Rigetti Computing, Inc. (RGTI) Q2 2022 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the Rigetti Computing Second Quarter 2022 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Polly Pearson with Sharon Merrill Associates. Please go ahead.

Thank you, operator and good evening everyone. Today we will be reviewing Rigetti’s second quarter 2022 earnings results. With me here is Chad Rigetti, Founder and CEO of Rigetti Computing, and Brian Sereda, CFO. Before I turn the call over, I’d like to point out that this call and Rigetti’s Q2 press release contain forward-looking statements concerning current expectations, objectives and underlying assumptions regarding future operating results. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those described. Also in an effort to provide useful information to investors, comments today include non-GAAP financial measures. For details on these measures and reconciliations to comparable GAAP measures and for further information regarding the factors that may affect Rigetti’s future operating results, please refer to today’s earnings release on Rigetti’s website at investors.rigetti.com or to the 8-K filed with the SEC earlier today. And now, I will turn it over to Chad. Chad?

Thank you, Polly and welcome everyone to our second quarter 2022 earnings call. We delivered strong results this quarter, advancing on our product roadmap, continuing to attract key talent and strengthening our base of customer and partner relationships. Our R&D and product development teams made excellent progress and we remain on track to meet our technology roadmap targets. This includes our planned next-generation 84 qubit system in 2023 and 336 qubit system later that year. Our Quantum Cloud Services team achieved a major step forward in quantum processing speed, demonstrating a 4.5x improvement compared to that performance we reported this past February, as Rigetti continues to be a pioneer in hybrid quantum classical systems. We unveiled our first UK-based quantum computer and won two new UK government awards for projects to advance quantum computing technology and applications. And we announced our selection to lead a new DARPA program focused on developing benchmark applications for quantum computing. Over the next decade, we expect the world’s most powerful computers to leverage quantum processors as accelerators in a quantum classical hybrid architecture, like the one we have pioneered at Rigetti. Rigetti is working to build the core hardware and software technologies to unlock the future. And we are commercializing it in our QCaaS or quantum computing as a service business model using our quantum cloud services platform. Over the years, we have carved out a distinctive position in the industry as a leading platform for delivering quantum classical computational power. Our trailblazing leadership and hybrid is no accident. We have been pursuing this vision since 2014 when we patented our hybrid coprocessor architecture for practical quantum computing. In 2018, with the release of our QCS platform, we were the first to offer access to quantum processors tightly integrated with classical computing infrastructure. By optimizing for flexibility, functionality and low latencies, Rigetti’s superconducting quantum processing units, or QPUs, are deliberately designed to integrate with classical computing systems and infrastructure. These features underpin the fast processing speeds we have been able to achieve on our platform. One metric for measuring quantum processing speed is circuit layer operations per second, or CLOPS. Originally developed and introduced by IBM, CLOPS assesses the processing speed of a quantum computer. This past February, we benchmarked our 80 qubit Aspen-M-1 system using CLOPS showing that our system was 18% faster than IBM’s comparable 65 qubit system at the time. Since then, we have continued to iterate and improve on these results. Recently, we reached a new milestone with our team successfully achieving a CLOPS performance greater than 4,000 on both our 40 qubit Aspen-11 system and our 80 qubit Aspen-M-2 system. These results represent a 4.5x acceleration since February. This is a big win. And I’d like to congratulate our team for their effort and success on this front. For more information about how CLOPS is calculated and important disclaimers regarding the use of CLOPS as a performance measure, please refer to our earnings release. Rigetti is also pioneering hybrid performance for real world applications by engaging in partnerships with classical chipmakers, such as Ampere. In our work with Ampere, we have made significant progress in advancing viable hybrid use cases. This includes successfully integrating Ampere’s cloud native processing platform with Rigetti’s quantum systems as well as completing the first rounds of tests for running quantum machine learning applications on the combined platform. We couple our leadership in hybrid with an emphasis on cloud delivery, which is core to our QCaaS business model. Rigetti has been delivering QPUs over the cloud since 2017. We expect cloud delivery to allow us to continue scaling adoption, achieve faster go-to-market times and optimize for capital efficiency and strong margin profiles. Cloud delivery also allows our customers and partners to access our latest systems choose the most suitable QPU for their business or research objectives and obtain maximum value when beginning a new quantum initiative or application development campaign. In our view, this emphasis on building quantum processors designed for hybrid integration and co-processing, paired with our cloud delivery model is the most practical approach to commercializing quantum computing. On that note, we