IonQ, Inc. Q2 FY2024 Earnings Call

Greetings, and welcome to IonQ Second Quarter 2024 Earnings Call. This conference is being recorded. I would now like to turn the conference over to your host, Jordan Shapiro. Please go ahead, sir.

Good afternoon, everyone, and welcome to IonQ second quarter 2024 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'm pleased to be joined on today's call by Peter Chapman, IonQ's President and Chief Executive Officer; Thomas Kramer, our Chief Financial Officer; and Dr. Dean Kassmann, our Senior Vice President of Engineering and Technology. By now, everyone should have access to the company's second quarter 2024 earnings press release issued this afternoon, which is available on the Investor Relations section of our website at investors.ionq.com. Please note that on today's call, management will refer to adjusted EBITDA, which is a non-GAAP financial measure. While the company believes this non-GAAP financial measure provides useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. You are directed to our press release for a reconciliation of adjusted EBITDA to its closest comparable GAAP measure. During the call, we will discuss our business outlook and make forward-looking statements. These comments are based on our beliefs as of today. Actual events or results could differ materially from the outlook and other forward-looking statements due to a number of risks and uncertainties, including those mentioned in our 10-Q filing with the SEC this week. We undertake no obligation to revise any statements to reflect changes that occur after this call, except as required by law. Now I will turn it over to Peter Chapman, President and CEO of IonQ. Peter?

Thanks, Jordan, and thank you to everyone joining today's call. There are a lot of exciting announcements to share today. We will discuss our recent technical breakthroughs that we believe bring the quantum error to a closer point than it has ever been, and our compelling commercial momentum that demonstrates how we're working with customers. Let's dive straight in. First, I'm excited to say that we have once again exceeded the high end of our revenue range for the quarter, delivering $11.4 million in recognized revenue, which was well above the range of $7.6 million to $9.2 million for the quarter. We also booked $9 million this quarter and are very confident about meeting our bookings goal for the year. Thomas will discuss our financials in more depth. You have likely heard there is a space race in quantum computing, but what does that really mean? It's a race between different companies, qubit modalities, and countries to produce a quantum computer that can outperform classical computing. The technical problem that bedevils the industry is noise or fidelity in its qubits. This noise can come from the qubits themselves, the environment, or any hardware like the control electronics that interact with the qubits. Key to the accuracy of a quantum computer is to increase the fidelity of its qubits and their ability to run more computational gates and larger applications. When any company can achieve enough fidelity and run applications in a production environment, significant application revenue can start. With this context, I'm excited to announce that IonQ has achieved a 2 qubit native gate fidelity of 99.9%, or three nines in barium. We chose to move to barium because science suggests it enables higher fidelities than ytterbium. And the better the native gate fidelity, the less error correction in all forms is required. So today's announcement is an important milestone towards even better gate fidelities ahead. To get to better gate fidelity beyond native gate fidelity, other techniques are required. In the past, you've heard us describe quantum error correction, the technique of using additional qubits grouped together to correct each other and produce more reliable results. Error correction is promising, but particularly on non-trapped ion platforms requires a large volume of qubits; think tens, hundreds, or even thousands of physical qubits per error-corrected qubit. It also requires many extra gates as overhead, the ratio of which is correlated with the native fidelity of the qubits. So error correction is out of reach for meaningful use in the quantum industry today. Another technique you've heard about from us is error mitigation, which uses software techniques to improve results without generally requiring additional qubits. Error mitigation is commonly used by the quantum computing companies, but poses difficulties for scaling given that it often incurs ever-increasing sampling costs that can lengthen the time to solution. Today, I am thrilled to announce IonQ has invented a new industry-first partial error correction technique for an important class of quantum gates used with many different applications. The technique, which reduces the errors for Clifford gates within circuits, offers the potential to supercharge the accuracy of near-term quantum computers, bringing us much closer to a commercial advantage. This Clifford error reduction technique allows for more accurate quantum algorithms but requires a ratio of only about 3 physical qubits per 1 error-reduced qubit and a modest doubling of gates in the algorithms used. We plan to offer this feature in our IonQ Tempo systems. With the combination of hardware and software improvements, we believe that we can extend our achievement of three nines to production systems in 2025 and bring that to five nines in 2025 and six nines in 2026 using error correction. This, along with a combination of much larger numbers of physical qubits and improved gate speeds, gives us more confidence about near-term quantum applications and application revenue for IonQ. For some time now, we have been investigating applications where we can deliver significant value and generate significant revenue. At our next earnings call, we will discuss the first of these application areas. While this has been a tremendous quarter for IonQ's technical development, it has been equally exciting on the commercial side of the business. First, I am delighted to announce that ARLIS, the Applied Research Laboratory for Intelligence and Security selected IonQ during our competitive bidding process to design two quantum networking node systems for blind quantum computing. Blind quantum computing is a process where quantum computers remain blind to what information is being processed through them and is a key achievement target for the US national security apparatus. In fiscal 2023 and 2024, Congress funded this research for a total of $40 million. The initial phase of the contract is a $5.7 million award for the design of the quantum computers based on IonQ trapped ion processors. We expect to complete this work by the end of this year. In the next phase of the project, ARLIS plans to have two systems built based on the initial IonQ design. We feel confident about our bookings guidance for the year, and we're working on several large additional sales for hardware, and otherwise, in addition to the ARLIS agreement. What makes us confident is the strength of our repeat customers and our sales team's focus, including large multiyear deals. Next, we have started final assembly of our first Forte enterprise system at QuantumBasel. And we now have officially begun construction of two more Forte enterprise systems in our Seattle, Washington manufacturing facility. Our investment in our manufacturing is already paying off, now enabling us to build multiple production systems at a time while not tying up significant engineering resources. I am also pleased to announce that we've extended our contracts with AWS to continue to offer our world-class quantum computers via Amazon Braket, the quantum computing service of AWS to developers everywhere who want to leverage the power of quantum computing. Alongside the AWS contract extension, we have launched an exciting new cloud feature set that includes 24/7 global operations, a new and improved queuing engine, and exclusive reservation windows. These features make it easier than ever for our customers to benefit from IonQ's cutting-edge quantum computers. In summary, this quarter has been another strong success for IonQ. We have proven that our barium qubit technology can achieve three nines of fidelity. We have developed an industry-changing partial error correction technique for error reduction that could bring production applications for quantum even sooner. We have factored those advancements into an aggressive new roadmap for our continued leadership in the industry, and we are working with customers like ARLIS and AWS to build the next generation of quantum networking and quantum computing applications. And with that, I'd like to pass the call over to Thomas.

