IonQ Q1 2023 Earnings Call Transcript

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May 11, 2023

There are 10 speakers on the call.

Operator

Greetings, and welcome to the IONQ First Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Jordan Shapiro, Vice President, FP and A and Head of Investor Relations.

Operator

Please go ahead.

Speaker 1

Good afternoon, everyone, and welcome to IonQ's Q1 2023 earnings call. My name is Jordan Shapiro, and I'm the Vice President of Financial Planning and Analysis and Head of Investor Relations here at IonQ. I'm pleased to be joined on today's call by Peter Chapman, INQ's President and Chief Executive Officer Thomas Kramer, our Chief Financial Officer Doctor. Chris Monroe, our Co Founder and Chief Scientist and Doctor. Jung Sang Kim, our Co Founder and Chief Technology Officer.

Speaker 1

By now, everyone should have access to the company's Q1 2020 The earnings press release issued this afternoon, which is available on the Investor Relations section of our website at investors. Inq.com. Please note that on today's call, management will refer to adjusted EBITDA, which is a non GAAP financial measure. While the company believes this non GAAP financial measure provides useful information for investors, the presentation of this information You are directed to our press release for a reconciliation of adjusted EBITDA to its closest comparable GAAP measure. During the call, we will discuss our business outlook and make forward looking statements.

Speaker 1

These comments are based on our predictions and expectations as of today. Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in our most recent filings with the SEC. Now, I will turn it over to Peter Chapman, President and CEO of IonQ. Peter?

Speaker 2

Thanks, Jordan. Good afternoon, everyone, and thank you for joining us for our Q1 2023 earnings call. We finished the Q1 with $4,300,000 in revenue, which was above the high end of our expected range. Meanwhile, we booked $4,100,000 in new contracts and are maintaining this year's annual booking guidance. Thomas will share more details on our commercial activity and financials later in the call.

Speaker 2

We continue to move forward at full speed at IAQ, trailblazing in our industry. In our view, we have distanced ourselves from the pack company to profitability based on our current roadmap. INQ will continue to focus on achieving quantum advantage And developing commercial applications for our customers. At INQ, our primary focus Has been not on the quantity of cubits in the system, but on the quality of the cubits and their operations. For quantum computers, this quality, also known as fidelity, is the key differentiator in successfully completing computational tasks.

Speaker 2

We measure the fidelity of our systems using an application oriented benchmark we call algorithmic cubits or AQ. AQ is based on work pioneered by the Quantum Economic Development Consortium, an independent industry group, And evaluates Quantum Computers utility in real world settings. Last year, we achieved our goal of hitting 25 AQ. This year, we set an even more ambitious goal of hitting 29 AQ by the end of the year. Recall that every additional AQ corresponds to roughly doubling useful computational space, meaning we can run much more powerful quantum Today, I am excited to share that we have hit our 29 8Q target, Meeting our 2023 technical goal 7 months early.

Speaker 2

This achievement made possible by the hard work and dedication The full INQ team brings dramatically more powerful quantum computing capability to our customers and puts us one step closer to reaching Quantum Advantage. What's more, I am excited to announce That we hit this target using INQ Forte, our newest world class quantum system. You may remember That we first announced work on our Forte system midway through last year, with the goal of running customer jobs on Forte before the end of 2022. We achieved that goal. Our next major technical is achieving 35 AQ, which is particularly significant.

Speaker 2

At 35 AQ, Simulating the operations of quantum algorithms using classical hardware can become exceedingly challenging and costly. We expect at 35 AQ, some customers will have an increasingly clear business case for running models on actual quantum computers rather than attempting to simulate those models with classical computers. If you're watching the quantum industry for signs Of our computers becoming more practical or more powerful than classical computers, hitting 35 AQ is an important milestone to track. The next steps will be for our systems to take on problems that are beyond the capacity of even the best quantum simulators And subsequently, to tackle problems that even the best supercomputers can't solve. We anticipate each of these milestones driving further Commercial adoption.

Speaker 2

Since going public about 20 months ago, we have been dramatically increasing our AQ Going from 6 AQ commercially available on our INQ Harmony systems to now 29 AQ on INQ Forte. That represents an increase of more than 1 AQ per month on average. Similarly, If you look ahead to our goal of hitting 64 AQ by the end of 2025, that also represents an average increase of more than 1 AQ per month. Moore's Law famously predicted the number of transistors in an integrated circuit Would double roughly every 2 years. As a reminder, each additional AQ roughly doubles the power of our systems As measured by the useful computational space for running quantum algorithms, Moore's Law was about doubling every 2 years.

