Greetings. Welcome to IonQ's Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this is conference is being recorded. At this time, I will turn the conference over to Jordan Shapiro, Vice President, FP&A, Head of Investor Relations. Jordan, you may now begin.

Good afternoon, everyone, and welcome to IonQ's second 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, our President and Chief Executive Officer; Thomas Kramer, our Chief Financial Officer; and Dr. Jungsang Kim, our Co-Founder and Chief Technology Officer. By now, everyone should have access to the company's second 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 management's 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?

Good afternoon, everyone, and thank you for joining our second quarter 2023 earnings call. It's been another outstanding quarter here at IonQ, as we continue to push ahead and further our lead over our competitors. We finished the quarter with $5.5 million in revenue, which was well above the high end of our guidance range of $4.1 million to $4.5 million. At the same time, we built upon our momentum in the private sector by closing our first major deal designed to put, not just one, but two generations of future IonQ systems in Europe. This commercial milestone brings our year-to-date bookings to $32 million and puts us in striking range to achieve our previously stated goal of $100 million in cumulative bookings during the first three years of our commercialization efforts. As we'll discuss, this quarter's success gives us the confidence to once again raise the midpoint of our bookings guidance for the full year from our previous outlook of $50 million, up to $52.5 million. Our momentum here at IonQ is accelerating with our groundbreaking technical progress driving our commercial wins. Last quarter, we shared that our team had already accomplished our technical goal for 2023 over seven months ahead of schedule, by achieving a record-breaking 29 algorithmic qubits or AQ on our IonQ Forte system. We have added approximately one AQ per month on average since going public in September 2021. With AQ 29 achieved, we are now focused on reaching AQ 35 and AQ 64. Building on that technology success, we have now closed IonQ's largest commercial deal to date. In June, we announced that we will be partnering with QuantumBasel, a Switzerland-based industry group to bring two of our future systems to Europe. These systems will follow our technical roadmap, with the first one expected…

Thank you, Peter. Before we dive into our financial results, we are pleased to announce that in addition to our groundbreaking partnership with QuantumBasel, we will be opening up our first European corporate office also in Switzerland. This location will allow us to service future customers in the European region and represents a major milestone in the international expansion of IonQ operations. Now, let's walk through this quarter's financial results in more detail. As Peter mentioned, we had an excellent quarter, recognizing $5.5 million in revenue, which was above the high end of the outlook we previously provided. This reflects us being able to compete work ahead of schedule for some of our milestone-dependent revenue. We exited the quarter with $32.2 million in bookings year-to-date, representing excellent progress towards our newly revised expectations of between $49 million to $56 million for the full year. While we've already increased our bookings range in June, our pipeline of new business has come into clear focus since that time. Thus, we consider it prudent to raise the range again to accurately reflect what we believe is the most likely weighted average outcome for our bookings in 2023. 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 be -- continue to be lumpy for quite some time. Moving down the income statement. For Q2 2023, our total operating costs and expenses for the second quarter were $38.6 million, up 79% from $21.5 million in the prior year period, but well within our plan for the year. To break this down further, our research and development costs for the second quarter were at $19.9 million, up 106% from $9.7 million in the prior year period. Recall that…

Thank you, Thomas, and thank you to everyone who has joined us today and of course to the entire IonQ team around the globe who continue to push forward on our mission of a quantum future. Now, I'd like to hand the call over to our operator for Q&A. I just like to say that and I should have said this earlier, but I wanted to say thank you to Thomas and the rest of the management team for all their hard work. The company is executing very well. I very much look forward to the years ahead and working with this team to continue and accelerate our progress. I'll now turn over the call for Q&A.

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] And our first question is from the line of David Williams with Benchmark Company. Please proceed with your questions.

Hey, good afternoon, and congrats Peter and Thomas and the team. You guys are doing a great job, and congrats on the progress.

Thanks, David.

I guess, maybe, first, Thomas, when we think about, you mentioned multiple potential machines in the next 18 months. How should we think about that in terms of, maybe a more realistic way to think about how many machines you could potentially sell and what kind of revenue we should think about over the next 18 months from that?

So we gave our guidance for this year, and we will come back to our guidance for next year on the Q4 call. But recognize that we are -- we are accelerating our sales and we're doing very well. We don't know exactly how many machines we will sell at any given point in time. What we do know is that we have a lot of inbound requests for this. And, we actually -- we have seen this much faster than what we thought. As you recall, when we went public, we talked mostly about access via the cloud. And we said that it would become realistic one day to selling machines and putting them on premise. We're just seeing that happening a lot faster than what we thought.

