IonQ, Inc. Q3 FY2024 Earnings Call

Greetings, and welcome to IonQ's Third Quarter 2024 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Jordan Shapiro. Thank you. You may begin.

Good afternoon, everyone, and welcome to IonQ's third quarter 2024 earnings call. My name is Jordan Shapiro, and 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 third quarter 2024 earnings press release issued this afternoon, which is available on the Investor Relations section of our website. 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 measure provides useful information for investors, it is not intended to be considered in isolation. We direct you 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. Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in our 10-Q filing with the SEC. We undertake no obligation to revise any statements to reflect changes after this call, except as required by law. Now, I will turn it over to Peter Chapman, President and CEO of IonQ.

Thanks, Jordan, and thank you to everyone joining today's earnings call. We have a lot to talk about, so let's dive in. On the financial front, we are leading the industry with our commercial trajectory. In the third quarter, we exceeded our expected range on revenue, raising our annual revenue guidance and brought in $63.5 million of new contract bookings. We are making game-changing announcements on the development of quantum applications with AstraZeneca and Ansys. We have solidified our push into quantum networking via our recent contracts, less than a year after announcing our networking initiative. And we are sharing the news of our acquisition of Qubitekk, a leader in the quantum networking industry. What's more, we will share some details of our rapidly developing technical progress and the manufacturing partnerships that are driving it. In more detail, we once again exceeded the high end of our revenue range for the quarter by delivering $12.4 million in recognized revenue compared to our range of $9 million to $12 million for the quarter. This represents IonQ doubling our third quarter revenue year-over-year. With that in mind, we are raising our revenue guidance for the full year 2024 and fourth quarter to a range of $38.5 million and $42.5 million. We announced a new $54.5 million contract with the United States Air Force Research Lab, as well as a $9 million renewal with the University of Maryland. This brings IonQ's year-to-date bookings for 2024 to $72.8 million, within close range of our target guidance for the year of $75 million to $95 million. Given our sales progress to date, we now believe that we will come in closer to the high end of the bookings guidance range. Our booking success will set us up for continued success next year in growing our revenue. IonQ has exceeded its original bookings targets for each of the past three years since we have been publicly traded, raising or beating our bookings or revenue expectations 12 times out of our 13 earnings calls, including today. Meanwhile, we are on track to roughly double the company's recognized revenue for the third year in a row. Our annual revenue has exceeded the high-end of our guidance range every year. In short, one can no longer ignore the scale of IonQ's commercial success. The investment thesis for IonQ is our potential for high growth, and we keep delivering on that promise. Thomas will discuss our financials in more depth. Everyone, investors and customers alike want to know when previously impossible tasks can be addressed by quantum applications. The answer is that, the convergence of powerful enough quantum computers, a matching application, and the ability to manufacture the hardware at scale. In the quantum world, there are two camps or schools of thought on this topic. One camp believes you need near perfection before value can be unlocked. If they are correct, sadly, quantum is still a long way off. The naysayers belong to this camp, but their numbers are dwindling every day. The other camp, which IonQ and others belong to, believe today's early noisy quantum computers can provide value even before they are perfected. If we are right, it gives us a significant advantage by generating meaningful cash collection as we work towards perfection. About 18 months ago, I challenged our teams to answer a critical question. I told them I don't care about theoretical algorithms with limited practical applicability. Instead, I asked them what are the applications that have the potential to disrupt multibillion-dollar industries. The team has since identified several application areas where we believe commercial value will be first realized and aligned with our next-generation hardware and IonQ's production capability. Today marks a seminal moment in the quantum industry, as we announce the first two application areas: biopharmaceutical drug discovery and computer-aided simulations for the engineering and manufacturing industries. In the global biopharmaceutical industry, I am excited to announce the creation of a new quantum application development center in collaboration with AstraZeneca. IonQ will be leveraging the power of our quantum experts and AstraZeneca's world-class scientists to develop applications in their innovation bio venture hub in Gothenburg, Sweden. In the computer-aided engineering industry, IonQ has joined forces with Ansys to accelerate simulation, expand high fidelity design exploration, and reduce product development timelines. The partnership is aimed at making simulation accessible to both quantum experts and non-experts by allowing seamless integration between Ansys software and IonQ computers. To reach our aggressive sales goals, we have always planned on growing application revenue. We expect these applications to drive demand for new systems in production, but also for us to share in the projected $2 trillion economic value that will be unlocked by 2035. We've reached an incredibly impactful point, and we could not be more excited to partner with AstraZeneca and Ansys to bring production-grade quantum applications to their respective industries. I can't express how personally excited I am about these applications. Now, switching our focus to quantum networking. We believe that IonQ is the only quantum computing company that has an inherent advantage in the quantum networking market, contributing to our early leadership. Specifically, we have always relied on networking as part of our architecture to scale our quantum computers. Our recent wins of a $54.5 million contract with the AFRL and our $5.7 million contract with the Applied Research Laboratory for Intelligence and Security (ARLIS) are examples of our quantum networking investments paying off. At more than $60 million, we believe these two sales alone have catapulted IonQ to become a leading player in the quantum networking industry. To expand on that leadership, today we are excited to announce that we have signed a definitive agreement to acquire Qubitekk, a leading quantum networking company based in Vista, California. The combination of Qubitekk and IonQ will allow us to continue our momentum in quantum networking by adding Qubitekk's 118 U.S. and international granted patents. I expect that the quantum networking products will continue to strongly drive sales and to be the first product group that is cash flow positive. Quantum networking is a large and rapidly growing opportunity, with estimates that quantum communication will become a $36 billion market by 2040. Quantum networking, like classical networking hardware, is also expected to require several orders of magnitude more physical hardware than quantum computing to build the infrastructure for the quantum internet. This is another element of the networking market where IonQ is particularly well suited, given the investments we have made over the past years to scale up our production manufacturing capabilities. The IonQ technical team also demonstrated ion-to-ion entanglement, the second of four significant milestones required to develop photonic interconnects and significantly scale our system capacity. While we are thrilled with our technical progress in quantum networking, we are even more excited to join forces with Qubitekk and leverage their quantum networking expertise. Lastly, on the technology front, we are happy to announce two new agreements for critical components of future systems, starting with IonQ Tempo. First, we announced a partnership with NKT Photonics, a subsidiary of Hamamatsu Photonics, to develop next-generation laser systems for our trapped ion computers and networking equipment. The arrangement will begin with NKT Photonics developing and delivering three innovative prototype optical subsystems to us in 2025, designed to improve the performance, size, weight, and power of our upcoming data center-ready quantum computers. Second, I am pleased to announce a new partnership with imec, a world-renowned innovation hub in nano electronics and digital technologies, to develop photonic-integrated circuits and chip-scale ion trap technology. With these groundbreaking technologies, IonQ aims to reduce overall hardware system size and cost, increase qubit count, and improve system performance and scale. The developments of this quarter are nothing short of groundbreaking and position IonQ to be the preeminent player in the quantum industry in the near-term and for many years to come. Many of you already know IonQ as a leading quantum computing company. With today's announcements, we believe we are now the leading company at the intersection of quantum computing and networking. In the future, we will likely also be known as a software application company. Our commercial track record has launched IonQ toward the rarefied echelon of rapidly growing young technology companies by achieving nine-figure bookings in record time. With that, I'd like to turn the call over to Thomas.