Speaker 2

At INQ, we've been doubling our systems power every month on average. For example, the most recent leap from 25 AQ The 29aQ represents a 16 fold increase in computational power. Potential customers are noticing the superior performance of I and Q systems and with demand for I and Q compute Time rapidly rising, we have been accelerating our system manufacturing efforts. Today, I am proud to announce We have completed construction of our 2nd ARIA class quantum computer, also known as ARIA 2. This new machine will join ARIA 1 on the public cloud this quarter.

Speaker 2

Bringing ARIA 2 online is a crucial step For our commercial efforts, as it improves our redundancy, capacity and order processing speed. Speaking of customers, we are proud to announce that as part of our commercialization efforts, earlier this year, We signed a contract with the United Emirates Quantum Research Center Technology Innovation Institute to explore how quantum computing can give the UAE a competitive edge. This agreement is testament to the trust and confidence The global leaders have in iNQ's cutting edge technology and our ability to drive breakthroughs in quantum computing. In addition to bringing on more customers, we're also seeing strong results from existing customers, Taking advantage of our increasingly powerful systems. In collaboration with Fidelity Center For Applied Technology or FCAT, We are proud to announce new work in the field of Quantum Monte Carlo.

Speaker 2

Our newest accomplishment focuses on speeding up Monte Carlo simulations, A widely used statistical analysis method in finance, science and engineering. A year ago, we started investing in Quantum Artificial Intelligence or Quantum AI. Our first output of that work is a paper On modeling human cognition, which has now been published in the peer reviewed scientific journal Entropy. We are excited by the potential for Quantum to power not just machine learning, but also artificial general intelligence or AGI. The point at which AI is strong enough to accomplish any task that a human can.

Speaker 2

With application areas for Quantum becoming increasingly clear, we are also forging channel partnerships that will help us distribute INQ compute access to a broad set of customers around the globe. We added a new enterprise partnership in April When INQ joined forces with BearingPoint, a global management and technology consulting firm to power their growing Quantum team in Europe. BearingPoint has offices in 24 countries around the world and has over 5,000 employees, With their Quantum team soon to be trained on our systems, BearingPoint Premier clients will be offered access to INQ's World class quantum computing systems and application development services. Our momentum here at INQ continues to build. We hit our key technical target for the full year well ahead of schedule, beat our revenue goal for the quarter, innovated with our customers to solve new problems and tapped into a new channel partnership in Europe.

Speaker 2

Lastly, it is my pleasure to introduce Pat Tang, The newest member of the INQ leadership team. Pat will be taking over as Vice President of Research and Development. He brings to INQ over 23 years of technology experience, most recently as a VP of Engineering at Amazon's Lab126. Pat is one more testament to the best in class talent that is convening at INQ. And with that, I would like to turn the call over to Thomas for a more detailed review of the financials.

Speaker 3

Thomas? Thank you, Peter. Now let's walk through this quarter's financial results in more detail. As Peter mentioned, we had an excellent quarter recognizing $4,300,000 in revenue, which was above the high end of the outlook we previously provided. This reflects us being able to complete work ahead of schedule for some of our milestone dependent revenue.

Speaker 3

While we experienced some accelerated revenue recognition from Q2 into Q1, we anticipate that the full year impact will be lower given how projects and milestones are distributed between periods. We exited the quarter with $4,100,000 in bookings, which is a great start towards our stated expectations of between $38,000,000 to $42,000,000 for the full year. Given that we are still at the beginning of our commercialization phase, I want to reiterate my comments from previous earnings calls That we expect bookings to continue to be lumpy for quite some time. Moving down the income statement. For Q1 2023, our total operating costs and expenses for the Q1 were $32,300,000 up 60% from $20,200,000 in the prior year period, but well within our plan for the year.

Speaker 3

To break this down further, our research and development costs for the Q1 were $16,200,000 up 121 percent from $7,300,000 in the prior year period. Recall that we are investing heavily in R and D and given anticipated demand, are especially focused on investing in our manufacturing capabilities to build more systems than previously anticipated this year. Our sales and marketing costs in the Q1 We're $2,700,000 up 43% from $1,900,000 in the prior year period. This increase was due to us growing our go to market function and additional sales and support personnel as we continue our investment into our commercial efforts. Our general and administrative costs in the Q1 were $10,600,000 up 15% from $9,200,000 in the prior year period.

