IonQ Q3 2024 Earnings Call Transcript

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November 6, 2024

There are 8 speakers on the call.

Operator

Greetings, and welcome to INQ's Third Quarter 2024 Earnings Conference 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.

Operator

Thank you. You may begin.

Speaker 1

Good afternoon, everyone, and welcome to INQ's Q3 2024 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 INQ. I am pleased to be joined on today's call by Peter Chapman, INQ's President and Chief Executive Officer Thomas Kramer, our Chief Financial Officer and Doctor. Dean Kastman, our Senior Vice President of Engineering and Technology. By now, everyone should have access to the company's Q3 2024 earnings press release issued this afternoon, which is available on the Investor Relations section of our website at investors.

Speaker 1

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 is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. 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 beliefs as of today. Actual events or results could differ materially from the outlook and other forward looking statements due to a number of risks and uncertainties, including those mentioned in our 10 Q filing with the SEC this week. We undertake no obligation to revise any statements to reflect changes that occur after this call, except as required by law. Now, I will turn it over to Peter Chapman, President and CEO of INQ. Peter?

Speaker 2

Thanks, Jordan, and thank you to everyone for joining today's earnings call. We have a lot to talk about, so let's dive in. On the financial front, we are leading the industry with our commercial trajectory. In the Q3, we exceeded our expected range on revenue, raising our annual revenue guidance and brought in $63,500,000 of new contract bookings. We are making game changing announcements on the development of quantum applications with AstraZeneca and ANSYS.

Speaker 2

We have solidified our push into quantum networking via our recent contracts less than a year after announcing our networking initiative. And we are sharing the news of our acquisition of Cubeitec, a leader in the quantum networking industry. What's more, we will share some details of our rapidly developing technical progress and the manufacturing partnerships that are driving it. So in more detail, we once again exceeded the high end of our revenue range for the quarter, delivering $12,400,000 in recognized revenue compared to our range of $9,000,000 to $12,000,000 for the quarter. This also represents I and Q more than doubling our Q3 revenue year over year.

Speaker 2

With that in mind, we are raising our revenue guidance for the full year 2024 Q4 to a range of $38,500,000 $42,500,000 We announced a new $54,500,000 contract with our existing customer, the United States Air Force Research Lab, as well as a $9,000,000 renewal with the University of Maryland. This brings INQ year to date bookings for 2024 to $72,800,000 within close range of our target guidance for the year of $75,000,000 to $95,000,000 Given our sales progress to date, we now believe that we will come in closer to the high end of the bookings guidance range. And of course, our bookings success will set us up for continued success next year in growing our revenue. INQ has exceeded its original bookings targets for each of the past 3 years since we have been publicly traded, raising or beating our bookings or revenue expectations revenue expectations 12 times out of our 13 earnings calls, including today. Meanwhile, we are on track to roughly double the company's recognized revenue for the 3rd year in a row.

Speaker 2

Our annual revenue has exceeded the high end of our guidance range every year. In short, one can no longer ignore the scale of INQ's commercial success. The investment thesis for INQ is our potential for high growth and we keep delivering on that promise. Thomas will discuss our financials in more depth. Everyone, investors and customers alike want to know when previously impossible tasks can be addressed by quantum applications.

Speaker 2

The answer is that the convergence of powerful enough quantum computers, a matching application and ability to manufacture the hardware at scale. In the quantum world, there are 2 camps or schools of thought on this topic. One camp believes you need near perfection before value can be unlocked. If they are correct, sadly Quantum is still a long way off. The naysayers belong to this camp, but their numbers are dwindling every day.

Speaker 2

The other camp, which INQ and others belong to, believe today's early noisy quantum computers can provide value even before they are perfected. And if we are right, it gives us a significant advantage by generating early meaningful cash collection as we work towards perfection. About 18 months ago, I challenged our teams to answer a critical question. I told them I don't care about theoretical algorithms with limited practical applicability. I don't care about the academic argument about quantum supremacy.

Speaker 2

Instead, I asked them what are the applications that have the potential to disrupt multibillion dollar industries. The team has since identified several application areas where we believe commercial value will be first realized and aligned with our next generation hardware and INQ's production capability. We then reached out to industry partners to understand the value of these applications to their respective industries. Today marks a seminal moment in the Quantum industry as we announced the first two application areas, biopharmaceutical drug discovery and computer aided simulations for the engineering and manufacturing industries. In the global biopharmaceutical industry, I am excited to announce the creation of a new quantum application development center in collaboration with AstraZeneca.

