IonQ, Inc. (IONQ) Q2 2022 Earnings Report, Transcript and Summary

Greeting, and welcome to IonQ Second Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [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 of Financial Planning and Analysis and Head of Investor Relations. Please go ahead, sir.

Good afternoon, everyone, and welcome to IonQ's second quarter 2022 earnings call. My name is Jordan Shapiro, and I am 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 second quarter 2022 earnings press release issued this afternoon, which is available on the Investor Relation's 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. This call discusses certain non-GAAP measures, and you are directed to our press release for reconciliation of such measures to GAAP. Before we begin, please note that some of our remarks in this call will be forward-looking. Therefore, please refer to the cautionary statement in today's press release for additional details about these remarks. Please note that forward-looking statements made during this conference call speak only as of today. Please refer to today's press release and to the company's quarterly report on Form 10-Q for the fiscal quarter ended June 30th, 2022, which was filed with the SEC and other filings with the SEC for detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Now, I will turn it over to Peter Chapman, President and CEO of IonQ. Peter?

Thank you, Jordan, and thank you everyone for joining us today. We had quite the quarter and I'm excited to fill you in on the tremendous progress we've made here at IonQ. With respect to our technical progress, we had previously reported six months ago that our Aria class of quantum computers had achieved a record 20 algorithmic qubits. As you'll remember, algorithmic qubits is a benchmark consisting of common quantum algorithms that represent the kind of jobs customers want to run. The algorithms used in the benchmark were defined by the quantum industry group, QEDC, with input from various hardware companies and users. Today, I am excited that we are bringing to the cloud a computer with more than 130,000 times the computational power of our previous cloud offering. Specifically, we've been hard at work to dramatically improve Aria's performance. And I can share today that we have achieved a record-breaking 23 algorithmic qubits. Every time you add an algorithmic qubit, you double the computational power, which is the useful computational space for running algorithms. Moving from 20 to 23 is therefore an eight-X increase in Aria's computational power, all in just six months since February of this year. This further cements Aria's lead as the most powerful known quantum computer in the world, in terms of its ability to run useful quantum algorithms. This is significantly better than what we initially had expected for Aria. In other words, we're well on our way towards meeting our 2022 technical goal of 25 algorithmic qubits and are confident of hitting that target. Initial tests show that our next-generation systems that we've discussed on prior earnings calls are already outperforming even the best Aria data on several key metrics. With Aria exceeding expectations, we believe the future is even brighter for our next-generation. And as you may remember, we plan to offer Forte to initial customers later this year, for those who are interested in using IonQ's latest and greatest. Moreover, with the progress we are making on our barium systems, we expect even better performance and have a high degree of confidence in meeting our technical milestones in the coming years. Meanwhile, we are thrilled to announce that IonQ Aria, which we believe to be the most powerful commercial quantum computer in the world with 23 algorithm qubits, will be available tomorrow to all users of Microsoft Azure Quantum. Anyone with access to Microsoft's platform can process jobs on Aria. It takes only a few minutes to set up an Azure account and to start programming on our IonQ quantum system. This announcement furthers our commitment to making industry-leading hardware publicly accessible to current and future generations of quantum programmers. IonQ systems are performing best-in-class and customers have noticed. Existing customers are expanding their engagements with IonQ and we've recently added new customers, including Airbus and Dow. Airbus is leveraging IonQ to use Aria to explore optimization problems that are at the core of their aerospace business, such as how do efficiently load cargo on aircraft. The quantum algorithm we're developing with Airbus will account for a number of critical aviation variables that make this problem particularly difficult for classical algorithms to solve. Dow, a global leader in chemistry and material science, is using Aria to explore the boundaries of quantum computing applications in materials discovery research. They join other IonQ customers who are partnering with us to explore the intersection of quantum machine learning, material science and chemistry. We continue to see compelling results on the projects we have initiated to apply our systems to real business problems, both internally and with customers. In June, we announced the results of our partnership with GE Research to develop a quantum algorithm that manages financial risk exposure. Our work used a large data set to generate the risk models across up to four variables. This technique is broadly applicable to industries which have risk management needs such as finance, insurance, and supply chain management. Recently, we also signed a formal agreement to collaborate with the University of Maryland on a project for the National Science Foundation. For this, IonQ will build and host a quantum router as part of a new quantum network, the Mid-Atlantic region quantum Internet spanning UMD's campus and the surrounding area. The work is not only important for quantum communications, but also continues our work towards connecting multiple quantum computers together to form even more powerful systems. We are also pleased to provide an update on the multimillion dollar DARPA contract awarded to Zapata Computing for which IonQ is a participant. Over the last months, our subcontract was finalized and our work with DARPA and Zapata is underway. Internally, we're investing in cutting-edge research for problems that we think will benefit the most from quantum computing and deliver near-term business value. For example, we recently published a series of quantum methods for natural language processing, or NLP, a technology that is increasingly ubiquitous in voice interfaces like Amazon's Alexa in email applications like Gmail and in chatbot functionalities like those who may have experienced in customer support. Our team created NLP algorithms to represent linguistic qualities like ambiguity, vagueness, and novelty on a quantum computer. These elements are notoriously difficult to represent and no previously published work has demonstrated ambiguity resolution or language generation working on a live quantum hardware. We think quantum techniques of this nature could eventually be embedded in these NLP applications, delivering a smoother and more powerful user experience. We are seeing a wealth of opportunities present themselves across enterprise, government and academic customers. And each time we achieve remarkable results with our customers, they become advocates and case studies for the value of IonQ quantum computing. This virtue cycle is the cornerstone of the go-to-market flywheel that we are developing alongside our technology. Lastly, in July, 2022, we welcome Kathy Chou to the IonQ Board of Directors. Kathy brings with her deep technical experience from her role as SVP of SaaS Engineering at Nutanix. Go-to-market experience as a sales and operations executive at VMware, and a background in mechanical engineering and manufacturing from Stanford. Kathy joins Inder Singh, the CFO and Executive Vice President of Arm Limited, as our two newest independent board members. We're thrilled to welcome Kathy to our Board. I will now turn the call over to Thomas for more detailed review of the numbers and corporate initiatives. Thomas?