Speaker 3

All of this resulted in a net loss of $27,300,000 in the first quarter, compared to $4,200,000 in the prior year period. It is important to note that these results include a non cash loss Of $3,600,000 for the Q1 related to the change in the fair value of our warrant liabilities. We saw an adjusted EBITDA loss for the Q1 of $15,900,000 compared to a $10,300,000 loss in the prior year period. Note that we projected an adjusted EBITDA loss for the year Of $80,500,000 so with this quarter's loss, we believe we are still on track to hit our prior 2023 projection. Turning now to our balance sheet.

Speaker 3

Cash, cash equivalents and investments as of March 31, 2023 We're $525,500,000 We continue to believe that this cash position, which we believe is the strongest of any Quantum peer player gives us sufficient cash reserves to get to profitability without needing to raise additional funds given our current roadmap. Now turning to our Q2 and full year 2023 outlook. We are pleased to increase our revenue outlook to $18,800,000 to $19,200,000 for the full year 2023. This represents our expectation that we may be able to accelerate delivery against milestones on some of our customer contracts throughout the year. We are maintaining our bookings outlook for the full year 2023 of $38,000,000 to $42,000,000 and we are introducing 2nd quarter revenue guidance of between $4,100,000 $4,500,000 As a reminder, we expect bookings of between $38,000,000 40

Speaker 2

Clearly, we have been hard at work and executing diligently against our technical and business roadmap. Our early foundations as a company and our underlying trapped ion architecture are yielding the dividends we expected. The naturally high fidelity of our approach has laid the groundwork for us to begin solving the engineering problems around scalability. Our technical achievements are driving exceptional demand for more INQ computers, which we are fulfilling with new systems like ARIA II. Meanwhile, we are trailblazing in system performance and manufacturability.

Speaker 2

We are seeing excellent progress on the commercial side of the business, adding new customers and adding value to existing ones, particularly in the growing area of quantum artificial intelligence. The time to figure out how quantum computing can accelerate your business is now. And with that, I would like to turn the call back over to our operator for the Q and A session. Operator?

Operator

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. Our first line our first question comes from the line of Scott Fessler with Morgan Stanley. Please proceed.

Speaker 4

Hi, guys. Congrats on the great quarter. Congrats on adding ARIA 2 to the cloud as well. I assume this is a reflection of how well ARIA 1 has gone on the cloud. With the achievements you guys have made around Forte, as you said, 16 times more powerful than ARIA, has there been any discussion of bringing that to the cloud as well?

Speaker 2

Hey, Scott. This is Peter. So certainly the reason we built ARIA II was because of the demand. And with Forte as well, we are looking at what we want to do next with that. That too, we have We haven't made the decision yet as to when we will put it out on the cloud or versus internal.

Speaker 2

But certainly that the demand for that system seems exceptional as well.

Speaker 4

Thanks. And if I could get a quick follow-up in as well. You've discussed on prior calls, the expectation of making a full system sale this year. Could you maybe discuss any updates around that?

Speaker 2

Well, we're continuing. There's quite a bit of interest, Especially as these systems become more powerful, as we start to get into AQ3564, customers understand That means that we're getting to a point where we can do things to get to quantum advantage. And so there's a lot of interest in the systems now, Especially now that we've gotten beyond 29. And so we're not ready to report deals closed, but there's Obviously, conversations going around in the background.

Speaker 5

We should also clarify that we did not actually specify that there would be a system sale in this calendar year, only that we expected one to happen in the next 12 months to 24 months And also that there are elements of hardware sales baked into our forecast. It may or may not be a full system sale. But we continue to The interest in this from several parties and actually in several segments of the market, so we continue to believe that this Indeed going to happen in a timeframe that we previously mentioned.

Speaker 6

Understood. Thank you.

Speaker 2

These are big ticket sales. So they take a little longer.

Speaker 4

Okay, understood. Thanks.

Operator

Our next question comes from the line of Richard Shannon with Craig Hallum. Please proceed.