Okay. Still appreciate the help there. And then can you maybe magnify or can you maybe quantify the magnitude of the interest you've had, not just on the system purchases, but maybe, just since, you’ve released AQ 29 and the progress that you’ve had, I guess, over the last six months, how have you seen the inbound interest improve? And is there a way to quantify that in terms of what level of interest you're seeing?

What I -- I guess what I would answer here is, as we get closer to AQ 64, it's clear that there's a lot of interest there. We're well -- as we said, we're well beyond simulation at that point. And so, customers are starting to recognize that that's going to be -- what I would say is kind of quantum's ChatGPT moment, if you will, if you know what that means, kind of people are going to wake up to quantum. So we're seeing that and it's now -- we're starting to see that excitement come through in terms of inbound.

Okay. And just one last one if I can. When you're speaking with customers, is there a -- if there is hesitation, what do you think causes customers to not move forward, or what do you hear most often as a reason? It seems like everyone would want to move this direction, but, do you ever hear, I guess, what are the negatives or what makes somebody not want to move forward? Is it the expense, is it cost, or just [lift] (ph)?

What I would say is it's probably like, Sam Altman over at OpenAI two years before ChatGPT. There was a lot of people at that point who said that, AI was never going to happen. And so, it turned out they were wrong. So, we still have disbelievers in our industry as a large. But, we continue to execute against our tech roadmap, just as what we said we were doing. And so we will continue doing that. We're very confident in it.

Thank you for the time. And again, congrats.

Thank you.

Our next question comes from the line of Quinn Bolton with Needham. Please proceed with your questions.

Hey, guys. I'll echo the congratulations on another strong quarter and, both technically and on the sales front. I guess, Thomas, now that you've had the QuantumBasel transaction sort of behind you for a month or two, can you walk us through sort of how the accounting works? Is it sort of rev rec on shipment? Is it percentage of completion because it will take a little bit of customization and it's not all delivered at one time? And then a related question is as you sell these systems, will there be sort of like a annual service and maintenance contract that could actually represent a recurring revenue sale alongside of the hardware?

Absolutely. So, while we actually haven't earned out the accounting quite yet because this will extend into several periods into the future, we have a pretty good idea of how it's going to look for the remainder of this year. And we're actually starting up with an access contract so that they can familiarize themselves with the power of, our flavor of quantum computing before they actually have on-prem machine. But this one will probably take a slightly different flavor of the essential complete, because of us also having the opportunity to resale some of this capacity ourselves and using this as a go-to-market entry point for Europe with localized service. But we will get back to that probably already on the next call when we can get into more details of how the recognition will work, but there will be ongoing service already today, but that will be remote. When we install the systems on-premise in Europe, we will also have ongoing maintenance and actually people on the ground there.

Perfect. And then for Peter, you guys hit AQ 29 seven months in advance. You've been sort of advancing AQs about one per month. So hitting 35 seems like you're well on track and we've got still multiple months left in this year. So maybe even surprises on timing of AQ 35. But I guess as I look forward to AQ 64, that seems like it's where you might start to achieve quantum advantage on certain applications. It's obviously an acceleration in the AQs per month. And so, how are you feeling about hitting AQ 64 in ‘25? What are the biggest milestones? Is it the laser system? Is it the type of ion you're using in the ion traps? What are kind of the biggest challenges to hitting AQ 64 in a couple of years’ time? Thank you.

Well, first is we do feel quite confident about hitting it in ‘25. And we have kind of here customer validation by QuantumBasel buying one of those machines, which is great. Just in -- there is a technical challenge. I don't want to make it sound like it's easy, but it is, outback. They kind of have taken all the various technical challenges and have multiple, approaches to be able to de-risk the roadmap. So for -- so outback, there's kind of an appropriate risk analysis that's going on. And we're investing in multiple different ways to do it to be able to make sure that we hit that milestone. So -- and it is a whole range of things, everything from quality of lasers to optics, it runs a gamut. So, but we are very confident in hitting it, just like we've done so far, hitting our roadmap, into the future.

Great. Thank you.

Our next question is from the line of Trevor Janoskie with Goldman Sachs. Please proceed with your questions.

Yeah. Hi, all. This is Trevor. Thanks for letting me ask some questions here and congrats on all the progress. So just to start with a clarification, with bookings being $28 million and QuantumBasel system sales equaling $28 million, does this mean there were no other bookings in the quarter or how should we think about this?

