IonQ Q2 2024 Earnings Call Transcript

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August 7, 2024

There are 9 speakers on the call.

Operator

Greetings, and welcome to INQ's Second Quarter 20 24 Earnings Call. At this time, all participants are in 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

Please go ahead, sir.

Speaker 1

Good afternoon, everyone, and welcome to INQ's Q2 2024 Earnings Call. My name is Jordan Shapiro, I'm the Vice President of Financial Planning and Analysis and Head of Investor Relations here at INQ. 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 and Doctor. Dean Castman, our Senior Vice President of Engineering and Technology. By now, everyone should have access to the company's Q2 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 IonQ. Peter?

Speaker 2

Thanks, Jordan, and thank you to everyone joining today's call. There are a lot of exciting announcements to share today. We will discuss our recent technical breakthroughs that we believe bring the Quantum error closer than it has ever been and our compelling commercial momentum that demonstrates how we're working with customers. Let's dive straight in. First, I'm excited to say that we have once again exceeded the high end of our revenue range for the quarter, delivering $11,400,000 in recognized revenue, which was well above the range of 7.6 $1,000,000 to $9,200,000 for the quarter.

Speaker 2

We also booked $9,000,000 this quarter and are very confident about meeting our bookings goal for the year. Thomas will discuss our financials in more depth. You have likely heard there is a space race in quantum computing. But what does that really mean? It's a race between different companies, cubit modalities and countries to produce a quantum computer that can outperform classical computing.

Speaker 2

The technical problem that bedevils the industry is noise or fidelity in its cubits. This noise can come from the cubits themselves, the environment or any hardware like the control electronics that interact with the cubits. Key to the accuracy of a quantum computer is to increase the fidelity of its cubits and their ability to run more computational gates and larger applications. When any company can achieve enough fidelity and run applications in a production environment, significant application revenue can start. With this context, I'm excited to announce that INQ has achieved a 2 cubit native gate fidelity of 99.9% or 39s in barium.

Speaker 2

We chose to move to barium because science suggests it enables higher fidelities than in Youtterbium. And the better the native gate fidelity, the less error correction in all forms is required. So today's announcement is an important milestone towards even better gate fidelities ahead. To get to better gate fidelity beyond native gate fidelity, other techniques are required. In the past, you've heard us describe quantum error correction, the technique of using additional cubits grouped together to correct each other and produce more reliable results.

Speaker 2

Error correction is promising, but particularly on non trapped ion platforms requires a large volume of cubits, think tens, 100 or even 1,000 of physical cubits per error corrected cubit. It also requires many extra gates as overhead, the ratio of which is correlated with the native fidelity of the cubits. So error correction is out of reach for meaningful use in the quantum industry today. Another technique you've heard about from us is error mitigation, which uses software techniques to improve results without generally requiring additional cubits. Error mitigation is commonly used by the quantum computing companies, but poses difficulties for scaling given that it often incurs ever increasing sampling costs that can lengthen the time to solution.

Speaker 2

Today, I am thrilled to announce IonQ has invented a new industry first partial error correction technique for an important class of quantum gates used with many different applications. The technique, which reduces the errors for Clifford gates within circuits, offers the potential to supercharge the accuracy of near term quantum computers, bringing us much closer to commercial advantage. This Clifford error reduction technique allows for more accurate quantum algorithms, but requires a ratio of only about 3 physical cubits per 1 error reduced cubit and a modest doubling of gates in the algorithms used. We plan to offer this feature in our INQ Tempo system. With a combination of hardware and software improvements, we believe that we can extend our achievement of 39s to production systems in 2025 and bring that to 5 nines in 2025 and 6 nines in 2026 using error correction.

Speaker 2

This along with a combination of much larger numbers of physical cubits and improved gate speeds gives us more confidence about near term quantum applications and application revenue for INQ. For some time now, we have been investigating applications where we can deliver significant value and generate significant revenue. At our next earnings call, we will discuss the first of these application areas. While this has been a tremendous quarter for the Applied Research Laboratory for Intelligence and Security selected INQ through a competitive bidding process to design 2 quantum networking node systems for blind quantum computing. Blind quantum computing is a process where quantum computers remain blind to what information is being processed through them and is a key achievement target for the U.