Speaker 2

Well, hi guys. Thanks for taking my question as well. I guess

Speaker 7

my first question is, it's a 2 parter here. I realize I'm kind of comparing things that aren't similar, but on the theme of getting Forte 29AQ ahead of time and then also More tactically or near term, accelerating some milestones allowed you to recognize a little bit more revenues in the Q1. What's kind of the dynamics here that's driving this acceleration? Maybe you can kind of compare any or compare and contrast any themes that might be consistent over those two dynamics, that'd be great. Please, Peter.

Speaker 2

Yes.

Speaker 8

On the technology side, I think we have Making investments for the last few years in thinking about how to continue to improve the performance of our system. And I think that is paying off. It's paying off in a way that we make strides and get to these technical milestones ahead of time.

Speaker 5

And when it comes to revenue recognition, that reflects the fact that two things actually. Earlier, we've had a predominance of Quantum as a Service, which is more or less like SaaS And revenue gets straight lined, which means that it will be very simple to forecast. But we have started to move over to a more of a percentage complete type of revenue recognition contracts, which means that When we're able to start the work earlier and implement more of it earlier, we will also be able to implement or get more revenue recognition early. And that's what we particularly saw in Q1, which has been good and we anticipate that most of that will actually flow through to An increase in the end of year revenue, but there are some acceleration that we think that that was merely an acceleration from Q2 to Q1, so it wouldn't persist throughout all the next periods. But we are happy to announce that this Does mean that we're able to raise our revenue recognition guidance.

Speaker 7

Okay, fair enough. Thanks for all that detail. My second question is, I understand your last conference call about system sales and whether they be government or or academic or commercial customers. And I remember your answer from that and kind of following up with one of the previous questions here about system sales. I've seen some evidence of kind of RFIs for government contracts for I think like 9 figures Kind of dollars here that could include, possibility of Quantum Hardware sale.

Speaker 7

Are some of the potential or earliest possibilities for system Sales, are those related to any government contracts that you're aware of either published or not? Or are they another kind of other dynamics driving that interest?

Speaker 2

We have interest both in governments, both nationally, internationally And also enterprise customers when it comes to system sales. So, there's interest from multiple parties And obviously, in both in a national budget point of view, there's quite a bit of money for Quantum and Systems and we're

Speaker 7

Okay, fair enough. I appreciate all the detail guys. I'll jump out of line. Thanks.

Operator

Thanks, Richard. Our next question comes from the line of Quinn Bolton with Needham and Company. Please proceed.

Speaker 9

Yes. Hey, guys. This is Trevor on for Quinn and congrats on the 29 AQ that's exciting to see. And I guess to start, I know the next goal is 35 AQ in 2024 and I don't want to put pressure on you, but with your progress doing 1 AQ a month, could this milestone be reached in the first half of 24?

Speaker 2

So we're not changing the roadmap, But at the same time, obviously, we're executing well, up to this point on hitting the Milestones early and we continue to expect that we will execute well.

Speaker 9

I guess, would you say that GAAP from 29% to 35% is Much more difficult from 25 to 29?

Speaker 2

No, the answer is no.

Speaker 8

It is going to be in this case, we're increasing by 6. So it will be 64 times more powerful in terms of the competition space. Yes. So there will be some work involved, but we feel quite confident that 35 in 2024 is a goal we can accomplish.

Speaker 2

There isn't anything major to getting to 35, just hard work.

Speaker 3

Okay.

Speaker 9

And do you expect the integration of the 2nd ARIA device in the cloud to have a material impact On revenue growth, I'm trying to get a grasp of the impact that system downtime and waiting queues May have on current revenues and if this system will help alleviate some of those problems?

Speaker 5

So it will Certainly alleviate the challenge of always having uptime and this was planned for us because it takes us some amount We'll have time to build these systems and the revenue from that system is built into our forecast for the year. Thanks, Quinn.

Operator

Our next question comes from the line of David Williams with Benchmark Company. Please proceed.

Speaker 6

Hey, good afternoon and congrats on the execution and the progress here.

Speaker 5

Yes. I want to touch a

Speaker 6

little bit just as you think about that transition from 29% to 35% and maybe Or even just to get into that 29, what are the keys, I guess, is it what areas are you improving? Is it around the system? Is it the optical Sat, is it the IO? Where are the improvements coming from? Or is it just better, higher quality cubits during the manufacturing process?

Speaker 6

Just trying to understand where this Where are you getting the benefits?

