IonQ, Inc. Q2 FY2023 Earnings Call

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. Please note, this 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 to reach AQ 35 and the second system expected to reach up to AQ 64. We plan to use these systems to serve European industry, government entities, and research institutes with local access to IonQ's powerful quantum systems. The beauty of this partnership is that as our first planned on-premise hardware project in Europe, we will retain some capacity on each system, allowing us to serve other prospective customers in the region from our new European datacenter. Our QuantumBasel partnership is significant to IonQ in a few ways. First, we noted in prior earnings calls that a large sale could create a significant boost in IonQ's near-term bookings. This is such a sale. Additionally, this partnership represents our first deal involving future IonQ systems and is a strong third-party validation of IonQ's ambitious technical roadmap. Looking forward, at AQ 64, IonQ quantum computers will be able to explore a useful computational space of two to the power of 64 for running quantum algorithms. In a fraction of a second, this system will be able to explore a computational space of 18 quintillion. As a reminder, a quintillion is one with 18 zeros after it. To put that in perspective, the Frontier supercomputer at Oak Ridge National Laboratory can calculate 1.1 quintillion floating point operations for a second. At AQ 64, classical computers will no longer be able to fully simulate an IonQ system, and as a result, we believe these systems will enable customers to tackle certain problems that even the best classical supercomputers can't solve. We currently expect to deliver AQ 64 by the end of 2025. We are committed to achieving quantum advantage and believe we can reach this at AQ 64. Though the technical challenges on the road to this goal are significant, our team is pursuing more than one path to arrive at this historic milestone, which enhances our confidence in doing so. While these milestones are just around the corner, we are seeing belief in our roadmap driving tangible commercial adoption for IonQ today. We believe IonQ is the only public company today that is executing against a roadmap that can deliver these technical results and sell systems in this time period. We are seeing increased demand for IonQ systems and we now hope to sell a number of systems over the next 18 months in various configurations based on customer needs. Our guidance for this year is a probability weighted average of our pipeline and it already accounts for the 2023 portion of these potential sales. Thomas will provide more details on our guidance later in the call. At Quantum World Congress on September 27, we will share a more detailed technical roadmap and upcoming product details. We will live stream this presentation and I encourage anyone interested in learning more about our roadmap or accessing our upcoming systems to use the link in our press release to sign up for the broadcast. Additionally, we are excited to be hosting an Analyst Day from our College Park office next month with presentations that will also be live-streamed via our website. Stay tuned to our Investor website for more details on registering for the Analyst Day. To prepare customers to use the upcoming systems on our roadmap, we're working with forward-looking groups to help get their workforces and economies ready for quantum. As an example, we recently signed a memorandum of understanding with South Korea's Ministry of Science or ICT to become a core provider of quantum education for Korean students, researchers, and industry professionals. We also had the honor to meet with South Korea's President to discuss how IonQ quantum computing might be able to accelerate the nation's economy. We could not be more thrilled to partner with the South Korean government on this initiative. We believe customers across the globe are partnering with IonQ, seeking access to our powerful new systems in order to prepare for the potential of our near-term AQ 64 systems. In June, we took another step towards broad accessibility of our platform when we announced that IonQ Forte and the full power of its AQ 29 is available to all our customers worldwide via direct access. Previously, this machine was only available to select partners, but now IonQ Forte can be accessed by any of our direct customers. Last week, we published a manuscript with our partners at Oak Ridge National Laboratory on modeling the benzene molecule. Benzene is a commonly used industrial solvent and its molecular structure is a widely used benchmark to evaluate quantum chemistry algorithms. We believe our work with Oak Ridge represents the most accurate benzene model run on a quantum computer to date. Clearly, we have had another strong quarter as we continue to expand to additional institutions around the world. Last quarter, we delivered on our promise of AQ 29, seven months ahead of schedule, and now we have translated that progress to phenomenal bookings growth. We believe IonQ has a clear path to scale with buy-in from institutions and corporations around the world. We could not be more optimistic about the future of IonQ and quantum computing as a whole. Now, I’d like to turn over the call to Thomas for a more detailed review of the numbers.