Thank you, Peter. It has truly been an exciting quarter on the applications 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 $12.4 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 $63.5 million of sales in the third 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 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, our total operating costs and expenses for the third quarter were $65.5 million, up 36% from $48.3 million in the prior year period, but within our plan for the year. To break this down further, our research and development costs were $33.2 million, up 35% from $24.6 million in the prior year period. Recall that we are investing heavily in R&D and growing our R&D headcount to support our roadmap and customer commitments. Our sales and marketing costs in the third quarter were $6.6 million, up 31% from $5 million in the prior year period. This increase was due to our growing marketing and sales teams, as we continue investing in our commercial efforts. Our general and administrative costs in the third quarter were $14.3 million, up 3% from $13.9 million in the prior year period. These increases were primarily driven by an increase in payroll-related expenses. All of this resulted in a net loss of $52.5 million in the third quarter compared to $44.8 million in the prior year period. This Q3 loss includes a non-cash loss of $3.9 million for the third 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 $24.6 million for the third quarter compared to $17 million for the prior year period. We saw an adjusted EBITDA loss for the third quarter of $23.7 million compared to a $22.4 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 September 30, 2024, were $382.8 million. We continue to believe this cash position is the strongest of any publicly traded company focused on full stack computing. Importantly, while we have increased IonQ's run rate in recent years, we are offsetting this by beginning to collect large payments from IonQ's customers, including those who have purchased systems. Our run rate increases are largely related to employee costs as we have worked rapidly to bring the best quantum talent to IonQ. It is also worth mentioning that a significant portion of our investment in setting up manufacturing is now behind us. IonQ's Board and management team are focused on being the leading business in both the rapidly expanding quantum computing and quantum networking segments. Our corporate goals in the coming years are profitable growth, positive free cash flow, and commercial quantum market leadership. Now turning to our financial outlook, we are pleased to announce that we will be raising our revenue guidance for the full year 2024 to a range of $38.5 million to $42.5 million, reflecting our confidence in our progress on our percentage of completion-based contracts. We expect revenue for the fourth quarter of between $7.1 million and $11.1 million. We remain confident in our 2024 bookings guidance of between $75 million and $95 million. Back to you, Peter.