Speaker 8

Yes. As we have said in the past, our cubits are individual atoms. They aren't getting any I think it's really about how we control our systems and operate them. So as we have discussed some time Forte actually has an improved optical system to drive our gates, and I think we're really seeing the benefits of that design upgrade. But also we're actually learning how to operate these systems more optimally.

Speaker 8

So a lot of this is really coming from improving the quality of our gates and our ability to Run longer circuits without any unexpected degradation in the performance.

Speaker 2

For the most part, it's these things are often So large part of the benefit is often in software, not in hardware. So it's we're doing a better job controlling it in software.

Speaker 6

Okay, very helpful. Thanks. I'm sure there's quite a few areas to within that topology that you can You can tweak to gain that performance as well. Is that correct assumption?

Speaker 2

That is certainly correct. I mean there's where all the hardware is under control of software. So how A job you do everything from pole shaping of light to the timing and all the rest of that's all under So if we can build a better piece of software, then we can get better performance out of this. Sometimes it requires hardware changes every Every once in a while somebody says, oh, hey, we could replace X, Y and Z and we could get better, but it's often mostly in software.

Speaker 6

Okay, very good. And then I guess lastly for me, maybe it's a 2 part, but just kind of thinking about the AI regulation that's been proposed, How do you see that? And then secondly, can you kind of talk about maybe what Pat does in terms of your R and D efforts and what your expectations are there?

Speaker 2

Yes. So there are obviously the regulations for AI, we expect As we get into that field more that they some part of that would be we control kind of what we do In the future, and we're supportive of an intelligent government regulation. I'm not sure does that exist, But you get the concept. And then Pat's experience at LAB126. LAB126 was The group that did all the hardware for Amazon and prior to Lab126, he was over at Apple working on their hardware.

Speaker 2

So, he very much has both R and D background, physics background and also very much a product Background, he's used to helping build real products. And if you look at the evolution of INQ, We kind of started off as an academic organization. We're moving to an engineering organization. And now the next the last transformation is to a product organization. Pat is going to take on the challenges related to R and D that have a little bit longer Timeframe.

Speaker 2

The engineering organization is always being pressed to build that next system to hit The next 8Q number and that's Pat will have a little more time. His time horizons This is probably closer to 3 to 4 to 5 years. So he can take on more ambitious goals, which are necessary to be able to hit

Operator

Our next question will come again from the line of Scott Hessler with Morgan Stanley. Please proceed.

Speaker 4

Yes, thanks for the additional question. So as your existing contracts start to roll off over the next year or 2, we'll call it, How should we expect pricing to change maybe gen over gen as you offer some way more higher powered hardware to your customers?

Speaker 5

That is an excellent question. What we like to see is that we Provide more value to the to our customers and we want to continue to create more and more value. We don't think that this is time to start gouging our customers. We want actually to partner with them, But there's definitely room for price to drift up as we provide more and more value to the market.

Speaker 2

And like any kind of traditional hardware, What you're seeing is kind of last year's hardware is being offered more cheaply And the latest generation is usually, at least as expensive, maybe more, especially here where you've got such Huge leaps in computational power.

Speaker 4

Got it. And then one more if time allows. As you move from 29 AQ to 35 next year, can you just talk about some of the big headline applications that you think Open up once you hit that 35 AQ number?

Speaker 2

It's very much quantum machine learning Is the things that we think in roughly 35. So we are investing heavily on the application side. The other aspect that we expect is not just in ML, but also in AGI. So we started investment and investigation that more than a year ago, which was the first part of that was the paper we just Produced, which ran on our hardware, but we're investing in that as well. So we expect strong AI or AGI to be Even better on Quantum Hardware going forward.

Speaker 2

So, I don't know yet if 35 will be enough, but we're investing in that. We do feel very strongly that in QML, Quantum ML, that you'll start to see Quantum Advantage in those

Operator

Thank you. Ladies and gentlemen, we have reached the end of the question and answer session. I'd like to turn the call back to Peter Chapman for closing remarks.

Speaker 2

I want to thank everyone for joining us today And thank you for all the thoughtful questions. Finally, I want to thank the entire INQ team for their hard and diligent work That allowed us to achieve the key technical and business milestones, including 29 AQ this quarter. We truly believe that we are changing the world one day at a time, and I look forward to speaking with all of you very soon. Thank you.

Operator

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

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