Thank you, Peter. Before we discuss our financial results, we are excited to share that alongside our innovative partnership with QuantumBasel, we will be establishing our first European corporate office in Switzerland. This new location will enable us to better serve future customers in Europe and marks a significant milestone in the international expansion of IonQ's operations. Now, let's take a closer look at our financial results for this quarter. As Peter highlighted, we had an outstanding quarter, achieving $5.5 million in revenue, exceeding the high end of our previous guidance. This success stems from completing work ahead of schedule for certain milestone-dependent revenue. We ended the quarter with $32.2 million in bookings year-to-date, which shows strong progress toward our updated expectations of $49 million to $56 million for the full year. Although we had already revised our bookings range in June, the clarity of our new business pipeline has become much more apparent since then. Therefore, we believe it is wise to further adjust our range to accurately represent what we see as the most likely average outcome for our bookings in 2023. As we are still in the early stages of our commercialization phase, I want to remind everyone that we anticipate our bookings will remain variable for some time. Looking at the income statement for Q2 2023, our total operating costs and expenses for the second quarter were $38.6 million, a 79% increase from $21.5 million in the same period last year, but consistent with our annual plan. To go into more detail, our research and development costs for the second quarter reached $19.9 million, up 106% from $9.7 million in the prior year. We are making significant investments in R&D and focusing particularly on enhancing our manufacturing capabilities to build more systems than originally planned in the near term. Our sales and marketing expenses in the second quarter were $3.6 million, an increase of 68% from $2.1 million last year, due to the expansion of our go-to-market functions and the addition of sales and support staff as we continue to invest in our commercial activities. Our general and administrative costs for the second quarter amounted to $10.9 million, up 45% from $7.6 million the previous year. As a result, we recorded a net loss of $43.7 million in the second quarter, compared to a $1.7 million loss in the same period last year. It’s important to note that these results include a non-cash loss of $15.5 million for the second quarter related to the change in fair value of our warrant liabilities. These warrants are a consequence of our business combination in 2021, and fluctuations in our stock price impact the fair value, which affects our GAAP net loss. We find that these non-cash gains and losses are less useful for investors focused on understanding IonQ's operational performance, which is why we believe adjusted EBITDA is a more relevant metric at this stage of our growth. We reported an adjusted EBITDA loss of $19.4 million for the second quarter, compared to an $11.6 million loss in the prior year. We project an adjusted EBITDA loss for the year of $80.5 million, and even considering this quarter's loss, we believe we remain on track to meet our earlier 2023 projections. Now, looking at our balance sheet, cash, cash equivalents, and investments as of June 30, 2023, stood at $509.2 million. We maintain that this cash position, which we believe to be the strongest among public quantum pure players, enables us to execute our current roadmap effectively within the emerging industry structure. Now let’s discuss our outlook for the second quarter and the full year 2023. We are pleased to raise our revenue forecast for the full year 2023 to a range of $18.9 million to $19.3 million. This reflects our expectation of delivering against milestones on some customer contracts throughout the year. We are also providing third quarter revenue guidance of between $4.8 million and $5.2 million. Additionally, we are increasing our full year 2023 bookings outlook to a range of $49 million to $56 million. With that, I would like to hand the call back to Peter.

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. 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?

We provided our guidance for this year and will update our guidance for next year in the Q4 call. However, it's important to note that we are seeing an acceleration in our sales performance. While we cannot predict the exact number of machines we will sell at any moment, we do have a significant number of inbound requests, and this demand has surpassed our initial expectations. When we went public, we mainly focused on cloud access, mentioning that selling machines for on-premise use would eventually become feasible. We are now witnessing this shift occurring much sooner than anticipated.

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?

As we approach AQ 64, it's evident that there is significant interest building. We're moving well beyond the simulation phase, and customers are starting to acknowledge that this moment could be comparable to quantum's ChatGPT moment, sparking a broader awareness of quantum technology. We're noticing this excitement reflected in the increasing inbound inquiries.

Okay. And just one last question if I can. When you're speaking with customers, 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 in this direction, but do you ever hear about the negatives or what makes someone not want to proceed? Is it the expense, cost, or just uncertainty?

What I would say is it's probably like, Sam Altman over at OpenAI two years before ChatGPT. There were 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 at 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 revenue recognition on shipment? Is it a 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 an 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 an 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 resell 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.

We are quite confident about achieving AQ 64 in 2025. We have customer validation with QuantumBasel purchasing one of our machines, which is encouraging. However, there are technical challenges involved. It's not as simple as it may seem, but the team is addressing various technical obstacles with multiple strategies to minimize risks on the roadmap. We are conducting a thorough risk analysis, and we are investing in different ways to ensure we reach that milestone. This encompasses a wide range of factors, including the quality of lasers and optics. We are very confident in our ability to achieve this, just as we have successfully navigated our roadmap so far.

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 average selling price 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 a great question. Let’s take a step back. The gross margin probably won't vary much because for 100% sales, we plan to apply the same pricing strategy for the second half. When it comes to actual pricing, several factors contribute to it. I mentioned earlier that QuantumBasel is operational with remote access to our current service in the US, and we will have service and maintenance available on site. We prefer not to disclose the specific components and their pricing, but you're in the right range. These machines are not inexpensive, which we referenced in a prior call when we mentioned our focus on large deals and our eagerness to pursue additional opportunities.

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 are 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 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.

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 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?

Yes, absolutely. As you know, when constructing a factory, the first step is to obtain building permits, and we were fortunate to secure those recently. Construction is currently underway in Bothell, Washington, and we anticipate the completion of the first phase this fall. Additionally, we have around 40 employees in Seattle who will start reporting to the Bothell office this fall. We're on schedule and staying within budget. Interestingly, we are also handling the construction of our manufacturing facility ourselves.

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. Now, in order to actually even have a walkthrough, you put on a vest, you have a nice little hard hat with the 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.