Thank you, Peter. Before I jump into our financial results, I wanted to touch on some important progress we made at the organizational level. I'm excited to share that we have identified a facility in Seattle to host our first assembly line for manufacturing quantum computers. We're gearing up production to support anticipate customer demand and our quantum networking R&D. To support our plans for production, we have hired Dave Mehuys as Vice President of Product Engineering. Dr. Mehuys joins us after leading Systems Engineering at PsiQuantum, where he oversaw teams throughout systems, R&D and operations, and brings a robust understanding of quantum hardware with him. Additionally, we are expanding our sales reach internationally with the creation of IonQ's first international entities in Germany and Israel. We also named Noam Zakay as our Managing Director IonQ Germany to oversee our sales growth in Europe. Noam join us after almost three decades at IBM. Most recently, as the Program Director of IBM quantum Europe. We are thrilled to welcome Dave and Noam on board as we gear up to service a rapidly expanding market. As more and more organizations are starting to explore quantum, we are getting ready to capture this demand on a worldwide stage. More than $24 billion was invested in quantum worldwide between 2016 and 2021. And to pay some investment is not slowing down. As a local example, U.S. government investment in quantum information science R&D nearly double from 2019 to 2022, going from a reported $449 million to a requested $877 million. At IonQ this manifest itself in increasing requests to participate in our piece, which we will expect will contribute to the commercial momentum we are experiencing. With both a larger number of inbound leads and the opportunities themselves being larger in size, our belief in the long-term market opportunity is as strong as ever. Now, let's walk through the second quarter results in more detail. We outperformed our revenue projections for the quarter with $2.6 million in recognized revenue due to faster than expected implementation and increased usage. This compares to $93,000 in a prior year period and is above the high-end of our previously provided range. Moving down the income statement, for Q2 2022, our total operating cost and expenses for the second quarter were $21.5 million, up 114% from $10.1 million in the comparable prior year period. To break this down further, our research and development cost for the second quarter were $9.7 million, up 76% from $5.5 million in the year prior period. We continue to invest heavily in R&D and given anticipated demand of building more systems than originally expected for this year. Our sales and marketing costs in the second quarter were $2.1 million, up 145% from $871,000 in their year prior period. We continue to believe investment in sales and marketing today will position us for increasing commercial momentum for years to come. Our general and administrative cost in the second quarter was $7.6 million, up 160% from $2.9 million in the comparable prior year period. This change is largely attributable to an increase in stock based compensation expense, which was $2.8 million for the second quarter compared to $1.7 million in the comparable prior year period. All of this resulted in a net loss of $1.7 million in the second quarter compared to $10 million in the prior year period. It's important to note that these results include a non-cash gain of $16.1 million for the second quarter related to the fair value of a warrant liability. Additionally, we saw an adjusted EBITDA loss for the second quarter of $11.6 million compared to a $7 million adjusted EBITDA loss in the prior year period. Turning now to our balance sheet. Cash, cash equivalents and investments as of June 30th, 2022, were $571.3 million. We continue to believe this gives us sufficient cash reserve to get to profitability without needing to raise additional funds, given our current roadmap. Focusing on our full fiscal 2022 outlook, we continue to have confidence in our full year 2022 revenue range of $10.2 million to $10.7 million. We expect third quarter revenue to be between $2.6 million and $2.9 million. We achieved $600,000 in bookings for the quarter compared to $57,000 in the Q2, 2021 period. As for full fiscal 2022, we are maintaining our expected range of $23 million to $27 million. This range reflects the high level of interest we have seen from customers and are confidence that the deals we are currently negotiating will close. As we have noted on prior calls, we continue to expect bookings to be lumpy for quite some time. This means that while we have confidence in our overall economic performance, it can sometimes be hard to accurately predict exactly in which quarter deals will close. We believe providing bookings outlooks on an annual basis rather than on a quarterly basis will better capture our business outlook and intend to provide only annual outlooks moving forward. While we believe we will achieve our booking forecast, we also feel it is prudent to acknowledge the risk associated with the present market conditions, which is leading to contracting delays across the technology sector. We have identified $12 million of late stage opportunity in our booking forecast that we believe is likely to close, but precise timing is unclear, which may lead us to miss some or all of this value in 2022. We, nevertheless, remain confident that these customers will contract with IonQ. We have noted the increase in demand we are seeing across the market. Our expectation is that large, late stage opportunities in our pipeline will eventually be prevalent enough that this lumpiness begins to smooth out. In the meantime, our team is approaching the market with gusto to capture that demand for IonQ. In summary, we are happy to say that even in these market conditions, we remain confident in our forecast and our ability to keep our spend in line with previous expectations. Our more than $0.5 billion cash position continues to be a significant advantage for the company and enable us to make investments in R&D and manufacturing to continue delivering our market leading systems.