Speaker 2

INQ will be leveraging the power of our quantum experts and AstraZeneca's world class scientists to develop applications in their innovation bio venture hub in Gothenburg, Sweden. In the computer aided engineering industry, INQ has joined forces with ANSYS to accelerate simulation, expand high fidelity design exploration and reduce product development timelines, enabling faster market entry for more innovative products. The partnership is aimed at making simulation accessible to both quantum experts and non experts by allowing seamless integration between ANSYS software and INQ Computers. To reach our aggressive sales goals, we have always planned on growing application revenue. We expect these applications to drive demand for new systems in production, but also for us to share in the up to $2,000,000,000,000 economic value that McKinsey projects will be unlocked by 2,035.

Speaker 2

We've reached an incredibly impactful point and we could not be more excited to partner with AstraZeneca and ANSYS to bring production grade quantum applications to their respective industries. I can't tell you how much personally I am excited about these applications. Now switching our focus to quantum networking. We believe that INQ is the only quantum computing company that has an inherent advantage in the quantum networking market, contributing to our early leadership. Specifically, we have always relied upon networking as part of our architecture to scale our quantum computers.

Speaker 2

Quantum networking and quantum computing for INQ are highly synergistic. Our recent wins of a $54,500,000 contract with AFRL and our $5,700,000 contract with the Applied Research Laboratory for Intelligence and Security or ARLIS are examples of our quantum networking investments paying off. At more than $60,000,000 we believe these two sales alone have catapulted INQ to become a leading player in the quantum networking industry. To expand on that leadership, today we are excited to announce that we have signed a definitive agreement to acquire Cubitec, a leading Vista California based quantum networking company. The combination of Cubeitec and INQ will allow us to continue our momentum in quantum networking by the addition of Cubeitec's 118 U.

Speaker 2

S. And international granted patents. I expect that the Quantum Networking products will continue to strongly drive sales and to be the 1st product group that is cash flow positive. Quantum Networking is a large and rapidly growing opportunity with McKinsey estimating that quantum communication will become a $36,000,000,000 market by 2,040. Quantum networking, like classical networking hardware, is also expected to require several orders of magnitude more physical hardware than quantum computing to build the infrastructure for the quantum Internet.

Speaker 2

This is another element of the networking market where INQ is particularly well suited, given the investments we have made over the past years to scale up our production manufacturing capabilities. The INQ technical team also demonstrated ion to ion entanglement, the second of 4 significant milestones required to develop photonic interconnects and significantly scale our system capacity. While we are thrilled with our technical progress in quantum networking, we're even more thrilled to join forces with Cubeitec and leverage their quantum networking expertise. Lastly, on the technology front, we are happy to announce 2 new agreements for critical components of future systems, starting with the IonQ Tempo. Number 1, we announced a partnership with NKT Photonics, a subsidiary of Hamamatsu Photonics to develop next generation laser systems for our trapped ion computers and networking equipment.

Speaker 2

The arrangement will begin with NKT Photonics developing and delivering 3 innovative prototype optical subsystems to us in 2025, designed to improve the performance, size, weight and power of our upcoming data center ready quantum computers. Number 2, today I am also pleased to announce a new partnership with Imeq, a world renowned innovation hub in nano electronics and digital technologies to develop photonic integrated circuits and chip scale ion trap technology. With these groundbreaking technology, INQ aims to reduce overall hardware system size and cost, increase cubic count and improve system performance and scale. The developments of this quarter are nothing short of groundbreaking and position INQ to be the preeminent player in the quantum industry in the near term and for many years to come. Many of you already know INQ as a leading quantum computing company.

Speaker 2

With today's announcements, we believe that we are now the leading company at the intersection of quantum computing and networking. And in the future, you will likely also know us as a software application company. Our commercial track record has launched INQ towards the rarefied echelon of rapidly growing young technology companies by achieving 9 figures in bookings in record time. And with that, I'd like to turn the call over to Thomas.

Speaker 3

Thank you, Peter. It has truly been an exciting quarter on the applications and commercial front and our financials are no exception. Let's walk through this quarter's financial results in more detail. As Peter mentioned, we had a strong revenue quarter, recognizing $12,400,000 which is above the high end of the range we previously provided. This over performance was primarily due to our ability to make more progress than previously anticipated on some of our contracts that use percentage of completion revenue recognition.