Thank you, Peter. It has truly been an exciting quarter on the technical and commercial front, and our financials are no exception. Let's walk through this quarter's financial results in more detail. As Peter mentioned, we had a strong revenue quarter recognizing $11.4 million, which is above the high end of the range we previously provided. This overperformance was primarily due to our ability to make more progress than previously anticipated on some of our contracts that use percentage of completion revenue recognition. We also booked $9 million of sales contracts in the second quarter. As we have mentioned in prior earnings calls, we anticipate lumpiness in our bookings since it is difficult to predict quarter-to-quarter or even in some cases, year-to-year exactly when a particular sale will materialize. We remain confident in our bookings target for the year. Moving down the income statement. For Q2 2024, our total operating costs and expenses for the second quarter were $60.3 million, up 56% from $38.6 million in the prior year period, but within our plan for the year. To break this down further, our research and development costs for the second quarter were $31.2 million, up 57% from $19.9 million in the prior year period. Recall that we are investing heavily in R&D given anticipated demand for building more systems than previously projected this year. Our sales and marketing costs in the second quarter were $6.1 million, up 72% from $3.6 million in the prior year period. This increase was due to us growing both our marketing and our sales teams as we continue investing in our commercial efforts. Our general and administrative costs in the second quarter were $13.1 million, up 19% from $10.9 million in the prior year period. These increases were primarily driven by an increase of $1.9 million in payroll-related expenses. All of this resulted in a net loss of $37.6 million in the second quarter compared to $43.7 million in the prior year period. Accounting for warrants is confusing to many. This is why we have always pointed out the impact they have on our results. These current 2024 Q2 results include a non-cash gain of $6.6 million for the second quarter related to the fair value of our warrant liabilities. These results also include growth in stock-based compensation expense related to our headcount growth, which was $21 million for the second quarter compared to $11.3 million in the prior year period. We saw an adjusted EBITDA loss for the second quarter of $23.7 million compared to a $19.4 million loss in the prior year period. We continue to project an adjusted EBITDA loss for the year of $110.5 million. Turning now to our balance sheet. Cash, cash equivalents, and investments as of June 30, 2024, were $402 million. We continue to believe this cash position is the strongest of any publicly traded company focused exclusively on full-stack quantum computing. Importantly, while we have increased IonQ's run rate in recent years, we are offsetting this by beginning to collect on large payments from IonQ's customers, including those who have purchased full systems. Our run rate increases are largely related to employee costs as we have worked rapidly to bring the best quantum talent in the world to IonQ. It is also worth mentioning that a significant portion of our investment in setting up manufacturing is now behind us. We increasingly look to focus on conservative spending and ramping up sales of large deals. Now turning to our financial outlook. We are pleased to announce that we will be raising our revenue guidance for the full year of 2024 to a range of $38 million and $42 million, reflecting increased confidence in our progress on our percentage of completion contracts. We currently expect revenue for the third quarter of between $9 million and $12 million. We remain confident in our 2024 bookings guidance of between $75 million and $95 million. Back to you, Peter.

