Rigetti Computing, Inc. Q3 FY2023 Earnings Call

Good day, and thank you for standing by. Welcome to Rigetti Computing Third Quarter 2023 Financial Results Conference Call. At this time all participants are in a listen-only mode. After the speaker's presentation there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Subodh Kulkarni. Please go ahead.

Good afternoon, and thank you for participating in Rigetti's earnings conference call covering the third quarter of 2023. Joining me today is Jeff Bertelsen our CFO who will review our results in some detail following my overview. Our CTO, David Rivas is also here to participate in the Q&A session. We will be pleased to answer your questions at the conclusion of our remarks. We would like to point out that this call and Rigetti's Q3 2023 press release contain forward-looking statements regarding current expectations, objectives, and underlying assumptions regarding our outlook and future operating results. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described and are discussed in more detail in our Form 10-K for the year ended December 31st, 2022, or Form 10-Q for the three and nine months ended September 30th, 2023 and our subsequent filings with the SEC and other filings with the Securities and Exchange Commission. We are here to review this discussion of risk factors. Turning now to the business of the third quarter of 2023. I'm pleased to report that we continue to grow our QPU systems sales. In the third quarter of 2023, Rigetti expanded its QPU customer base, delivering a 9-qubit quantum processing unit (QPU) to another premier National Laboratory. This follows our first QPU sale in the second quarter of 2023 to Fermilab in which we delivered a 9-qubit QPU as part of our partnership with the superconducting quantum materials and systems center (QMS). We were awarded a five-year indefinite delivery, indefinite quantity (IDIQ) contract with the Air Force Research Lab (AFRL) information directorate to supply AFRL researchers with Quantum Foundry Services. This contract allows AFRL to leverage Rigetti’s fabrication and manufacturing capabilities to build customized quantum systems. Within the scope of the contract, we will be able to provide quantum integrated circuits, quantum-limited amplifiers, cryogenic microwave components, and 9-qubit QPUs. This contract builds on the existing relationship between Rigetti and AFRL to harness our fabrication capabilities for quantum networking, hardware, research, and development. We are thrilled that leading government agencies and national labs are beginning to choose Rigetti’s established fabrication capabilities to advance their quantum computing research and development. By providing hands-on access to our QPUs, we believe that we are enabling greater progress towards narrow quantum advantage and quantum technology breakthroughs. I'm pleased to report that we were recently awarded a DARPA IMPAQT contract to advance quantum algorithms for solving combinatorial optimization problems. Our DARPA IMPAQT project seeks to develop a novel and efficient encoding of optimization problems onto qubits, with the goal of enabling larger problems to be mapped to currently available NISQ-era quantum computers. The project specifically addresses scheduling problems, which are among the best known and most pervasive types of combinatorial optimization problems across numerous industries, as well as some of the most challenging to solve. Additionally, in October 2023, we were awarded an Innovate UK Grant as part of the feasibility studies in quantum computing applications competition. Joining Rigetti in this work is HSBC, the quantum software lab based at the University of Edinburgh, and the National Quantum Computing Center. Together, the consortium aims to enhance existing money laundering techniques by using quantum machine learning techniques, with the goal of improving the performance of current state-of-the-art machine learning algorithms. On the technology front, we are continuing to work to improve the system performance of our fourth-generation chip architecture, which features a square lattice and tunable couplers to support our anticipated Ankaa-2 84 qubit system. Our Ankaa-2 84 qubit system is expected to be deployed and made available to external customers in the fourth quarter of 2023. We continue to make good progress with fidelity on our fourth-generation systems. We have achieved higher than 98% median 2-qubit fidelity with our 9-qubit system, 98% median 2-qubit fidelity with our 24-qubit system, and higher than 97% median 2-qubit fidelity with our Ankaa-2 84 qubit system. Our plan continues to be to get to 98% median 2-qubit fidelity with our Ankaa-2 84-qubit system and over 99% median 2-qubit fidelity in 2024. Thereafter, we intend to develop the 336-qubit Lyra system and to demonstrate narrow quantum advantage in two to three years. And with that, I'll turn the call over to Jeff who will review our third quarter and 2023 financial performance.