are excited to announce plans for our inaugural Investor Day on September 16 at our Fab-1 facility, the industry’s first dedicated quantum fab. The theme of this event will be integrating quantum into the fabric of the cloud and we will provide attendees with the opportunity to tour our fab facility. If you are interested in attending the event, please reach out to our Investor Relations team at rgti@investorrelations.com. We will also be announcing a webcast option for those unable to attend in-person. Now, I will provide more color on our technology updates for the quarter. We are very excited about our product roadmap and remain on track to meet our technology roadmap targets announced in connection with our first quarter 2022 earnings. We are making excellent progress on our 84 qubit system planned for 2023. We recently completed the design of the chip packaging and expect to begin testing chips this month. This next generation processor will be the first to introduce a new lattice expected to bring higher conductivity and our tunable coupling technology. As development has progressed, we continue to see high 2 qubit gate fidelities around 99% on test devices, in line with the anticipated performance improvements of our 84 qubit systems. Our planned 336 qubit machine, currently expected in late 2023, will be based on 484 qubit chips assembled together using our proprietary multi-chip technology. We introduced the multi-chip architecture, beginning with our Aspen-M systems and continue to advance this modular approach to enable our next generation machines. With our unique and patented multi-chip technology, we believe that we hold a very strong position relative to direct competitors and that we are well positioned to continue pioneering this critical scaling technology. For example, our engineering and R&D teams have recently completed several important milestones towards delivering our 336 qubit system. First, in Q2, we demonstrated tunable coupling between qubits on separate chips, paving the way to leverage this patent pending technology in our next generation multi-chip processors. Second, we have begun designing and producing the advanced higher density packaging for this system. Third, we executed the first proof-of-concept for our next generation control system expected to be based on radiofrequency system on a chip technology. We believe this approach can bring greater performance, increased scalability and reduce costs to our control system for the 336 qubit QPUs and beyond. Turning to partnerships, during the second quarter of 2022, we deepened existing relationships and won new deals in both the UK and U.S. as we continue to work hand in hand with top organizations in pursuit of quantum advantage. During the quarter, we launched our first UK based quantum computer, a 32-qubit machine. Backed by UK government funding, Rigetti is leading a consortium that includes Oxford Instruments, the University of Edinburgh, Phasecraft, and Standard Chartered Bank. Our goal is to advance practical quantum computing applications in the areas of machine learning, materials simulation and finance. Building on this momentum in the UK, we have recently won two new Innovate UK awards through the IFCF commercializing quantum technologies challenge. Under one of these initiatives, we plan to work alongside Riverlane on error correction research and development. On the other, we plan to work with Phasecraft and BT formerly British Telecom to build quantum algorithms and software for solving optimization and constraint satisfaction problems for the telecom industry. Back here in the U.S., we announced that Rigetti was selected by DARPA to lead a multiyear program focused on developing and evaluating benchmark applications for quantum computing. This project expands on our current work with DARPA and aims to reformulate key quantum metrics to make those metrics testable and estimate the required quantum and classical resources needed to reach critical performance thresholds. The total award to Rigetti and its partners is worth up to $2.9 million over 3 years and is based on the achievement of certain milestones. Of which, approximately $1.5 million is subject to DARPA’s exercise of an option to extend the initial 18-month term. Additionally, we are making good progress in our work with NASDAQ and are now in the process of identifying and selecting finance use cases for further development. Notably, we continue to see strong potential for quantum advantage and valuable applications in quantitative finance. Turning to our cloud platform, we on-boarded our first Azure private preview users this quarter. We expect to announce public access to Rigetti systems on Azure in the coming months. Alongside this momentum on our technology and business, we are excited to announce a committed equity facility. We believe this facility should provide financial flexibility to support our continued focus on our mission and business plan. Given the current macro environment, we believe this is both prudent and an important vote of confidence from the capital markets. With technology advancements, business progress, and the potential to add cash to our balance sheet, we are moving with focus and intention towards our mission. In conclusion, we believe Rigetti remains at the forefront of industry progress with an enduring commitment to build and operate the world’s most powerful computers. During the quarter, we continued to make tremendous advances, driving forward our quantum technologies and strengthening key partnerships. As a result, we remain on track to meet our technology objectives that we laid out on our prior earnings call. With that, let’s turn it over to Brian for the financials.

