IonQ, Inc. (IONQ) Earnings Call Transcript & Summary

Greetings, and welcome to the IonQ First Quarter 2023 Earnings Call. [Operator Instructions] 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&A and Head of Investor Relations. Please go ahead.

Good afternoon, everyone, and welcome to IonQ's first quarter 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 am pleased to be joined on today's call by Peter Chapman, IonQ's President and Chief Executive Officer; Thomas Kramer, our Chief Financial Officer; Dr. Chris Monroe, our Co-Founder and Chief Scientist; and Dr. Jungsang Kim, our Co-Founder and Chief Technology Officer. By now, everyone should have access to the company's first quarter 2023 earnings press release issued this afternoon, which is available on the Investor Relations section of our website at investors.ionq.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. 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?

Thanks, Jordan. Good afternoon, everyone, and thank you for joining us for our first quarter 2023 earnings call. We finished the first quarter with $4.3 million in revenue, which was above the high end of our expected range. Meanwhile, we booked $4.1 million 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. We continue to move forward at full speed at IonQ, trailblazing in our industry. In our view, we have distanced ourselves from the pack of pure-play quantum computing companies by having the best cash position by a wide margin. We also believe we are sufficiently funded to get the company to profitability based on our current roadmap. IonQ will continue to focus on achieving quantum advantage and developing commercial applications for our customers. At IonQ, our primary focus has been not on the quantity of qubits in the system, but on the quality of the qubits and their operations. For quantum computers, this quality, also known as Fidelity is the key differentiator in successfully completing computational tasks. We measure the Fidelity of our systems using an application-oriented benchmark, we call algorithmic qubits, 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 algorithms. Today, I am excited to share that we have hit our 29 AQ target, meeting our 2023 technical goal 7 months early. This achievement made possible by the hard work and dedication of the full IonQ 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 IonQ 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 milestone is achieving 35 AQ, which is particularly significant. At 35 AQ, simulating the operations of quantum algorithms using classable 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 we'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 super computers can't solve. We anticipate each of these milestones driving further commercial adoption. Since going public about 20 months ago, we have been dramatically increasing our AQ going from 6 AQ commercially available on our IonQ Harmony systems to now 29 AQ on IonQ 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. At IonQ, we've been doubling our systems power every month on average. For example, the most recent leap from 25 AQ to 29 AQ represents a 16-fold increase in computational power. Potential customers are noticing the superior performance of IonQ systems. And with demand for IonQ compute time rapidly rising, we have been accelerating our system manufacturing efforts. Today, I am proud to announce that we have completed construction of our second Aria-class quantum computer, also known as Aria 2. This new machine will join Aria 1 on the public cloud this quarter. 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 a testament to the trust and confidence that global leaders have in IonQ'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. 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. With application areas for quantum becoming increasingly clear, we are also forging channel partnerships that will help us distribute IonQ compute access to a broad set of customers around the globe. We added a new enterprise partnership in April when IonQ 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 IonQ's world-class quantum computing systems and application development services. Our momentum here at IonQ 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. Lastly, it is my pleasure to introduce Pat Tang, the newest member of the IonQ leadership team. Pat will be taking over as Vice President of Research and Development. He brings to IonQ 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 IonQ. And with that, I would like to turn the call over to Thomas for a more detailed review of the financials. 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 $4.3 million 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. 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 $4.1 million in bookings, which is a great start towards our stated expectations of between $38 million to $42 million 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 first quarter were $32.3 million, up 60% from $20.2 million in the prior year period, but well within our pattern for the year. To break this down further, our research and development costs for the first quarter were $16.2 million, up 121% from $7.3 million in the prior year period. Recall that we are investing heavily in R&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 first quarter were $2.7 million, up 43% from $1.9 million 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 first quarter were $10.6 million, up 15% from $9.2 million in the prior year period. All of this resulted in a net loss of $27.3 million in the first quarter compared to $4.2 million in the prior year period. It is important to note that these results include a non-cash loss of $3.6 million for the first quarter related to the change in the fair value of our warrant liabilities. We saw an adjusted EBITDA loss for the first quarter of $15.9 million compared to a $10.3 million loss in the prior year period. Note that we projected an adjusted EBITDA loss for the year of $80.5 million. 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, cash, cash equivalents and investments as of March 31, 2023, were $525.5 million. We continue to believe that this cash position, which we believe is the strongest of any quantum pure player, gives us sufficient cash reserves to get to profitability without needing to raise additional funds given our current road map. Now turning to our second quarter and full year 2023 outlook, we are pleased to increase our revenue outlook to $18.8 million to $19.2 million 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 million to $42 million, and we are introducing second quarter revenue guidance of between USD 4.1 million and USD 4.5 million. As a reminder, we expect bookings of between USD 38 million and USD 42 million for the full year 2023. And with that, I would like to turn the call back over to Peter.

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 IonQ computers, which we are fulfilling with new systems like Aria 2. Meanwhile, we are trailblazing in system performance and manufacturability. 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&A session. Operator?

[Operator Instructions] Our first question comes from the line of Scott Fessler with Morgan Stanley.

Congrats on 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, 16x more powerful than Aria, has there been any discussion of bringing that to the cloud as well?

Scott, this is Peter. So certainly, the reason we built Aria 2 was because of demand. And with Forte as well, we are looking at what we want to do next with that. That too, we have customers clamoring to get access to that as well. We haven't made the decision yet as to when we will put it out on the cloud or versus internal. But certainly, that -- the demand for that system is seems exceptional as well.

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?

Well, we're continuing. There's quite a bit of interest, especially as these systems become more powerful as we start to get into AQ 35 and 64 customers understand that means that we're getting to a point where we can do things to get the 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.

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 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 see interest in that this from several parties and actually in several segments of the market. So we continue to believe that this is indeed going to happen in the time frame that we previously mentioned.

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

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

I guess my first question is a 2 parter here. I realize, I'm kind of comparing things that aren't similar, but on the theme of getting Forte, 29 AQ ahead of time and then also more tactically your near-term, accelerating some milestones in a layer to recognize a little bit more revenues in the first quarter. What's kind of the dynamics here that's driving this acceleration? Maybe you can kind of compare and contrast any fees that might be consistent over those 2 dynamics, if that would be grateful experience?

Yes. On the technology side, I think we have been 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.

And when it comes to revenue recognition, that reflects the fact of the -- 2 things, actually. Earlier, we've had a predominance of quantum-as-a-service, which is more or less like SaaS and revenue gets straight line, which means that it will be very simple to forecast, but we have started to move over to 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 through all the next periods. But we are happy to announce that this does mean that we're able to raise our revenue recognition guidance.

Okay. Fair enough. My second question is, I asked you on the last conference call about system sales and whether they be government or maybe more -- or academic or commercial customers. And I'm remembering 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 the possibility of Quantum hardware sale. 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?

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, both in a national budget point of view, there's quite a bit of money for quantum and systems, and we're competing for those dollars.

Our next question comes from the line of Quinn Bolton with Needham & Company.

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?

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.

I guess, would you say that gap from 29 to 35 is much more difficult from 25 to 29?