And that allows us to have a more nuanced land and expand motion over time. It changes the offering in a way that you have more flexibility on the price point and it gives you a new way of going to market with channel partners. So we think it actually opens up a lot of opportunities. Customers are pretty excited about that. We've seen opportunities to leverage those modules already with new customers both on the pipeline side but even new customers where we're actually implementing and converting. And, yeah, I think that it's – and I also – I guess the last part of your question, I would expect to see this both in government and commercial.
spk03: And I'll touch base a little bit on the guidance for 2021. So 93% of our customers or 93% of our revenue is from existing customers recurring and growing. So we're very focused on bringing on new accounts because that creates a starting point for this land and expand dynamic. But again, 93%. coming from existing customers occurring and growing. A little bit more, a few more numbers there I think are important to focus on. Average revenue per customer through the first nine months of this year grew 38% compared to last year. Average revenue for our top 20 customers grew 36% compared to last year. And for both these numbers, still three months to go here. We've also reduced our customer concentration. Our top 20 customers are going from 68% of our total revenue to 61% of the total revenue through the first nine months of 2020. Touching just briefly on the seasonality question, I think it's important. One thing you might be pointing out and focused on is that we had a very strong fourth quarter in 2019. about 20% sequential growth. So what you're seeing a little bit here in 2020 is that smoothing out a little bit. And what you've also seen is our guidance raising a little bit to 44% for the full year.
spk09: Our next question comes from Chris Merwin with Goldman Sachs. Your line is open.
spk05: Okay, thanks very much for taking my question. I wanted to ask about the commercial business. It looks like it grew 35% in the quarter, which I think was well above the growth rate you had for last year. I know you had a very significant $300 million renewal in the quarter. Was that the main driver of the acceleration, or was it the other wins that you called out as well, and actually be thinking about the sustainability of that higher growth rate for the commercial business in the near term here? Thanks.
spk00: Yeah, it's been a great couple quarters on the commercial side here. I think the drivers are really a diversified set of new deals that, you know, if we look at the renewal here, that's really looking at 21 revenue and beyond. So we should look at that towards future periods. And so the work we've done with the U.S. Consumer Goods Company, the work that we've done with other manufacturing companies, U.S. and abroad, the work that we've done in Japan, all of these things are building into the commercial business And we expect to continue to close deals in this area. One thing we are leaning into significantly as the second wave of the pandemic seems to be upon us here is helping our customers. And so we're very aggressive about getting started, working immediately. You know, we can deploy our solution within hours and can have a meaningful impact on the durability of their operation within hours to days. And so we're leaning in very hard to doing that and figuring out the specifics around payment and timing and all that stuff later. It's a great opportunity for Foundry to really be the core operating system that delivers in a big moment. It's what we spent the last five years investing our R&D in and the software is there to meet that moment.
spk05: Great. And maybe just a follow-up on the commercial as well. I think you touched on it briefly before, but I wanted to ask you about how the sales motion is evolving. I know there's a lot of use cases for commercial, a growing number of use cases for commercial. But in terms of making these customers aware of the power of the platform, is that really going to be a direct sales effort, or could, you know, you see some more investments in growing the partner ecosystem, just given, I'm sure, the complexity of the issues that a lot of the commercial customers are facing? Thanks.
spk03: Sure. So, you know, the direct sales force we're continuing to invest in, doing quite well there. I'd say it's a little early here, but sort of feeling somewhat optimistic about the early work with some of the channel partners. We've seen some early success. I think we'll be talking more about that going forward. And particularly in the commercial market, it's certainly true that the more we do, and oftentimes just the faster we do it, it opens up a lot more opportunities for us. I think something that you'll hear more about with Foundry modules is that the customer is really able to have sort of much more opinion, not only on how they use Foundry, but what specific pieces of Foundry they would like to use. So, you know, instead of being required to use the full Foundry stack, the customer can now choose only the part they need so they can build on what else it is that they have. And, you know, that gives us a lot of flexibility. It gives us flexibility on pricing, but also it does open this big, as Sean mentioned, sort of window for channel partners who seem to be quite excited about that. So look to hear more about boundary modules. We plan to show as much of this as we're able to in the upcoming presentations.
spk09: Our next question comes from Brad Zelnick with Credit Suisse. Your line is open.
spk08: Great. Thanks so much, and congrats to you all on a nice strong quarter out of the gate. My one question is actually pretty simple. I just wanted to ask about contract duration, which I think you disclosed at 3.6 years this quarter. Maybe you can comment on how that's trended year on year and how you expect that might trend forward into calendar 21.