Thanks, Chad. We increased revenues in the second quarter of 2022 by 39% year-over-year to $2.1 million from $1.5 million in the same period a year ago. Higher quarterly revenues were mainly driven by a new government agency contract signed in late 2021 as well as additional revenue earned from the second phase of a large government agency contract that we initiated in August of last year. Gross margins came in at 59% for the quarter versus 73% in the same period in 2021. The decline year-over-year was because of an increase in third-party subcontractor costs and speaks to the variability and timing around the amount of third-party resources applied to various projects. Total GAAP OpEx for the second quarter 2022 was $26.9 million versus $10.9 million in the same period a year ago. This is primarily due to significantly higher stock compensation in connection with the closing of the business combination, other public company costs including audit, insurance and additional legal fees tied to Q2 public company transition activities as well as increased headcount in R&D and SG&A on a year-over-year basis. R&D expenses were $12.6 million in the second quarter compared with $7.5 million in the same period a year ago. This increase was mainly driven by higher headcount, stock compensation and increased materials and software subscription costs. We plan to continue investing in R&D going forward to advance our technology and drive toward meeting our roadmap objectives. Sales and marketing expenses were $1.5 million in the second quarter versus $0.6 million in the same period a year ago. This increase was driven by higher headcount, stock compensation and sales and development activities as we continue to execute our go-to-market strategies. We are pleased with the progress we are seeing in this area and expect our established technology relationships and hands-on experience to continue winning us deals such as our recent DARPA contract announcement. G&A expenses were $12.8 million in the second quarter compared to $2.7 million in the same period a year ago. This increase was due to higher stock compensation as well as increased employee and other costs related to operating as a public company, including director and officer insurance. Higher quarterly G&A expenses were partially offset by a $5.1 million gain in fair value forward contract agreement change connected to our strategic collaboration with Ampere. Non-GAAP OpEx was $16.4 million in the second quarter versus $9.3 million in the same period a year ago. Non-GAAP OpEx removes depreciation, stock compensation and change in fair value of forward contract agreement liability. We have included a table of reconciliation in our press release as an additional reference for investors. Net GAAP loss was $10 million or $0.09 per share in the second quarter of 2022 compared to a net GAAP loss of $10.1 million or $0.46 per share in the prior year period. Adjusted EBITDA was a loss of $15.1 million in the second quarter compared with a loss of $8.1 million in the same period a year ago. For reconciliation of net GAAP loss to adjusted EBITDA, please refer to the reconciliation table in our press release. As of June 30, 2022, we had cash equivalents of $184 million versus $11.7 million as of December 31, 2021. As a reminder, the higher cash balance is due to the net proceeds gain we achieved through our successful business combination in March of this year and pipe financing. As we continue to work closely with our partners and invest in our technology roadmap, we believe we are taking important steps to lay the foundation for growth. While macro headwinds persist, we do continue to see pressure and fluctuations in various cost areas such as labor and supply. Regarding our revenue outlook for this fiscal year, as we discussed on our Q1 earnings call in May, our estimated revenue for 2022 is $12 million to $13 million. This includes approximately $4 million tied to contracts that are being negotiated with a government entity that is also an existing customer. As mentioned in our Q2 results press release issued after market today, the contracting process has taken longer than anticipated and revenue recognition for some or all of the estimated $4 million could potentially be deferred to a fiscal period beyond 2022. If this were to occur, adjusted EBITDA loss for the fiscal year 2022 could be greater than the $50 million to $53 million range we estimated in May. I’d like to finish with some added color on our committed equity facility that we announced today. While our balance sheet remains in good shape we believe that having access to capital markets further strengthens our balance sheet and is prudent given the amount of general uncertainty and depth and duration of both the current macroeconomic and capital markets downturn. We believe additional working capital on our balance sheet would allow us to remain focused on our key priorities and technology roadmap. We also believe that having access to capital is another important vote of confidence from the equity markets despite current conditions. With that, I will hand the call back to Chad for his closing comments. Thanks again everyone.