Speaker 2

S. National Security Apparatus. In fiscal 2023 2024, Congress funded this research for a total of $40,000,000 The initial phase of the contract is a $5,700,000 award for the design of the quantum computers based on IonQ trapped ion processors. We expect to complete this work by the end of this year. In the next phase of the project, Arles plans to have 2 systems built based on the initial INQ design.

Speaker 2

We feel confident on our bookings guidance for the year and we're working on several large additional sales for hardware and otherwise in addition to the Arliss agreement. What makes us confident is the strength of our repeat customers and our sales team's focus in closing large multi year deals. Next, we have started final assembly of our first Forte enterprise system at Quantum Basel and we now have officially begun construction of 2 more Forte Enterprise systems in our Seattle, Washington manufacturing facility. Our investment in our manufacturing is already paying off, now enabling us to build multiple production systems at a time, while not tying up significant engineering resources. I'm also pleased to announce that we've extended our contracts with AWS to continue to offer our world class quantum computers via Amazon Bracket, the quantum computing service of AWS, to developers everywhere who want to leverage the power of quantum computing.

Speaker 2

Alongside the AWS contract extension, we have launched an exciting new cloud feature set that includes 20 fourseven global operations, a new and improved queuing engine, and exclusive reservation windows. These features make it easier than ever for our customers to benefit from INQ's cutting edge quantum computers. In summary, this quarter has been another strong success for INQ. We have proven that our barium cubit technology can achieve 3 nines of fidelity. We have developed an industry changing partial error correction technique or error reduction that could bring production applications for Quantum even sooner.

Speaker 2

We have factored those advancements into an aggressive new roadmap for our continued leadership in the industry. And we are working with customers like Arliss and AWS to build the next generation of quantum networking and quantum computing applications. And with that, I'd like to pass the call over to Thomas.

Speaker 3

Thank you, Peter. It has truly been an exciting quarter on the technical and commercial front, and our financials are no exception. Let's walk through this quarter financial results in more detail. As Peter mentioned, we had a strong revenue quarter recognizing $11,400,000 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 $9,000,000 of sales contracts in the 2nd quarter. 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. For Q2 2024, our total operating costs and expenses for the Q2 were $60,300,000 up 56% from $38,600,000 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 2nd quarter were $31,200,000 up 57% from $19,900,000 in the prior year period. Recall that we are investing heavily in R and D and given anticipated demand of building more systems than previously projected this year. Our sales and marketing costs in the Q2 were $6,100,000 up 72% from $3,600,000 in the prior year period. This increase was due to us growing both our marketing and our sales teams as we continue investing into our commercial efforts. Our general and administrative costs in the Q2 were $13,100,000 up 19% from $10,900,000 in the prior year period.

Speaker 3

These increases were primarily driven by an increase of $1,900,000 in payroll related expenses. All of this resulted in a net loss of $37,600,000 in the 2nd quarter compared to $43,700,000 in the prior year period. Accounting for warrants is confusing to many. This is why we have always pointed out the impact they have on our results. These current 2024 Q2 results include a non cash gain of $6,600,000 for the Q2 related to the fair value of our warrant liabilities.

Speaker 3

These results also include growth in stock based compensation expense related to our headcount growth, which was $21,000,000 for the 2nd quarter compared to $11,300,000 in the prior year period. We saw an adjusted EBITDA loss for the 2nd quarter of $23,700,000 compared to a $19,400,000 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 investments as of June 30, 2024 were $402,000,000 We continue to believe this cash position is the strongest of any publicly traded company focused exclusively on full stack quantum computing. Importantly, while we have increased INQ's run rate in recent years, we are offsetting this by beginning to collect on large payments from INQ's customers, including those who have purchased full systems.

Speaker 3

Our run rate increases are largely related to employee costs as we have worked rapidly to bring the best quantum talent in the world to INQ. It is also worth mentioning that a significant portion of our investment in setting up manufacturing is now behind us. We increasingly look to focus on conservative spending and ramping up sales of large deals. 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 $38,000,000 $42,000,000 reflecting increased confidence in our progress on our percentage of completion contracts.

