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Palantir Shares Drop on Profit Outlook

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(Bloomberg) -- Palantir Technologies Inc. said its operating margin will shrink in the fourth quarter, sending shares plummeting.

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The operating margin in the period that ends in December will be 22%, the company said in a statement Tuesday. Analysts were expecting 24%, according to an average of estimates compiled by Bloomberg.

The stock fell as much as 10%, the biggest intraday drop since February.

Palantir went on a hiring spree this year. It added 150 employees in sales and dramatically increased marketing expenses, the company said. Still, sales from each customer are expected to decline on average in the future, David Glazer, the chief financial officer, said in a conference call with analysts.

The Denver-based company spent more than $200 million on stock-based compensation in the third quarter, an expense that has long been a sore spot for many investors frustrated with the company’s lack of net income. Those costs have decreased from previous quarters and should continue to do so, said Shyam Sankar, the company’s chief operating officer.

However, he cautioned, they won’t disappear entirely. “Equity itself is incredibly important to incentivize employees and to align them with existing shareholders,” Sankar said in an interview.

The margin aside, Palantir outperformed by most measures in the financial report. The company gave an improved outlook for the year and sales for the fourth quarter above estimates, anticipating increased government spending on infrastructure and national security.

The company, co-founded by billionaire Peter Thiel, can thank Beijing. Deteriorating relations between China and the Western governments that rely on Palantir’s data analysis tools is likely to drive growth, Sankar said.

Governments of the U.S., U.K. and Australia, all major customers, will increase spending with Palantir on efforts designed to combat escalating military and intelligence threats from China, Sankar said. “It’s what’s galvanizing investments.”

Another factor is the $550 billion U.S. infrastructure bill passed last week, Sankar said. Palantir expects to benefit from spending on climate initiatives and other projects that involve sifting through large volumes of data, he said.

Adjusted free cash flow in 2021 will exceed $400 million, up from an earlier forecast of more than $300 million, Palantir said. Fourth-quarter revenue will increase 30% to $418 million, beating the average of analysts’ estimates.

The third-quarter performance largely exceeded expectations. Adjusted earnings were 4 cents a share in the third quarter. The net loss was 5 cents a share.

Sales grew 36% to $392 million in the period that ended in September. Palantir said it increased the number of business customers by 34, about half of which signed deals worth at least $10 million.

Palantir also expanded some Covid-19 programs, including one with the National Institutes of Health. Sankar touted Palantir’s pandemic response in the conference call with analysts Tuesday: “When the bat signal was put up in the night sky, the motley crew of hobbits answered the call for America and her allies.”

(Updates with CFO comments in the fourth paragraph.)

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