Thanks, Brian. With disciplined engineering execution, we continue to deliver solid results in the second quarter and we remain on track to meet our technology roadmap as laid out on our first quarter 2022 earnings call. Now, let’s open it up for questions. Operator?

Thank you. [Operator Instructions] Our first question comes from the line of David Williams with The Benchmark Company. Your line is open. Please go ahead.

Hey, good afternoon. Thanks for letting me ask the question and congrats on the progress with the customer wins.

Hey, thanks.

I guess maybe first, if we kind of think about the contract – the customer contract. And Brian, you have talked about this a bit at the end of the call or the script, but you talked about taking longer and it’s an existing customer? I guess I am just trying to understand why that’s taking longer, maybe what are the puts and takes there or maybe the challenges, hurdles that you are trying to overcome? Is it pricing? Is it timing? What are the big, I guess hurdles in getting that completed?

There is a lot of details to these contracts as you can imagine. And it goes from not so much pricing, but the structure of the contract structure around costs incurred, etcetera. So typical contract, government contract negotiation process for technology development services, nothing out of the ordinary, it’s an existing customer, very strong working relationship with this customer for a lengthy period already. And we expect this agreement will expand the relationship and provide opportunities for several years going forward. So, it’s an important contract to the company and this is an important stage you might say an inflection point in the relationship.

Okay, fantastic. Thanks for the color there. And then you had mentioned maybe if it took longer that that would push into 2023. What is that timeframe that you would expect that not to be able to produce revenues this year from that contract?

Yes, it’s – well, we expect that if we can close before the end of the fiscal year, there will be some contract, some revenue recognized, it depends on the timing of when those contract negotiations are completed and the contracts are executed and difficult to estimate at this point. But we do believe that we have a very good potential of closing this in time to meet our revenue guidance.

Okay, fantastic. And then maybe another one for you Brian, but just kind of thinking about the share purchase agreement or just it seems like the balance sheet is really strong here and I understand the rationale. But should we think maybe that the cost or maybe the profitability has been pushed out? Is there anything I guess from a fundamental perspective that we should be there just given the increased capital here?

No, not at all. I mean, we point to just given the current macroeconomic conditions, condition of the capital markets, no one can estimate the duration of the cycle and we just want to be prudent. The opportunity for the company to strengthen its balance sheet at this time, I would think it just allows us to continue to double down and focus on our short-term and long-term technology roadmap not have to deviate from that, again, the – mainly because of just the current market conditions, we want to be absolutely sure that we can remain focused.

Okay, thanks so much. And then maybe Chad real quick, you talked about the performance advantages and what you have been able to accomplish since February and the 4.5x increased improvement in performance, can you give a little more color just kind of around that the magnitude of that and what that means as you kind of think about the progress and the roadmap and just kind of how you think about that performance advantage?

We are very excited about the performance we have been able to demonstrate, the 4.5x improvement in CLOPS. We are an industry leader in this and this is a result of Rigetti’s long-term commitment, investment and pioneering innovation in hybrid quantum classical computing. Our full stack of technology is optimized for that environment for integrating quantum with classical infrastructure and our ability to deliver very fast CLOPS performance and the tremendous work from our engineering teams to make this happen over the quarter is a result of that enduring commitment in that pioneering leadership.

Great. Thanks so much for the help. Appreciate it.

Thank you. And our next question comes from the line of Krish Sankar with Cowen. Your line is open. Please go ahead.