Speaker 3

We currently expect revenue for the Q3 of between $9,000,000 $12,000,000 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. In closing, INQ has yet again pushed the boundaries of the quantum computing industry this quarter, bringing us even closer to the quantum era. Our technical team demonstrated our highest qubit fidelities yet, introduced a paradigm shifting technique for error reduction, and unveiled an aggressive new roadmap to continue our technical leadership. Commercially, our exciting new work with customers Arliss and AWS gives us increased confidence not just in meeting our bookings targets for the year, but also in the long term potential of our quantum computing and quantum networking products. Financially, we greatly exceeded the high end of our revenue range for the quarter and posted a solid $9,000,000 in bookings that we believe will propel us towards our goals for the year.

Speaker 2

To build on our strong position in the Quanta market, we will pursue strategic partnerships and other opportunities, strengthening our ecosystem and benefiting our customers, shareholders and other stakeholders. We look forward to a great Q3 and the rest of the year ahead with our team, our customers, our partners and our investors. With that, I would like to turn it over to the operator for our question and answer session.

Operator

Thank you, Sub. At this time, we will be conducting a question and answer The first question we have comes from David Williams of The Benchmark Company. Please go ahead.

Speaker 4

Hey, good afternoon. Thanks for letting me ask a question and congrats on the really strong progress here. Maybe Peter, maybe first, can you give maybe just a little more color on the partial error mitigation scheme that you had mentioned earlier? How does that maybe change your roadmap? And is this an innovation that you had seen and have been working towards?

Speaker 4

Or is this something that maybe has developed as you've worked towards other error mitigation? Just trying to understand the innovation here and how we should think about this type of development going forward?

Speaker 2

I tell you what, we'll tag team this one. I have Dean here with me as well. So Dean, I'll let you talk about the technology, maybe I'll take the business.

Speaker 5

Yes. So right now, this is something that we've been working on for a while, right? We've been building up our air correction team and the experts that we have through kind of just continued hiring and trying to build out that part of our research and kind of development team. From a technical perspective, this is a technique that has been talked about before in terms of high level approaches where you're not trying to achieve full fault tolerance, but instead you're trying to target those parts of the system and those gates that are causing the most problems. This technique targets what are called Clifford Gates, which are comprised of many different applications or make up many different circuits that are used to solve different applications.

Speaker 5

And so the Clifford Gates are one of the noisiest gates in many quantum computers. And so this technique allows us to reduce the most noisy part of those circuits, so that you can end up with basically better results at the end of the day. And so it's going to factor into the way we think about approaching applications, the kind of applications that are accessible. So what this at the end of the day does is make a larger set of applications reachable earlier than we would have earlier thought.

Speaker 2

And I'll just add a little bit to it, which is, this plus many of the other things that we have going, really starting to give us confidence in kind of the timeframe for meaningful applications and actual revenue significant revenue generation. Frankly speaking, I think up to this point, it's been early for significant investments in applications. Some companies started application development 10 years ago, even though there wasn't quantum computers yet. So this is kind of I think a significant milestone for us in terms of getting to confidence that now is the time for application development. And we'll talk about the first kind of large application at the next earnings call.

Speaker 4

Great. Thanks so much for the good color there. And I guess maybe secondly on the Arliss contract, I noticed in the press release, it seemed like there were a few different figures there. And just hoping you could help me understand exactly what those meant. I saw 5.7 and then 12 and even a 40.

Speaker 4

So just help me understand what each one of those figures represent, please?

Speaker 2

Yes. No, I'm happy to give you the color on that. First, even before diving into this, I think the one of the most important things is we've opened up another branch of the government to be an IAQ customer. And we like our existing customers, we hope that this is not a one and done, but a multi year relationship that continues into the future. So we're excited to have Arliss the intelligence community as a customer and we look forward to many years working with them.

Speaker 2

As to this particular contract, in fiscal 2023 2024, Congress so far has funded this project for $40,000,000 And so we have won the 1st phase of the contract. It's a multi phase contract for $5,700,000 The remaining $40,000,000 is expected to largely go to the construction of the hardware. And we expect by the end of this year to win the next phase of this of an additional 12,000,000 dollars So in fiscal 2024, we expect the Arliss contract to contribute roughly $17,500,000 towards our bookings goal for the year. And the rest of the remaining of it will show up in 2025.