Thank you, Thomas. The second quarter was marked by landmark technical progress on our systems in a rapidly expanding set of customer applications that are already delivering compelling results. The future continues to be bright for quantum computing. We could not be more proud of the team, and we are grateful to have you alongside us for this journey. And with that, I'd like to have the operator open the line for questions.

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Quinn Bolton with Needham & Company. Please proceed with your question.

Hi, guys, congratulations on the nice results, especially on the 23 algorithmic qubits for Aria. I guess, wanted to start with the comment that you'll be bringing Aria to Azure quantum beginning tomorrow. Obviously, you've talked about bringing that computer to Azure this year. So, congratulations on that achievement. But I guess I'm wondering since Aria or Harmony is available on other public clouds, how easy will it be to bring Aria to other public clouds later this year? And is that in your current plants? And then, I've got follow-up. Thanks.

Hey, Quinn. Good -- a good question. Just on the technical -- I'll answer the technical part first, which is all the machines support the same API, whether it's an old machine or an latest generation. So, largely there's kind of not much work on the cloud provider's part to get to the latest machine. It's mostly configuration work that they have to do just to inside their system and administratively to say, hey, there's a new system and those kinds of things. Actually, to be honest, probably setting up new rates and those kinds of things are more difficult than it is actually integrating one of our new systems, so that part's relatively easy. The -- we look forward to make -- to explore other avenues for Aria on other systems, but we're not making any comments on that today.

Understood. And then for Thomas, I know there've been some delays in government contracting this year, just with COVID and work from home, et cetera, but wondering on the $12 million of late-stage bookings you identified that could be subject to delays and slip out of 2022 into 2023. Can you comment is that mostly government-related contracts? Is it heavily skewed to commercial? Just sort of what's the mix between government and commercial in that $12 million?

So, we're not actually breaking up segments. And given that we've always said we have a lumpy business. And so, we have a small number of contracts that they're often very large. And so, given that these contracts are still in negotiation, we would like to disclose as little as we can about them. But it's a mix of contracts. And the good news for us is that we have buyers who are interested and we continue our discussions, but these are complex sales. It's not like you walk into the supermarket and grab a Snickers bar. Although, we're negotiating the safeway, if we can be listed there.