Thank you, Thomas. As we have evidenced since our IPO, near our customer wins and our fantastic third quarter, IonQ is demonstrably leading the commercialization of quantum computing and quantum networking worldwide. The quarter's bookings were on par with our entire last year of bookings combined. We are making great strides with our collaborations with AstraZeneca and Ansys to break new ground in applications. And we furthered our leadership position in quantum networking demonstrated by our $54.5 million cornerstone deal with AFRL, as well as our achievement of the second milestone on our path to implementing photonic interconnects. We look forward to a strong close to the year and updating you all again on our fourth quarter call in February. With that, I'd like to turn it over to the operator for our question-and-answer session.

Our first question comes from David Williams with The Benchmark Company.

Hi. Good afternoon, everyone, and thanks for taking my question. Lots of really interesting, exciting things going on. It's hard to find a place to start. But maybe first, Peter, can you speak to just the Qubitekk acquisition? What that technology brings? And how does that kind of merge synergistically with what you've been doing internally?

Yes, I'd be happy, David. Several things here. One is that, as we've discussed in the past, the way that IonQ will achieve scale is by photonically networking our quantum computers together. Qubitekk is doing something similar—not exactly the same—but they have the same kind of skill sets in terms of people. The other side is it gives us another product line to go after. It's a new market for us. So it's both complementary and also expands the Total Addressable Market that we can pursue.

Okay, fantastic. And just kind of thinking about you have the networking efforts now and you also have the computing side. How do you think about the sensing pillar in terms of quantum, and is that an area we should anticipate that you might be looking to enter at some point?

Yes. One of the nice things is that often sensing requires quantum networking, enabling the transport of quantum information. So again, it enables another piece of infrastructure in the three different markets that make up quantum: quantum sensing, quantum networking, and quantum computing.

Sure. Okay. And then just one last one, if I may. You've talked about applications this quarter, and before you alluded to it. We've seen other areas where you partnered with manufacturers or different industries to work on a specific problem. Can you talk about how this application develops over time and how you think about that relative to maybe the one-off projects you've done in the past?

You've expressed the core of it. A lot of times we've worked with companies for a one-off or maybe an R&D project. We largely put an end to those about 18 months ago. We said, it's time to focus on the applications that will be the first that we put into production. We didn't want to start on application software until the hardware was ready. So we are timing those two things together. What the two announcements today with Ansys and AstraZeneca represent is the beginning of working on those applications. We've been working on the prototypes for these applications for the last six to eight months, so we're not starting at square one, but it's not completed either. So that's the major difference. I would put Hyundai maybe into the third camp as well, where our engagements there are moving into what can we do that actually helps them in our production sense.

Our next question comes from Richard Shannon with Craig-Hallum.