Speaker 4

Okay, perfect. Great. Thanks for the help there. And then maybe just lastly, you've made some really tremendous progress here over the last several quarters and lots of moving pieces here. But I guess if you were going to kind of boil down your progress and where you are today relative to where you were maybe 12 months ago, how do you think about that progress?

Speaker 4

And where are we in on the pathways to RealQuantum from where you sit today? Maybe not just for IonQ, but just broadly, how do you think about it? Thank you.

Speaker 2

Well, I think in lots of companies and not just IonQ, there's been lots of interesting progress across lots of different modalities. We do continue to believe we look at many of the other companies that are modalities and technologies. We think that many of them still have a number of kind of technical things to overcome before kind of getting to a place of great success. We do think as we always look that we think that INQ is in good position for that. And we're going to be getting to a new phase of the business, which is generating revenue from applications rather than generating hardware sales.

Speaker 2

And that's kind of the next exciting phase that we're about to start to invest in and hopefully see a return on. So it's just I think it's that part where everyone's been waiting to be honest, which is when do we start to transition from kind of these early sales to something which is much more significant. And I think on the other side too, if you look at our what we said we were going to do in terms of both technical and financial from the IPO, we're hitting out of the park once again. We continue to beat even our original estimates. So we're starting to build quite a significant track record.

Speaker 2

We're on our ways to breaking through I think a mental barrier which would be the $100,000,000 mark in sales. Had we not gone public via a spec, we would be thinking about going public with those kinds of sales just as to a more normal IPO process. So I think that's a significant milestone for the company as well.

Speaker 4

Thanks very much for the insight. Certainly appreciate it.

Speaker 2

Always a pleasure.

Operator

Thank you. The next question we have comes from Quinn Bolton of Needham and Co. Please go ahead.

Speaker 2

Hey, guys. Let me

Speaker 6

add my congratulations on the financial and technical milestones, especially hitting that 99.9% to cubic gate fidelity. I wanted to start just maybe you talked about the updated roadmap. I think you published that back in late June. Kind of what are the key milestones now on the updated technology roadmap? Are you still targeting tempo for delivery in 2025?

Speaker 6

Is that still expected to be based on barium cubits? Just what are the highlights of the updated technical roadmap?

Speaker 2

Yes. Dean, you want to take?

Speaker 5

So right now, our technical roadmap remains the same. We're still targeting AQ64 in Tempo. It's still planning. We're looking at barium as the cubic species. So all of those pieces are there, right?

Speaker 5

So what we're starting to unveil is a little bit more detail about some of the component benchmarks and other things that are going to kind of enable those 8Q benchmarks and numbers that we've talked about in terms of our native 2Q bit gate fidelities, our Q bit counts, etcetera. But right now our robot remains strong and our progress remains strong.

Speaker 2

And you've seen not only in this particular announcement today, we have gotten to 99.9 in barium, right? So that's significant. The other thing is you've seen, I believe, some images of 64 ions loaded in a system as well. So these are all small milestones or along the way to getting to tempo. And so we're just kind of showing the progress along the way.

Speaker 2

Yes, but the answer is yes, we're on track for delivering in 2025 the first manufactured systems for Tempo.

Speaker 6

Perfect. And then on the error correction announcement from this week, I guess can you give us some sense what percent of gates in a typical circuit and there's probably no typical circuit, but how frequently use your Clifford Gates? Are those 10% of the gates, 50% of the gates? And can you take the techniques to improve the or to perform error correction on Clifford Gates? Can you use similar techniques on other commonly used gates in quantum circuits?

Speaker 5

Great question. And so the Clifford Gates are a class of gates that we use here, a lot of other companies use as well. And so they're highly applicable to many different applications. It's a lot of the variational circuits, chemistry circuits are comprised of large sub blocks of Clifford Gates. And so these kind of noise reduction techniques allow us to be able to target really the key pieces of those circuits to be able to reduce the overall noise and improve the overall results.

Speaker 5

And so the beauty of this is as a stepping stone, there's another class of gates that we will have to address noise on and those are called T gates. But our overall philosophy is that any noise reduction helps before the industry reaches full fault tolerance, which is still we believe years away, right? There's a lot of other building blocks besides just the error correcting code required for full fault tolerance. And so as we move forward, these are the kind of innovations that accelerate both in hardware and software, the capabilities to be able to kind of as Peter said supercharge the systems to be able to deliver value sooner.