Hi, guys. This is Stephen calling on behalf of Krish. Thanks for taking my questions. I had a couple. First for either Chad or Brian, I was curious in terms of second quarter revenues, I was wondering if you could provide some more color on the underlying trends from the research professional services portion of revenues compared to the quantum system access fees, what’s running with it was that both sides of the demand were relatively stable for the quarter or was there any lumpiness during Q2 and kind of…

Yes, sorry. We are seeing consistency quarter-over-quarter. I think, again, our long-term vision hasn’t deviated quantum computing-as-a-service through the cloud is ultimately where this – where we see our business model headed. And we are continuing to see ongoing strength in that model, no change. And we don’t anticipate that, that will happen. As a matter of fact, we anticipate that that will just continue to grow over time as more – as we broaden the user base for quantum computing.

And just to follow-up on that with the UK quantum computing center now online, should we expect that, that will primarily drive more research from professional services for the near-term, or could there actually be a decent amount of quantum access, lay revenues in the third quarter.

Bringing up our first quantum computer in the UK is a big step forward. We are very excited about this and our long-term strategy towards building our quantum computing facilities to underpin our quantum cloud services model. This contract and this machine is under existing UK contract. It’s a big milestone for the teams to deliver that machine.

Alright. And my follow-up, Chad, I was wondering for you any DARPA performance benchmarking win. Could you provide some more color on sort of what Rigetti’s portion of the potential proceeds from that initial 18 months $1.4 million DARPA program that you guys like, a third or some other percentage of the value there?

Yes. This is a $2.9 million program over up to 3 years for Rigetti and partners. Rigetti is prime contractor on this program with DARPA and that’s the step forward for us as an organization and important capability. Our portion over the full program is approximately $1.5 million.

Okay. Thank you so much.

Thank you. And our next question comes from the line of Trevor Janoskie with Needham. Your line is open. Please go ahead.

Yes. Hey Chad. Hey Brian. This is Trevor on for Quinn Bolton. And thanks for letting me ask the question. On the outlook, I wanted to clarify, if this $4 million falls to 2023, is business basically changing your 2022 guidance to $8 million to $9 million?

We are not changing guidance. We expect revenue this year of $12 million to $13 million. And we want to identify the specific risk associated with a protracted contracting process. But we remain confident we are going to close that by the end of the year.

Okay. And another clarification, is this contract on the $4 million with the government customer a single contract, or is it possible that negotiations on the part of the already performed work could be completed and recognized in 2022? I am trying to get a better sense of if this contract is an all or nothing for 2022.

As of right now, we fully anticipate being able to invoice, secure, complete an invoice against the contract and to be in that $12 million to $13 million range. It is multiple contracts and with an existing customer that we have had a longstanding relationship with.

Okay. And on the CLOPS scores, congrats on that, that’s very encouraging. But could you provide more color on the changes made that led to this collapse in score, CLOPS score increase. Is it mainly a function of QV layers? Any info would be helpful?

Sure. Our performance improvements that we have been able to deliver in CLOPS directly result from our long-term commitment to optimizing our quantum processors for practical use cases where they are integrated with classical computing. The particular engineering developments that led to this are not something we are going to get into. However, what we can describe is it the CLOPS performance characterizes the overall throughput of a quantum classical computing system, inclusive of communication, and back and forth between classical and quantum computing capabilities. And overall, this result has been driven by a kind of an aggregate system optimization towards that goal of delivering faster and faster customer performance. We believe the clock speed and overall speed of quantum computers is a very important area. And it’s something where we remain focused. It relates to overall throughput of our systems, and kind of walk-off time, as well as to the – directly impacts the customer user experience when computing with this system. So, speed matters in all forms of computing. And we are really excited to be in the leadership position with CLOPS right now in the industry.

Awesome. Thank you.

Thank you. And our next question comes from the line of Sidney Ho with Deutsche Bank. Your line is open. Please go ahead.

Thank you, and good afternoon. This is Zamarud Khan for Sydney. Just a few questions for me. The first one is, Chad, you previously spoke about deployment of your quantum machines through Strangework. Could you just touch on how that is progressing and when would you expect your systems to go live?