Speaker 3

We also booked $63,500,000 of sales in the Q3. As we have mentioned in prior earnings calls, we anticipate lumpiness in our bookings since it is difficult to predict quarter to quarter or even in some cases year to year exactly when a particular sale will materialize. We remain confident in our bookings target for the year. Moving down the income statement. Our total operating costs and expenses for the Q3 were $65,500,000 up 36% from $48,300,000 in the prior year period, but within our plan for the year.

Speaker 3

To break this down further, our research and development costs for the Q3 were $33,200,000 up 35% from $24,600,000 in the prior year period. Recall that we are investing heavily in R and D and growing our R and D headcount to support our roadmap and customer commitments. Our sales and marketing costs in the Q3 were $6,600,000 up 31% from $5,000,000 in the prior year period. This increase was due to our growing both our marketing and our sales teams as we continue investing into our commercial efforts. Our general and administrative costs in the Q3 were $14,300,000 up 3% from $13,900,000 in the prior year period.

Speaker 3

These increases were primarily driven by an increase in payroll related expenses. All of this resulted in a net loss of $52,500,000 in the 3rd quarter compared to $44,800,000 in the prior year period. Accounting for warrants can be so we've always pointed out the impact they have

Speaker 2

on our results. This Q3 loss includes a non cash

Speaker 3

loss of $3,900,000 for the 3rd quarter related to the fair value of our warrant liabilities. These results also include growth in stock based These results also include growth in stock based compensation expense related to our headcount growth, which was $24,600,000 for the 3rd quarter compared to $17,000,000 for the prior year period. We saw an adjusted EBITDA loss for the Q3 of $23,700,000 compared to a $22,400,000 loss in the prior year period. We continue to project an adjusted EBITDA loss for the year of $110,500,000 Turning now to our balance sheet. Cash, cash equivalents and investment as of September 30, 2024 were $382,800,000 We continue to believe this cash position is the strongest of any publicly traded company focused on full stack computing.

Speaker 3

Importantly, while we have increased INQ's run rate in recent years, we are offsetting this by beginning to collect large payments INQ's customers, including those who have purchased systems. Our run rate increases are largely related to employee costs as we have worked rapidly to bring the best quantum talent to INQ. It is also worth mentioning that a significant portion of our investment in setting up manufacturing is now behind us. INQ's board and management team are focused on being the leading business in both the rapidly expanding quantum computing and quantum networking segments. Our corporate goals in the coming years are profitable growth, positive free cash flow and commercial quantum market leadership.

Speaker 3

Now turning to our financial outlook. We are pleased to announce that we will be raising our revenue guidance for the full year 2024 to a range of $38,500,000 to $42,500,000 reflecting our confidence in our progress on our percentage of completion based contracts. We currently expect revenue for the Q4 of between $7,100,000 $11,100,000 We remain confident in our 2024 bookings guidance of between $75,000,000 $95,000,000 Back to you, Peter.

Speaker 2

Thank you, Thomas. As we have evidenced since IPO, near our customer wins and our fantastic Q3, INQ is demonstrably leading the commercialization of quantum computing and quantum networking worldwide. The quarter's bookings were on par with our entire last year of bookings combined. We are making great strides with our collaborations with AstraZeneca and ANSYS to break new ground in applications. And we furthered our leadership position in quantum networking, demonstrated by our $54,500,000 cornerstone deal with AFRL, as well as our achievement of the 2nd milestone on our path to implementing photonic interconnects.

Speaker 2

We look forward to a strong close of the year and updating you all again on our Q4 call in February. With that, I'd like to turn it over to the operator for our question and answer session.

Operator

Thank you. At this time, we'll be conducting a question and answer Our first question comes from David Williams with The Benchmark Company. Please proceed with your question.

Speaker 4

Hey, good afternoon, everyone, and thanks for taking my Lots of really interesting and exciting things going on. It's hard to find a place to start. But maybe first, Peter, can you speak to just the Cubatec acquisition, what that technology brings? And how does that kind of merge synergistically with what you've been doing internally?

Speaker 2

Yes, I'd be happy, David. Several things here. One is that, as we've kind of talked about it in the past, the way that INQ will get to scale is by, photonically networking our quantum computers together. And Cubatec is doing something similar, not exactly the same, but they have the same kind of rough skill sets in terms of people. The other side is it gives us another product line as well to go after in it's a new market for us.

Speaker 2

So it's both complementary and also expands the TAM that we can go after.