Thank you, Thomas. In closing, IonQ has yet again pushed the boundaries of the quantum computing industry this quarter, bringing us even closer to the quantum era. Our technical team demonstrated our highest qubit fidelities yet, introduced a paradigm-shifting technique for error reduction, and unveiled an aggressive new roadmap to continue our technical leadership. Commercially, our exciting new work with customers like ARLIS and AWS gives us increased confidence not just in meeting our bookings targets for the year but also in the long-term potential of our quantum computing and quantum networking products. Financially, we greatly exceeded the high end of our revenue range for the quarter and posted a solid $9 million in bookings that we believe will propel us towards our goals for the year. To build on our strong position in the quantum market, we will pursue strategic partnerships and other opportunities, strengthening our ecosystem and benefiting our customers, shareholders, and other stakeholders. We look forward to a great Q3 and the rest of the year ahead with our team, our customers, our partners, and our investors. With that, I would like to turn it over to the operator for our question-and-answer session.

Thank you. We will now begin the question-and-answer session. The first question comes from David Williams of the Benchmark Company. Please go ahead.

Hey, good afternoon. Thanks for letting me ask a question and congrats on the really strong progress here. Maybe, Peter, maybe first. Sorry, maybe first, can you give maybe just a little more color on the partial error mitigation scheme that you mentioned earlier? How does that maybe change your roadmap? And is this an innovation that you had seen and have been working towards, or is this something that maybe has developed as you work towards other error mitigation? Just trying to understand the innovation here and how we should think about this type of development going forward?

I tell you what, we'll tag team this one. I have Dean here with me as well. So Dean, I'll let you talk about the technology, maybe I'll take the business.

Yes. We have been working on this for a while, focusing on building our error correction team and hiring experts to enhance our research and development efforts. From a technical standpoint, this approach revolves around targeting specific problem areas within the system rather than aiming for full fault tolerance. It specifically targets Clifford gates, which are known for being some of the noisiest components in many quantum computers. By addressing these noisy elements, we can improve the outcomes of our circuits. Consequently, this strategy will influence how we approach various applications, enabling us to make a wider range of applications accessible sooner than we had previously anticipated.

I will add that many of the initiatives we have underway are truly enhancing our confidence in the timeline for meaningful applications and actual revenue generation. Up until now, it has been somewhat premature for significant investments in applications. Some companies began developing applications a decade ago, despite the absence of quantum computers. I believe this represents a key milestone for us in establishing that the time for application development is now. We will discuss the first major application at our upcoming earnings call.