Thanks, Subodh. Revenues in the third quarter of 2023 were $3.1 million, compared to $2.8 million in the same period of 2022. Revenue variability is to be expected at this stage of the company's evolution given the variable nature of contract deliverables and timing with major government agencies. Gross margins in the third quarter of 2023 came in at 73%, up from gross margins in the third quarter of 2022 of 72%. On the expense side, total OpEx in the third quarter of 2023 was $19.1 million compared to $33.4 million in the same period in the prior year. Year-over-year decrease was primarily due to an $11.5 million reduction in stock compensation expense. Other decreases in the third quarter of 2023 included lower employee wages and benefit costs resulting from our February 2023 reduction in workforce. The non-cash change in the fair value of the Ford agreement for the ampere warrant increased G&A expense by $1.1 million in the third quarter of 2023, compared with a $387,000 reduction in G&A expense in the third quarter of 2022. In the third quarter of 2023, stock compensation expense totaled $3.7 million and depreciation and amortization expense totaled $2.1 million, compared to $15.1 million and $1.8 million in the third quarter of 2022, respectively. Operating loss for the third quarter of 2023 was $16.8 million, compared to an operating loss of $31.3 million for the same period of 2022. Net loss for the third quarter of 2023 was $22.2 million or $0.17 per share, compared to a net loss of $18.8 million or $0.16 per share for the same period of 2022. Net loss for the third quarter of 2023 was negatively impacted by the non-cash change in the fair value of the earnout and derivative warrant liabilities of $1.7 million and $3.4 million respectively. Net loss for the third quarter of ‘22 was favorably impacted by the non-cash change in the fair value of the earnout and derivative warrant liabilities of $4.9 million and $8.1 million respectively. Cash, cash equivalents, and available for sale investments totaled $110.2 million as of September 30, 2023, compared with $105.5 million as of June 30, 2023. During the third quarter of 2023, we raised $12.7 million from the sale of 6.3 million shares of common stock under our common stock purchase agreement with B. Riley. Based on our current operating plan and assuming no additional capital is raised in the three months ending December 31, 2023, we expect to have cash, cash equivalents, and available for sale securities of $88 million to $94 million at the end of 2023. Thank you, we would now be happy to answer your questions.

Please hold on while we prepare the Q&A lineup. Our first question comes from Krish Sanka at TD Cowen. Your line is open.

Hi there. Thanks for taking my questions. This is Steven calling on behalf of Krish. As my first question, I want to dive deeper into the Air Force Research Lab contract you mentioned. Can you share any details about the potential long-term value of that contract? Also, how soon might some revenues begin to materialize, considering any contingencies related to technical aspects or the timing of when you'll be providing the foundry components you mentioned? That would be great.

Sure. Thanks, Steven. So as we just described, the Air Force Research Lab contract is an IDIQ contract, which by definition means it's indefinite in its evaluation. They give us broad guidelines on what all they expect, certainly foundry services QPU, and affiliated services are included in the contract. It's hard to put a monetary value on it because by definition it is indefinite. Certainly, AFRL is a huge organization committed to quantum computing. They get funding out of DOD. So we certainly expect it to be sizable, but we cannot quantify sitting here right now. Regarding monetization of the contract that has already started, we booked some dollars from that contract already in Q3, and we definitely expect that value to increase in Q4 and in the subsequent quarters. Hopefully, that answers your question.

Okay, thanks. And I guess another follow-up to sort of the QPU sales that you've recognized in the last two quarters, just kind of like big picture question is, just given that there's numerous government agencies that are interested in purchasing QPUs and I think previously you said, there's the potential to sell more you can go into next year, just given the sizable investment that these government agencies need to make to support the superconducting modality system, the necessary infrastructure and service refrigerators. I assume it's a long-term investment. So, I guess, doesn't say anything about international labs and the views on superconducting modalities versus the other competing modalities with respect to the maturity of superconducting with a scalability that compares with other modalities.

Superconducting technology is certainly a leading option for quantum computing, alongside other competitive technologies. We believe superconducting technology has a significant advantage in scalability. Currently, we have achieved 84 qubits, while other competitors in superconducting technology are at a similar level. This positions us significantly ahead compared to other modalities, and we have the potential for further scaling. However, all technologies are still a ways from achieving quantum advantage, which we estimate to be two to three years away. This advantage involves demonstrating better performance or cost-effectiveness compared to classical computing in practical applications. Government agencies such as DOE and DOD are committed to investing in various modalities, and we stand to gain when they invest in superconducting technology for quantum processing units (QPUs). In the second quarter, we sold our first QPU, which we can now confirm was to the SQMS center at Fermilab. In the third quarter, we shipped another QPU to a leading National Lab, although we cannot disclose the name at this time. We hope to announce it soon. To our knowledge, we are the only company to have sold a functioning quantum computer to any organization, and now we have achieved this milestone twice, first in Q2 and then in Q3. It's a significant achievement for our company, and we are extremely proud of it. Our pipeline is continuing to grow, and we are in discussions with numerous customers, including national labs and university researchers, who are very interested in acquiring an on-premise quantum computer. There are numerous advantages to this approach; it allows for hands-on research and enables direct experience in quantum computing, including optimization and algorithm development. Customers have expressed interest in getting a quantum computer on-premise for these reasons. Our 9-qubit quantum computer is designed to be a simple module that can be easily plugged into an existing dilution refrigerator. Many national labs and university researchers have already invested in these refrigerators, making it a relatively straightforward process for them to replace certain components with our quantum computer and get up and running quickly. This ease of integration is a focus for us, alongside the development of the technology.