Speaker 4

Okay. Fantastic. And just kind of thinking about you have the networking efforts now and you also have the computing side. How do you think about the sensing pillar in terms of quantum? And is that an area we should anticipate that you might be looking to enter at some point?

Speaker 2

Yes. So one of the nice things is that often sensing requires quantum networking, we'd be able to transport the quantum information. So again, it enables another piece of infrastructure in the 3 different markets that kind of makes up quantum. It's quantum sensing, quantum networking and quantum computing.

Speaker 4

Sure. Okay. And then just one last one, if I may. You've talked about applications this quarter and before you alluded to it. And we've seen before other application or other areas where you partnered with manufacturers or different industries to work on a specific problem.

Speaker 4

Can you just talk maybe about how this application develops over time? And how do you think about that relative to maybe the one off things you've done in the past?

Speaker 2

You've kind of expressed actually the core of it. A lot of times we've worked with companies sometimes for a one off or maybe an R and D kind of project. We largely put an end to those about 18 months ago. And so we said, okay, it's time to rent now really to focus on the applications that will be the first applications that we put into production. And so we didn't want to get started on the application software when we had the hardware done.

Speaker 2

We want the software to come along at exactly the same time as when the hardware is ready to run those applications. So we're timing those two things together. What the two announcements that are today with both ANSYS and AstraZeneca is the beginnings of working on those applications. We've been working on the prototype for these applications for the rest, I don't know, 6 or 8 months or so. So it's not we're not starting at square 1, but it's not completed either.

Speaker 2

So that's kind of the major difference. I would put Hyundai maybe into the 3rd camp as well, which is our engagements there are now moving into what can we do that actually helps them in our production sense as well.

Speaker 4

Thanks so much for the color. Certainly appreciate it.

Operator

Our next question comes from Richard Shannon with Craig Hallum. Please proceed with your question.

Speaker 5

Hi, guys. This is Tyler Anderson on for Richard Shannon. Congratulations on the quarter and M and A. I'm very surprised it's amazing. And thank you for taking my questions.

Speaker 5

I was wondering, does the hardware from Cubatec require distillation or node to node swap operations? And then also, will the chip scale ion trap from the IMEC partnership be used within the AFRL contract? And could you describe the price of the Cubitec acquisition and expected incremental OpEx?

Speaker 6

Okay. I'll start. This is Dean. There's a lot to unpack on your question. The first piece is with regards to the technology and regards to the swap and other things that we expect to need to use to basically generate 2 trap entanglement or 2QPU entanglement.

Speaker 6

That is not part of the fundamental technology stack that we have with the tech and the QKD work that they have. There is similarity though associated with the milestone that we just actually announced with our photonic interconnects in terms of like the Bell state analyzer and the photon entanglement. And so there is analogies between the work that we're doing with the photonic interconnect as well as what's being done in those quantum networks. So there's parallel technology, some of it in the component technology is 1 and the same. But right now they are operating at different frequencies.

Speaker 6

And so what we need to do for our photonic interconnects is fundamentally different than what you would need is currently being done as state of the art in many of the QKD solutions. Your second question was associated with IMAIC and some of the PICC development and its relationship to our AFRL work. The overall AFRL work is focused on development of our in particular the most recent large item was first associated with frequency conversion. So this goes back actually to relate to the Cubitec acquisition where we're looking at conversion of wavelengths from barium and other computing frequencies down to telecom frequencies to be able to push the entanglement over long distances. The second piece of that is the, I would say, photonic switching that work there, the prototypes there.

Speaker 6

And then the third is really component ruggedization. The IEMEC work has the potential to play in all of those areas, but not in the near term, but instead in the far term. So as we think about our technology stack, as we think about putting optics down on to chip scale devices, that is where we expect to see that. None of the activities right now within the period performance of our current AFRL contract.

Speaker 2

And then there was one other question, which was price.

Speaker 3

Yes. So the consideration for the acquisition is $22,000,000 which we have funded in cash from our balance sheet. The details are laid out in the quarterly disclosures. We evaluate the size and determine that the cash commitment was manageable relative to the size of our cash position and we plan to close the transaction in the next 6 months.

Speaker 2

And I'll just add one other little piece which is that the Cubatec purchase also given their existing contracts, they have a relationship with real world telcos. And so it kind of moves our efforts out of the laboratory and now starting allows us to start to test in the field, so to speak. Great questions, by the way.