It does not mean that. The reason is due to rounding and also foreign currency conversion. But it does mean of course that the majority of the bookings came from QuantumBasel.

Okay. Yeah. That makes sense. And another one on the systems. So with your QuantumBasel agreement for two systems being $28 million, I guess we can infer about $14 million for each system, give or take, but you're also managing 50% of these systems. Does that mean that the ASP of a single system could be $28 million if you're not managing all of it or any of it at all? And what could the gross margin be for a single system sale where you were not co-managing the system?

That's an excellent question. I think the -- let's go backwards. The gross margin shouldn't be all that different because when you sell 100%, we aim to use the same pricing model for the second 50%. And when it comes to the actual pricing, there's a lot of different elements that goes into this. I mentioned already that, QuantumBasel is already up and running on a remote access to our current service here in the US. And we will also have, service and maintenance on the ground. And we prefer not to break out the, the specific elements and their pricing, but you are in the right ballpark. These are not cheap machines, which I think we alluded to in an earlier call when we said that we do large deals and we look forward to doing more.

Trevor, for you, we're willing to take you up with a machine at a reasonable price right now. You can drive it off the lot as we're speaking. I'll just add a little bit to that as we have customers in the pipeline here who have different needs. And so there's different pricing. For instance, there's companies now which are working on quantum networking and they have different needs and those will be priced differently. They're not looking for AQ 64 systems. They're looking for quantum memory to build quantum networks in the future quantum internet. So each customer is a little different and the pricing is a little different based on what the customer wants.

Okay. And one more, if I may. So are these customers that are coming to you, that are interested in system sales, are they mostly considering the 35 AQ and 64 AQ like QuantumBasel, or is there also interest in your Aria 29 as well?

In terms of system sales, usually these are, as you know, kind of big ticket items that you have to run through a budget year and also a manufacturing cycle. So people are usually looking forward by at least a year. And so they're looking at the roadmap. So what I would say is, people very much are interested in AQ 64. They know they can't get that delivered next year. So then they're thinking, well, can I get a access to an AQ 35 system so I can get started and start programming and get my application started. But people are really, I think we see lots of excitement for AQ 64 systems.

Awesome. Thanks for the color guys.

Thank you.

[Operator Instructions] The next question is from the line of Kevin Garrigan with WestPark Capital. Please proceed with your questions.

Yeah. Hey, Peter and Tom, let me echo my congrats on the strong results. Going off of David and Trevor's questions about kind of customer interest, since you since you last launched Forte for commercial use for everyone, can you kind of give us a sense on how many new commercial customers you signed up since and any to point out?

So, happy you asked that question. As you know, we already have commercial customers on that system since late last year and we continue to work with several customers on it. What we also want to make sure is for everybody else to know that we're open for business and we welcome all incoming calls right after this earnings call.

Okay. Got it. Yeah. That makes sense. Okay. and then just as a quick follow-up, the announcement of the partnership with QuantumBasel and you guys providing two systems, can you give us an update on how things are progressing with your manufacturing facility in Seattle?

Yeah, very much. So, as you know, probably when you're building a factory, the very first thing you have to do is get building permits. And so we were lucky enough to get those, not too long ago. And, so construction is hot and heavy as we speak in in Bothell, Washington. And we expect to see this fall the first phase of the stretch -- construction come to completion. And we've already got, I think, roughly 40 -- roughly 40 people in Seattle. And so, they will start to be reporting to the Bothell office starting this fall. Oh, and it's -- just to let you know, it's a timeline. We're hitting our timelines and it's also on budget as well. Little did anyone know, but we're also a construction company as well. So we're managing building over manufacturing facility as well.

Yeah. If I might add, this is probably my 20th office build up. And, I was just there a couple of weeks ago, and it's beautiful. Like, it's very, very well done. It's orderly. Like, when I started building out offices, there was not a hard hat in sight. And now in order to actually even have a walk through, you put on a vest, you have a nice little hard hat with IonQ logo on. It's being done very, very professionally and we forward to the day when we can cut the ribbon.

Yeah. We're all looking forward to that as well. Okay, great. I appreciate the color. Thanks guys.

Likewise.

Thank you. At this time, we've reached the end of the question-and-answer session. And I'll turn the call over to Peter Chapman for closing remarks.

Thank you everyone for joining us this afternoon. We look forward to the exciting times ahead for IonQ and to seeing you at our Analyst Day and Quantum World Congress. Thanks everyone.

Thank you.

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