Hi, guys. This is Tyler Anderson on for Richard Shannon. Congratulations on the quarter and M&A. I'm very excited. It's amazing. Thank you for taking my questions. I was wondering, does the hardware from Qubitekk require distillation or node-to-node swap operations? And will the chip-scale ion trap from the imec partnership be used within the AFRL contract? Could you describe the price of the Qubitekk acquisition and expected incremental OpEx?

Okay, I'll start. This is Dean. There's a lot to unpack in your question. The first piece is regarding the technology and the swap. The fundamental technology stack that we have with Qubitekk and the QKD work does not require that. There is similarity with the milestone that we announced with our photonic interconnects in terms of the Bell state analyzer and photon entanglement. There are analogies between the work that we're doing with the photonic interconnect and what's being done in those quantum networks. This technology does operate at different frequencies, however. So, we need to do for our photonic interconnects is fundamentally different from what's currently being accomplished in many QKD solutions. Your second question was about imec and PIC development and its relationship to our AFRL work. The AFRL work focuses on developing our latest large item associated with frequency conversion, relating to the Qubitekk acquisition, where we are looking at conversion of wavelengths to enable pushing entanglement over long distances. The imec work has the potential to play in all of those areas but not in the near term.

Yes. So the consideration for the acquisition is $22 million, which we have funded in cash from our balance sheet. The details are laid out in the quarterly disclosures. We evaluated the size and determined that the cash mix was manageable relative to our cash position, and we plan to close the transaction in the next six months.

And I'll just add one other piece, which is that the Qubitekk purchase also gives us a relationship with real-world telcos. It allows us to start testing in the field. Great questions, by the way.

Awesome. Thank you, guys. One more for me. Could you quantitatively frame the near-term government spending opportunity on a national and international level? Where is your strength across the different types of opportunities in terms of application, computation, and networking? And what are the sizes of those different buckets?

We might need another whole meeting to get through that question. What we could probably point you to are some of the analyses done by BCGs and McKinsey regarding expected markets for those aspects. I take pride in the fact that, since our IPO, we have communicated clearly about our intent and followed through on those statements.

Okay. Then maybe just a little bit further, how would you weigh your focus between government and commercial funding moving forward with all these acquisitions and the telco involvement?

In the near-term, a good portion has been towards government. But with the application projects beginning now, we are starting to switch over to enterprise. That's always been part of the plan. If you go back to the very beginning of the IPO, you'll see that we anticipated this shift would take off as soon as we brought these applications online.

Our next question comes from Shadi Mitwalli with Needham and Company.

This is Shadi Mitwalli dialing in for Quinn Bolton. First off, congrats on an exciting quarter. Lots to unpack here. Earlier in the year, you knocked a major milestone in photonic interconnects, and with the partnership with NKT Photonics, it's clear IonQ is making solid progress on the photonics front. I just want to touch on how NKT Photonics systems will support the commercialization of IonQ's quantum computers?

Dean, do you want to take it?

I'll take it from the technology perspective. NKT has different types of lasers, such as diode lasers, pulse lasers, and fiber-based lasers. What we need are robust lasers that operate at the required frequencies, and we are looking for suppliers who can provide these lasers that need to be reliable and work uninterruptedly. This aims to establish larger scale manufacturing and supplier agreements.

From the business perspective, the cost of these systems is significant. When we decided to move to production, we also needed to reduce costs and size, which is why these partnerships with imec and NKT are critical.

Great, thanks for all that. Regarding OpEx, you announced several new partnerships and awards this quarter. Earlier in the prepared remarks, you mentioned expanding the team to support this growth. I'm curious about how we should think about OpEx moving forward and how much the team needs to expand to support this growth.

We're not making any changes to OpEx right now, and we'll discuss the OpEx for next year on the Q4 call. What we are focusing on is aligning growth with meaningful investments and refocusing capital to areas where it counts.

Awesome. Thanks for all the color and congrats on the exciting quarter.

We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Peter Chapman for closing comments.

Thank you. I want to thank everyone for joining us today for your support and for all the questions. Finally, I want to thank the entire IonQ team for their diligent work that contributed to such a meaningful quarter for us technically and commercially. This continues to fuel everything we look forward to in the future. Thanks, everyone.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.