Okay, perfect. Just the last question if I could, wanted to ask about your quantum cloud service. So, I know it's still very early innings for your QCS business. I guess in terms of non-government cloud service revenues. It's still, I think, just given your strategic shifts in focus to the fidelity rates and all the progress you've made so far this year, I guess have you sensed any noticeable shift in commercial interest in using your QCS services, either from direct feedback from customers or maybe any indications from your ecosystem partners that you work with to deliver a QCS?

For our Quantum service through the cloud, we have established partnerships with AWS, Azure, and our own cloud, while also focusing on quantum computers for select government organizations. There is some commercial interest, but it remains relatively low compared to national labs and university researchers. This is likely due to the fact that we have not yet reached quantum advantage. As we near that milestone in the next two to three years, we anticipate a significant increase in commercial interest, presenting a substantial growth opportunity. However, at this time, the majority of usage is driven by researchers, with national labs and university researchers leading in the adoption of quantum computing.

Great, thank you so much. And nice job on the quarter.

Thank you, Steven.

Our next question comes from David Williams with the Benchmark Company. Your line is open.

Good afternoon, and thank you for taking my question. I apologize if this has already been addressed, as I joined the call a bit late. Subodh, could you discuss the recent QPU sale you mentioned? I understand there is another sale you cannot disclose, but could you share your thoughts on the inbound activity and any indicators that suggest potential future sales? Thank you.

So, sure. Thanks, David. So, we sold our first QPU in Q2. And as I mentioned earlier, as far as we know, that is the first time any company has sold a quantum computer to a customer. That was to the SCMS center at Fermilab that happened in Q2 of this year. We sold another QPU in Q3 of this year to another premier national lab, it will hopefully be able to disclose the name soon. The pipeline for future QPU sales continues to build; we are talking to more than a dozen customers right now. Most of them are for 9-qubit, some have expressed interest in 24-qubit. One has even expressed interest in 84-qubit. Certainly, the price point goes up dramatically when you go from 9-qubit to 24-qubit. Overall, we are very pleased with the reaction we are getting for QPU, especially the optimized QPU. And again, most of the applications are for research purposes, so they can do things ranging from fundamental understanding of quantum computing, to pulse shape optimization, to algorithm development, and many other applications that they can think of. So, hopefully, I've answered your question.

No, no, that's very helpful, thank you. And then maybe if you just kind of think about this opportunity as you go forward, it feels like you've got multiple revenue stream potentials here in terms of the processor. And then also the quantum as a service, and you've made some really great progress. I have to commend you on just the efficiency that you've definitely instilled in getting the 84 out and everything you've been able to achieve there. So, congrats on that. But I guess just if you could help us understand how you envision the business developing over time, and if there are any differences today, I guess, given some of this interest on the QBUs versus where you would have thought whenever you came in some time ago. Thank you.

Thank you, David. Our primary focus at this time is on technology development, aiming to achieve a fidelity of 99% and then scale up to 336 qubits. Currently, with our 9-qubit quantum processing units, we are nearing 99% fidelity, and with 24 qubits, we are around 98%. For 84 qubits, the fidelity stands at approximately 97%. These figures represent two-qubit fidelities and are impressive compared to where we started. Our error rates have been significantly reduced, which is a major achievement since I joined the company. We remain committed to this mission as improving error rates is essential for achieving quantum advantage and unlocking significant growth opportunities. In the meantime, we are also pursuing sales opportunities for our QPUs to researchers interested in conducting their own experiments. Our 9-qubit QPUs are nearly at 99% fidelity, allowing researchers to explore practical applications, which I believe will continue to generate sales. However, our primary focus remains on technology development to reach narrow quantum advantage and then capitalize on subsequent growth opportunities.

Thank you very much.

Thank you, David.

And this concludes the question-and-answer session. I would like to turn the call back over to Dr. Kulkarni for closing remarks.

Thank you for your interesting questions. We look forward to updating you after our Q4 results. Thanks, again.

And this concludes today's conference call. Thank you all for participating. You may now disconnect.