Okay. Thank you very much.

Thank you.

Our next question comes from Sam Peterman with Craig-Hallum. Please proceed with your question.

Hi, guys. Thanks for taking my question. I wanted to follow up on the bookings and maybe ask a different way, but I know you're not changing your revenue guidance for fiscal 2022, which is consistent with how you talked about those bookings on the last call. But curious if you're seeing any impact to potentially your fiscal 2023 revenue outlook from some of these bookings push outs, or just from the general market environment out there and broadly technology pushing out some of those contracts. Not asking for a number, obviously, you haven't guided to that, but just curious, qualitatively how you guys are thinking about whether that might impact your fiscal 2023 revenue.

So, we will get back to our 2023 outlook on the Q4 call, where we will give detailed expectations of it. But what we're seeing here is that there is interest in our technology and so far, we continue to have a great confidence in what we think is going to happen in 2023.

Okay. Fair enough. I guess my second question on the improvement in the algorithmic qubits for Aria. Could you talk a little bit more about what enabled that? And then if those improvements are kind of -- if those improvements will translate to other systems like Forte, for example.

Absolutely. This is Jungsang responding to your question. So, there are many different fronts that we've been pushing. One is, obviously, improving the performance of the hardware. But we've also been making great strides in learning how to mitigate some of the errors that are in our systems in a more intelligent and effective way. And also we've been pushing on performance of our software tools, including compilers and optimizers. So, all of these things allow us to take the same algorithm and then make it more effectively executable on our machine and then with a higher probability to get the right answer. So, it's really a combination of all the technology developments of many fronts, that have made this possible.

And I'll just jump in on this, which is everything -- which I think was part of your question -- everything that we're learning on Aria, I think is some of it very directly like the compiler work that Jungsang mentioned is applicable across everything we're doing. But even the things that we're learning on Aria is something that often translates into a next machine and gives us a hint as to what to do on the next one. So, it is kind of today and also tomorrow.

Got it. Thanks, guys.

Our next question comes from Toshiya Hari with Goldman Sachs. Please proceed with your question.

Hi. Good afternoon. Thanks so much for taking the question. I've got two as well. My first one, Thomas, I wanted to go back to the contracting delays you talked about. Just want to clarify, is this sort of macro-driven where your customers, whether it be private companies or governments becoming a little bit more prudent and careful with their investments, or if it's something more tech-related, quantum-related, any color there would be helpful. And then as my second question on profitability, you guys talked about building more systems this year and that driving, I think, it was R&D spend a little bit higher. You also talked about your location in Seattle and building out your presence in Germany and Israel. So, I guess, the question is, should we be thinking about the timing of profitability being pulling -- being pulled in or pushed out relative to prior expectations or no change to how you're thinking about converting to profitability. Thank you.

Good to hear your voice again, Toshiya. Those are excellent questions, and I'll just start from the back. So, I don't forget. The -- when it comes to our expenses and a lot of this is also investments, as opposed to just P&L expense. We have no changes in our plans. This is essentially what we had planned to do all along. And yes, we have more machines in production that doesn't really affect our P&L since a lot of that is capitalized. But what it does do is it allows us to have more capacity come online in the near to medium future, actually make that medium future because we're not planning to double our capacity overnight, but we do want to be able to satisfy all the demand that's out there. And right now, with the record-breaking performance that we have, it's just prudent of us to make more machines. On to your other question is this macro-related? I think some of it's macro-related, but some of it's also just that these are really large purchases, and they are purchases in a technology that world essentially has not seen before. And so, there's just a lot of back and forth and everybody needs to understand it. And a lot of the time there are people like me on both sides and we're like, we know the price of everything and the value of nothing. And it just takes longer to get like all the number crunch errors and the legal to get to it. We are not seeing a slow down in demand.

Got it. Thank you.

Okay. [Operator Instructions] Our next question comes from David Williams with Benchmark. Please proceed with your question.

Hey, gentlemen, thanks so much for letting me ask the question. Congrats on all the progress.

Thanks David.

One, what I wanted to ask maybe quickly and you kind of talked about the build out of the hardware sales and the manufacturing there. Seems like you're moving fairly quickly. And just kind of curious, if you are thinking that maybe the Aria platform could be introduced in these machines or if that's for the next-generation, and then maybe if there's any component of this, this related to the networking side versus the computing side.