We are continuing to have a strong relationship with Strangeworks, continue to work with them on bringing customers on to the shared platform. We will be able to provide more fulsome update on this at our upcoming Investor Day in September.

Got it. That’s helpful. And then congrats on your deployment of the quantum system in the UK. As you mentioned in your prepared remarks, my question is what is sort of like a realistic timeline for you to start seeing revenues or revenue opportunities from both public and private customers in the UK and in the EU?

Yes. In this particular case with QPU in the UK, we are already under revenue generating agreement and partnership to deliver that QPU and provide access to the partners under that program. So, that QPU is currently being used by partners to carry out research and development towards quantum advantage. We are also really excited this quarter to welcomed the first private beta users after getting QPUs over Azure and we anticipate additional announcements on this going forward in the next quarter as well.

Got it. Thank you. That’s really helpful. And then just one last one for me. I am just curious to hear your takes on the recent developments in probabilistic error cancellation, PEC that was announced by – in a blog post by one of your competitors recently. I guess given the progress achieved in industry, is there a possibility that you could introduce error mitigation ahead of your 1,000 qubit system, potentially with your 136 qubit system?

Thank you for the question. We are very encouraged by what we are seeing in the industry more broadly, as well as within Rigetti work on error mitigation techniques. Error correction long-term is going to be an essential component of unlocking the full potential and TAM of quantum computing over the next handful of years. We anticipate the error mitigation techniques, especially when those techniques can be identified in a manner where they are stackable with one another to further reduce error rates. We believe those have a real potential and possibility to enable much higher customer facing performance in practical applications and to unlock real world use cases. And it’s a very promising area.

Thanks Chad. Thanks team.

Thank you. And we do have a follow-up question from the line of David Williams with Benchmark Company. Your line is open. Please go ahead.

Hey guys. Again, thanks for letting me ask a follow-up here. Just wanted to ask on the share repurchase, if that requires an SEC filing and maybe what that does, in terms of the flow of what your expectations are in terms of maybe the takedown and just the price impact, anything I guess around that structure would be helpful.

Yes. David, there are plenty of filings. You will see those start to flow out today. It’s referred to as a synthetic ATM. So, it’s an as needed facility. There is no requirement for us to sell anything in the markets. Again, we view this as a – not as a defensive, but as a proven method of protecting us in the event that there is a protracted downturn in the markets, the geopolitical and current macroeconomic environment persists. So, we view this as a strategy just to maintain a strong balance sheets so that we can focus on the objectives at hand.

Okay. Great. And then any color around maybe the window there in terms of when you request the shares, and when they can – when they take those down in terms of funding?

Well, they don’t say, it’s up to us. Again, it works very similar to an aftermarket facility where we would place orders to sell shares through our bank.

Okay. And that happened fairly immediately afterwards.

Well, the timing uncertain, but certainly, it’s at our availability. So, we would plan to use it opportunistically in the market, but again as needed. We don’t see any immediate urgency to be selling shares into the market and have no plans to do so in the immediate-term. But again, the facility is available to us, and it has certain parameters around it, as you will see in the filings. It is a very – you might say measured way of raising capital in a very low cost and effective way as well.

Okay, very well. Thanks so much.

Thank you. And I am showing no further questions at this time. And I would like to hand the conference back over to Chad Rigetti for any further remarks.

Thank you, operator. To close, I would like to thank our teams, partners and investors for their support and collaboration. Rigetti is a mission driven company, laser focused on developing the world’s most powerful computers. Looking ahead, we will soon be announcing our attendance at several investor conferences. We ask that those interested in meeting with us at these conferences, please contact the conference organizer or reach out to our IR team directly. Separately, we are excited to host our inaugural Investor Day this coming September. Well, we will be webcasting the event. We encourage investors interested in attending to reach out to our IR team for more information. Please know that this is a limited capacity event. Thank you everyone again for joining today. That concludes the call.

This concludes today’s conference call. Thank you for participating. You may now disconnect.