spk03: So we're pretty happy with sort of getting additional visibility on the revenue here. I think when we're thinking about You know, we're really sort of looking at the portions and success we're having with the breakdown of the three-phase model. You know, and when we looked at just new customers that we've acquired in a year, that group has grown nearly 200%. Dave mentioned this, you know, compared to last year. The acquire phase has grown over 100% just the last three months. And the interesting thing about the acquire phase is that there are a lot more accounts in here that are not yet customers. In other words, there are many accounts that are in pilot phase that we believe will grow over time into the expand and scale phases. And you're seeing some of this in the growth of the acquire and the new account phases. So these are kind of the early land portion going into our model here. The expand phase accounts, we did $254 million through the first nine months of the year, and those accounts did a 41% contribution margin. So for some context, this same group did $176 million and a negative contribution margin of negative 43% in 2019. So that's 44% growth already for this year, and we still have three months to go. And again, worth kind of focusing on here, this account group went from negative 43 contribution margin to positive 41% while growing revenue at this rate. And then, you know, the last portion I think, you know, should focus on is The scale phase customers, scale phase accounts generated 452 million of revenue through the first nine months of year contribution margin of just below 70%. You know, at the limit, we think all accounts should be in the scale phase and that scale phase should grow. And we're seeing this in the performance of the contribution margin in both the expand and acquire phases. So it looks like, you know, we will see growth in the scale category.
spk09: Again, if you would like to ask a question, press star 1 on your telephone. Our next question comes from Tyler Radke with Citi. Your line is open.
spk07: Hey, thanks so much for taking my question. Shyam, I wanted to ask a couple questions to you, and I thought it was pretty interesting, one of your comments on just saying that you wish you'd invested faster or sooner in the direct sales force. And I guess I'm curious about, Now that you've kind of been able to look at the successful investments, how are you thinking about growing overall headcount from here? I think the original target was for somewhat muted headcount growth in 2020, I think maybe 4% to 5%. But given some of the successes and some of the things you're investing in with the foundry modules, how are you thinking about growing headcount going forward. And then just had a quick follow-up on the foundry modules. How do you think that kind of changes the competitive environment for you guys? Do you think you're going to be kind of going up against some of these data and analytics point tools and kind of the best of breed vendors there? Maybe just give us a sense for how that changes your competitive landscape as well. Thank you.
spk00: Yeah, on the first question – thanks, Tyler. So on the first question – I think what we're very confident is that top line will continue to grow much faster than operating expenses. You're right. If we find opportunities to invest, we're going to take them. But right now, I'd reiterate what we're kind of expecting around 4 or so percent headcount growth. The One of the things that's in there that kind of might make that 4% seem low, but it's actually not, we're getting so much more efficient. What we've been able to do with our sales and marketing spend, and even though we're hiring into our direct sales force here, In some sense, it looks like sales and marketing is going down, which isn't actually what's happening. We're actually doing more sales and marketing, but we're just much more efficient at delivering it based on the investments we made around Apollo and software-defined data integration. And so I think we're getting just a big benefit from there. We're able to do a lot more with the same humans that we do have. And so we're seeing some of that benefit. And in terms of foundry modules in the competitive landscape, We think there are a couple of things that we're doing on the modules, at least that we keep hearing from customers that are really unique. I think customers will continue to pick those. The important part here is working with the customer to find what investments they really believe in that they've already made and ensuring that the architecture that we're putting forth fits with their plans their roadmap going forward and so i think of it much less as a competitive situation in terms of what you know the customers evaluating this best of breed tool versus that tool it's really about look i have things i'm happy with i really believe in your solution but i want to be able to leverage the investments i've already made and uh That's going to help us win a lot more. It's going to help the direct sales force be more effective. It means that channel partners have a proposition that they can succeed with, both because it will integrate with their existing offerings, but because also the channel has to do less to really get this to work for the customer in terms of their enterprise architecture planning.
spk09: Ladies and gentlemen, we have reached the end of the allotted time for questions. I will now turn the call back over to the planning team management for closing remarks.
spk00: Well, thank you all so much for joining us for our first quarterly conference call. We hope to have many more with this group here. I would like to end by just thanking all of our employees, past and present. It's the commitment to do the hard thing that we see from them all the time, and it's so inspiring. They built this company over years and years of hard work, and when the crisis came, when the pandemic came, they were ready. They met their moment. So thank you guys so much. Thank you all.
spk09: This concludes this conference call. You may now disconnect.
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