Great. Thanks so much for the good color there. And I guess maybe secondly, on the ARLIS contract. I noticed in the press release, it seemed like there were a few different figures there, and just hoping you could help me understand exactly what those meant. I saw 5.7 and then 12 and even a 40. So just help me understand what each one of those figures represents, please?

I'm glad to provide some clarification on that. First, I want to highlight that we have successfully opened another branch of the government as an IonQ customer. We value our current customers and are optimistic that this will be a long-term partnership rather than just a one-time engagement. We are thrilled to welcome ARLIS and the intelligence community as a client and look forward to many years of collaboration. Regarding the specific contract, for fiscal '23 and '24, Congress has allocated $40 million for this project. We have secured the first phase of the contract, which is a multiphase agreement worth $5.7 million. The remaining $40 million will primarily be used for hardware construction. We anticipate winning the next phase of an additional $12 million by the end of this year. Therefore, we expect the ARLIS contract to contribute approximately $17.5 million to our bookings goal for fiscal '24, with the remainder showing up in '25.

Okay. Perfect. Great. Thanks for the help there. And then maybe just lastly, you've made some really tremendous progress here over the last several quarters and lots of moving pieces here. But I guess if you were going to kind of boil down your progress and where you are today relative to where you were maybe 12 months ago, how do you think about that progress? And where are we on the pathway to real quantum from where you sit today? Maybe not just for IonQ, but just broadly, how do you think about it? Thank you.

There has been significant progress across various companies and technologies, not just at IonQ. While we believe many companies still face technical challenges before achieving major success, IonQ is in a strong position for this transition. We are entering a new phase focused on generating revenue from applications rather than hardware sales, which is an exciting development we are about to invest in. It’s the moment everyone has been anticipating—the shift from early sales to more substantial revenue. Additionally, we are meeting and exceeding our initial technical and financial projections from the IPO, showcasing a solid track record. We are on track to surpass a notable milestone of $100 million in sales. If we had not gone public via SPAC, we would have considered a traditional IPO with those sales figures, marking a significant achievement for the company.

Thanks very much for the insights. Really appreciate it.

Always a pleasure.

Thank you. The next question we have comes from Quinn Bolton of Needham & Co. Please go ahead.

Hey, guys, let me add my congratulations on the financial and technical milestones, especially hitting that 99.9% 2-qubit gate fidelity. I wanted to start just maybe you talked about the updated roadmap. I think you published that back in late June. Kind of what are the key milestones now on the updated technology roadmap? Are you still targeting Tempo for delivery in '25? Is that still expected to be based on barium qubits? Just what are the highlights of the updated technical roadmap?

Yes, Dean, do you want to take...

So right now, our technical roadmap remains the same. We're still targeting AQ 64 in Tempo. It's still planning. We're looking at barium as the qubit species. So all of those pieces are there, right? So what we're starting to unveil is a little bit more detail about some of the component benchmarks and other things that are going to kind of enable those AQ benchmarks and numbers that we've talked about in terms of our native 2 qubit gate fidelities, our qubit counts, et cetera. But right now, our roadmap remains strong and our progress remains strong.

And you've seen not only in this particular announcement today, we have gotten to 99.9 in barium, right? So that's significant. The other thing is you've seen, I believe, some images of 64 ions loaded in a system as well. So these are all small milestones along the way to getting to Tempo. And so we're just kind of showing the progress along the way. Yes. But the answer is yes, we're on track for delivering in '25 the first manufactured systems for Tempo.

Perfect. Regarding the error correction announcement from this week, could you provide some insight into the percentage of gates in a typical circuit that are Clifford gates? How commonly are these gates used—are they around 10% or 50% of the total gates? Additionally, can the techniques developed for error correction on Clifford gates be applied to other frequently used gates in quantum circuits?