Speaker 5

Awesome. Thank you, guys. And then one more for me. Could you quantitatively frame the near term government spending opportunity on a national and an international level? And then where is your strength across the different types of opportunities as far as application, computation and networking?

Speaker 5

And what are the size of those different buckets?

Speaker 2

We might need another whole meeting I think to get through that question.

Speaker 7

Sorry.

Speaker 2

I think maybe what we could probably best point you to is to some of the work that the BCGs and the McKinsey's of the world in terms of what the expected markets are for those things. Clearly, we have one of the things that I think most proud of at INQ is we've kind of told the market even from the day 1st day of the IPO what it is we're going to do and we just do it. We keep on doing it and exceeding it. So it's actually not much of a secret. We've been saying it since the 1st day of the IPO.

Speaker 5

Okay. Then maybe just a little bit shorter, how would you weigh your focus between government and commercial monies moving forward with all of these acquisitions and the telco involvement?

Speaker 2

Well, in the near term, it's been a good portion, which is towards government. But the beginnings now of these application projects, now it's switching is starting to switch over to enterprise. And that's always been the plan. If you again, if you go back to the very beginning of the IPO, you'll see that we said, hey, it's really going to start to take off as soon as we can start to bring these applications online.

Speaker 5

Awesome. Thank you guys and congratulations again.

Speaker 2

Thank you. Thank you.

Operator

Our next question comes from Shadi Mehta Mehta Mehta Mehta Mehta Mehta Mehta Mehta Mehta Mehta

Speaker 3

Mehta Mehta Mehta Mehta Mehta Mehta Mehta Mehta

Operator

Mehta Mehta Mehta. Please proceed with your question.

Speaker 7

This is Shani Mowale dialing in for Quinn Bolton. First off, congrats on an exciting quarter, lots of unpack here. Earlier in the year, you guys knocked a major milestone in photonic interconnects. And now with the partnership with NKT Photonics, it's clear INQ is making solid work on the photonics front. I just want to touch on how NKT Photonics systems will support the commercialization of INQ's quantum computers?

Speaker 5

You want Tim, you did take that? I'll take it

Speaker 6

first from the technology perspective and Peter can take it from the business perspective. On the technology side, MKT has a different kind of different sets of different lasers and there's different laser technology, diode lasers, pulse lasers, fiber based lasers. And so what we're looking for from a technology perspective in our laser kind of vendors and suppliers are robust lasers that operate at the frequencies and the wavelengths that we're interested in and lasers that simply just work, right. And so part of this represents us both trying to put in place larger scale manufacturing and larger scale kind of supplier agreements, as well as trying to down select to technology partners that can provide the wavelengths that we need, the cost points that we need and the robustness and stability that we need for really 20 fourseven operation of the systems.

Speaker 2

And I'll just add just a little bit on the business which Dean kind of hinted at which is the question of the cost of these systems. Lasers are a significant portion of our overall cost. So when we sat down and said, look, we're going to be moving to production, one of the pieces to be able to reduce the cost, also reduce the size. So this is investments that you see in both of these announcements today, both with IMAIC and also within KT, as us actually working towards that promise.

Speaker 7

Great, great. Thanks for all that. And then maybe on OpEx, you guys announced a number of new partnerships and awards this quarter. And earlier in the prepared remarks, you guys talked about expanding the team to support all this growth. So just curious on how we should think about OpEx going forward?

Speaker 7

And then maybe talk about how much the team needs to expand to support all this growth?

Speaker 3

Well, I think that where we are on OpEx for the rest of the year is already laid out in what we have discussed earlier. We're not making any change to OpEx right now. And we will be discussing the OpEx for next year on the Q4 call, which I look forward to seeing everybody call into as well. What we are focusing is we've gone through rapid growth and it's time for us to think about growth where it really matters and start making sure that we are always investing in only the places that matter and that we re funnel capital to areas where they can be the most invest used.

Speaker 7

Awesome. Yes. Thanks for all the color and congrats on the exciting quarter.

Speaker 2

Thank you.

Operator

We have reached the end of the question and answer session. I'd now like to turn the call back over to Peter Chapman for closing comments.

Speaker 2

Thank you. I want to thank everyone for joining us today for your support and for all the questions. Finally, I want to thank the entire INQ team for the continued diligent work that contributed to such a meaningful quarter for us technically and commercially. And that continues to fuel everything we look forward to in the future. Thanks everyone.

Operator

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

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