Speaker 3

Perfect. Thank you.

Operator

Thank you. The next question we have comes from Kevin Garrigan of Westpark Capital. Please go ahead.

Speaker 7

Yes. Hi, all. Let me echo my congrats on all the progress and congrats on the results. To start, I'm just kind of wondering if you can give a little more color on the Nautilus contract. How many were in the bidding process?

Speaker 7

Were they all different quantum computing architectures? Anything else you can kind of provide there?

Speaker 2

I'm not sure we know exactly. I mean, strangely, they didn't send us the responses to the RFPs. So but it is my belief system that there was a number of other companies in different modalities that competed for it. So, but I don't to be honest, I don't know what the companies exactly were and obviously know nothing about their of what it is they proposed. So but it was an open bid and we won against everyone else.

Speaker 7

Okay. Got it. Got it. And then Peter, you had mentioned Arliss opens up another government avenue. I'm just kind of wondering if you can give us some color on the commercial and enterprise side of things.

Speaker 7

Have you started to see an increase in commercial and enterprise customers looking to adopt quantum computing?

Speaker 2

Yes, very much so. This is I guess there's a couple of different things. We see 2 different kind of things customers are interested in. 1 is quantum networking and 1 is quantum computing or application development. It's a little confusing because both of them require quantum computers.

Speaker 2

And communication and the other one is doing adds an interest in applications. But both require systems. So that part of it can be confusing. When for instance, when we were talking about Forte Enterprise sales, those are largely customers interested in compute not networking. So the Arliss is a case where we're building systems, but now for their primary interest is networking.

Speaker 2

And so we also see increased interest in the applications and the compute space as well. And as I mentioned, we'll talk about the first of those coming up at the next earnings call.

Speaker 7

Okay, perfect. I appreciate the color. Thank you.

Operator

Thank you, sir. The next question we have comes from Joe Moore of Morgan Stanley. Please go ahead.

Speaker 8

Thank you. Yes, along the same lines, I mean, you've gotten so many federal opportunities between the Air Force, the Navy, now ARLIS. Can you kind of talk about if there's a common thread why you keep winning those opportunities? And you said it's a competitive bidding process. What are the criteria you think that's getting you selected ahead of other quantum opportunities?

Speaker 2

Well, that's a complex question. I do think that there's a number of things. We have I think a good product and the fact that the error rates are the best in the industry, kind of in general ion trapping is the early winner here. So that certainly helps compared to some of the other modalities out there. But then even within the ion traps, I think we're winning largely because we've got a good sales force and a good sales plan.

Speaker 2

And so we're from what I can see from all the published data is that I can see is iNQ is winning on the sales front. And so that's a it's got to be a mixture of Rima and her sales team and the products that we have. So I think customers in the know are liking what we're doing.

Speaker 5

I can speak a little bit. The success criteria that the Arliss customer was looking for in the competitive process involved technical capability in terms of the system that included the ability to optically connect systems across the distance. Our investment in our photonic networking and capabilities and the experimental results and things that we've achieved to date were a feather in our cap. They're also looking for a proven track record in delivering and providing systems to customers. We have that track record.

Speaker 5

So when we were scored at the end of the day, the customer basically scored us high in many of the technical and kind of programmatic requirements that they were looking for in terms of what they were shooting for. And so it goes to speak to the track record that we've been building in investing in both on the technology side as well as on the company side.

Speaker 2

Great. Thank you very much.

Operator

Thank you, At this stage, there seems to be no further questions. I will now turn the conference call back to Peter Chapman for closing remarks. Please go ahead.

Speaker 2

I want to thank everyone for joining us today and for your support and for all the great questions. Finally, I want to thank the entire INQ team for their continued diligent work that contributed to such a meaningful quarter for us, both technically and commercially. And that continues to fuel everything that we look forward to in the future. So thanks again everyone for joining and we look forward to talking to you at the next earnings call.

Operator

Thank you, sir. Ladies and gentlemen, that then concludes today's conference.

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