Great question. And so the Clifford gates are a class of gates that we use here, and a lot of other companies use as well. And so they're highly applicable to many different applications. There's a lot of the variational circuits, chemistry circuits are comprised of large sub-blocks of Clifford gates. And so these kind of noise reduction techniques allow us to be able to target really the key pieces of those circuits to be able to reduce the overall noise and improve the overall results. And so the beauty of this as a stepping stone, there's another class of gates that we will have to address noise on, and those are called T gates. But our overall philosophy is that any noise reduction helps before the industry reaches full fault tolerance, which is still, we believe, years away. There's a lot of other building blocks besides just the error correcting code required for full fault tolerance. And so as we move forward, these are the kind of innovations that accelerate both in hardware and software, the capabilities to be able to kind of, as Peter said, supercharge the systems to be able to deliver value sooner.

Perfect. Thank you.

Thank you. The next question we have comes from Kevin Garrigan of WestPark Capital. Please go ahead.

Yeah, hi, all. Let me echo my congrats on all the progress and congrats on the results. To start, I'm just kind of wondering if you can give a little more color on the ARLIS contract. How many were in the bidding process? Were they all different quantum computing architectures, or anything else you can kind of provide there?

I'm not exactly sure. Interestingly, they did not send us the responses to the RFP. However, I believe there were several other companies with various modalities that competed for it. To be honest, I don't know which companies were involved or what they proposed. Nevertheless, it was an open bid, and we emerged as the winner against all other competitors.

Okay, got it. Got it. And then, Peter, you had mentioned ARLIS opens up another government avenue. I'm just kind of wondering if you can give us some color on the commercial and enterprise side of things. Have you started to see an increase in commercial and enterprise customers looking to adopt quantum computing?

Yes, very much so. There are a couple of different things to consider. We see two distinct types of customers: those interested in quantum networking and those focused on quantum computing or application development. This can be a bit confusing since both require quantum computers. One type aims at networking and communication, while the other is more interested in applications. However, both need quantum systems. For example, when we discussed Forte enterprise sales, most customers were focused on computing, not networking. In contrast, ARLIS is an instance where we are building systems primarily for networking. We are also observing a growing interest in applications and the computing space. As I mentioned, we will discuss the first of those upcoming developments in the next earnings call.

Okay, perfect. I appreciate the color. Thank you.

Thank you, sir. The next question we have comes from Joe Moore of Morgan Stanley. Please go ahead.

Great. Thank you. Yes, along the same lines, I mean, you've gotten so many federal opportunities between Air Force, the Navy, now ARLIS. Can you kind of talk about if there's a common thread why you keep winning those opportunities? And you said it's a competitive bidding process. What are the criteria you think that's getting you selected ahead of other quantum companies?

That's a complex question. I believe there are several factors at play. We have a strong product and our error rates are the best in the industry. Generally speaking, ion trapping is a significant advantage for us. Additionally, within the ion traps, we're succeeding largely due to our effective sales force and solid sales strategy. From what I can gather from published data, IonQ is performing well in sales. It seems to be a combination of Rima, her sales team, and the quality of our products. Therefore, it appears that informed customers appreciate what we are offering.

I can speak a little bit. The success criteria that the ARLIS customer was looking for in the competitive process involve technical capability in terms of the system that included the ability to optically connect systems across the distance, our investment in our photonic networking and capabilities and the experimental results and things that we've achieved to date were a feather in our cap. They're also looking for a proven track record in delivering and providing systems to customers. We have that track record. So when we were scored at the end of the day, the customer basically scored us high in many of the technical and kind of programmatic requirements that they were looking for in terms of what they are shooting for. And so it goes to speak to the track record that we've been building and investing in both on the technology side as well as on the company side.

Great. Thank you very much.

Thank you. At this stage, there seem to be no further questions. I will now turn the conference call back to Peter Chapman for closing remarks. Please go ahead.

I want to thank everyone for joining us today and for your support and for all the great questions. Finally, I want to thank the entire IonQ team for their continued diligent work that contributed to such a meaningful quarter for us, both technically and commercially. And that continues to fuel everything that we look forward to in the future. So thanks again, everyone, for joining, and we look forward to talking to you at the next earnings call.

Thank you, sir. Ladies and gentlemen, that then concludes today's conference. Thank you for joining us. You may now disconnect your lines.