All, David, excellent questions. We actually are building a second Aria system here in College Park and in record time. So -- and that's to me upcoming demand as well. The answer though in the Seattle, it maybe just even to help, to break down as to what the two locations are going to do. In the Seattle office, they'll be working on manufacturing of quantum computers and kind of bringing the Henry Ford effect, if you will, to that. So that team is very much focused on building rack mounted, quantum computers that can be easily manufactured. Here in College Park, they have a different charter, which is to work on improving the performance. And so, those are kind of the teams have different kind of goals, if you will, between the two locations. And your insight about machines is spot on. If you want to do networking, you have to have more than one quantum computer to do it. So one of the reasons that we are building, gearing up manufacturing is to have enough free machines, so that R&D can do experiments for quantum networking. We can get the software written for those things. So that's kind of part of it as well. You asked one last question, I think, which is kind of, will these be Aria machines? I think they're more than likely going to -- not be Aria machines into the future. That'll be next-generation Forte or better is it will be the first ones rolling off the assembly line in Seattle.

Great.

This is Chris Monroe here. I might add about your networking question. As you might know, we're going to scale our quantum computers by networking many chips together. That's always been in our plans. We're starting to spin up that effort right now. I would say, in our current systems, we don't need that yet, but this is what -- when we -- when our systems get more powerful, that's how we will do it. And that said also we're just now kicking off a big program with the University of Maryland on developing protocols for networking, optically networking ion trapped quantum computer systems.

Okay. All very great color. Thanks for that. Certainly appreciate it. And then, I know this question was asked earlier, but we're just going to dig in a bit. But you talked about the performance improvements on the Aria system. And I know that was a bit of a surprise. And maybe just digging in, is this -- it doesn't sound like it's chip specific. So, are there areas, I guess that you kind of look across your platform today, are there other areas that you could squeak out additional performance maybe in the classical compute side, or maybe even the algo side? Do you think there's additional room to optimize, or do you feel like you've kind of squeezed out all of your performance at this point?

Yeah. So, I think we …

Again, Chris Monroe here. Go ahead Jungsang.

Yeah. I think, we have plenty of room to continue to squeeze. If you think about getting a very complex algorithm and getting executed on a very specific machine, there tends to be a lot of different steps that has to be taken. Many of them in the software domain, and many of them in improving the hardware. And we're finding quite a bit of opportunities, especially as we understand some of these applications deeper. And then, finding ways to improve the mitigation of errors in our systems. We continue to find opportunities and these many of these things actually carry into the future. So, I think this is one of the areas where as we focus on kind performance metric tied to a realistic and practical algorithms, we're finding compounding opportunities to continue to improve the performance, so that we can actually run bigger and more challenging problems on the same -- on improving hardware.

And I'll just add a little bit to this, which is, we had talked about improving the native hardware in the past. We talked about error correction. A burgeoning area of quantum at the moment is kind of what we'll call error mitigation. And that's kind of in the middle, which is kind of a new field. And in part that's also what's happening here. It's one part is to reason that we've managed to get Aria to go further than we initially planned.

And again adding to that a little color, is that the type of errors that our machines experience, without getting two technical they're sort of miscalibration. They're -- they don't destroy the quantum information. It's still in there. And the types of areas we have, and that's not true of all quantum computing systems. We knew we were able to mitigate, and we're seeing that now that are our compilers and software are able to squeeze more out without doing active air correction. We're going to do that too, but we're going to have the whole kind of spectrum of air mitigation and then full-blooded error correction as our systems grow.

Again, all great, very good color. Certainly appreciate it. One last one, if I might. And just on the barium, any update there and how much performance advantage do you think you would have today if you were had that employed on the Aria system? Thank you.

Yeah. We continue to make progress and make an increasing effort in improving, validating Aria systems. We have already expressed some of the progress we've seen today. But we will actually share more as we have more concrete information, not much more to concretely point this time.

[Operator Instructions] Our next question is from Martin Smith. Looks like we lost, one second. Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would now like to turn the call back over to Peter Chapman for closing remarks.

Thanks everyone. Thanks for listening in today and the great questions that were presented to us. We are very happy with the progress we made this quarter. And we continue to look forward to hitting our both earnings and bookings numbers as we outline today. I want to say a huge thanks to the IonQ team for making the technical progress that they've made so far. And we look forward to talking to you all in 90 days or. So, thanks again. Have a great day.

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