Earnings Call Transcript - RGTI Q1 2023

Operator, Operator

Thank you for standing by. Welcome to the Rigetti Computing First Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentations, there'll be a question-and-answer session. As a reminder, today's program is being recorded. And now, I’d like to introduce your host for today’s program, Dr. Subodh Kulkarni, President and CEO. Please go ahead, sir.

Dr. Subodh Kulkarni, CEO

Good afternoon, and thank you for participating in Rigetti’s earnings conference call covering the first 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 Q1 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 31, 2022, our Form 10-Q for the three months ended March 31, 2023, and our subsequent filings with the SEC, and other filings with the Securities and Exchange Commission. We urge you to review these discussions of risk factors. Turning now to the business of the first quarter of 2023. I'm pleased to report that we believe we are on track and progressing towards the nearer-term strategic priorities and technology roadmap we announced in February 2023. We are starting to see positive impacts following the implementation of our updated business strategy we announced in February 2023, which is designed to improve our focus, operating efficiency, and preserve cash resources. Our next generation 84-qubit Ankaa-1 system, which is built using a new architecture of square lattice and tunable couplers, was deployed internally within Rigetti for testing in March 2023. Ankaa-1 is achieving 96% to 97% median 2-qubit fidelity and 65 to 70 nanosecond gate speeds based on our internal testing. Our prior generation 80-qubit Aspen M-3 system achieved 94% to 95% median 2-qubit fidelity and 185 to 190 nanosecond gate speeds. We believe these metrics demonstrate the superior performance of Ankaa-1 compared to Aspen M-3 and confirm our belief that the chip used in the Ankaa-1 system is a leap forward in architectural design. As previously disclosed, we currently anticipate launching Ankaa-1 to select customers in mid-2023. We continue to work to improve Ankaa-1 performance with the goal of reaching a median 2-qubit fidelity of 98% to support the anticipated Ankaa-2 84-qubit system. Our Ankaa-2 84-qubit system with anticipated improvements in design and performance is expected to be deployed and made available to external customers in the fourth quarter of 2023. We remain committed to working to achieve 2-qubit fidelity of 99% with the anticipated Ankaa-2, which we expect to be achieved in 2024 and development of the 336-qubit Lyra system thereafter. We recently released the results of application and development work that demonstrates the progress the Company is making towards improving its hardware and software capabilities, which we believe reflects advancement towards potentially achieving narrow quantum advantage. Using quantum-inspired classical simulations, we were able to demonstrate the computational power of quantum methods compared to the classical alternatives. At the Quantum Tech Conference in April, we presented the results of new application work undertaken with Moody's and Imperial College London that illustrates a novel approach to addressing the problem of forecasting recessions, using cutting-edge machine learning techniques that combine classical signature kernel methods with quantum-enhanced data transformations. By using noiseless quantum simulation, we were able to demonstrate that the quantum-enhanced version of our model outperforms the classical version as well as standard models used for this class of problems in accurately predicting a recession. As part of our ongoing DARPA project, we released a manuscript that presents a new quantum algorithm for solving optimization problems with NASA that provides performance assurances even with noise and outperforms several classical and quantum approaches for solving the same problems. At our current stage of development, we believe that executing towards our roadmap and achieving our technology milestones are key to fueling our goal of achieving quantum advantage. We remain focused on meeting our objectives. And with that, I'll now turn the call over to Jeff, who will review our first quarter 2023 financial performance.

Jeff Bertelsen, CFO

Thanks, Subodh. Revenues in the first quarter of 2023 were $2.2 million compared to $2.1 million in the same period of 2022. Revenue variability is to be expected at this stage of the Company's evolution, given the nature of contract timing with major government agencies. Our development contracts also primarily consist of technical milestone-based work or cost share arrangements with revenue recognition varying according to the timing of deliverables. Gross margins in the first quarter of 2023 came in at 77%, virtually in line with gross margins in the first quarter of 2022 of 80%. On the expense side, total OpEx in the first quarter of 2023 was $23.7 million, compared to $27 million in the same period the prior year. The year-over-year decrease was mainly due to expenses recorded in the first quarter of 2022 related to the business combination, including $8.9 million of cumulative deferred stock compensation expense related to satisfaction of a liquidity condition that was resolved by virtue of the business combination in March 2022 and $2.1 million of transaction bonuses. We also recognized $1.3 million of expenses in the first quarter of 2022 for a prior period catch-up of electric utility fees. The change in the fair value of the forward agreement for the Ampere warrant increased G&A expense by $1.1 million in the first quarter of 2023 compared with a $3 million reduction in G&A expense in the first quarter of 2022. We recognized expenses totaling $2 million in the first quarter of 2023 for restructuring and contractual based severance for executive officers that were terminated during the quarter. Other increases in the first quarter of 2023 compared to the same period of 2022 included higher cost per headcount, primarily in the R&D area, a $742,000 impairment charge for deferred offering costs, and higher costs for legal fees and D&O insurance mainly related to being a public company for the entirety of the first quarter of 2023. In the first quarter of 2023, stock compensation expense totaled $1.7 million, and depreciation and amortization expense totaled $2.1 million compared to $11.5 million and $1.4 million in the first quarter of 2022, respectively. Operating loss for the first quarter of 2023 was $22 million compared to an operating loss of $25.3 million for the same period of 2022. Net loss for the first quarter of 2023 was $23.4 million or $0.19 per share compared to a net loss of $17.6 million or $0.33 per share for the same period of 2022. Cash, cash equivalents and available for sale investments totaled $122 million as of March 31, 2023 compared with $142.8 million as of December 31, 2022. Based on our current operating plan, we expect to have cash, cash equivalents, and available for sale securities of between $65 million and $75 million at the end of 2023. At this time, based on our current operating plan, we anticipate that Rigetti will need to raise additional funding by late 2024, early 2025 to continue its research and development efforts and achieve its business objectives. Thank you. We would now be happy to answer your questions.

Operator, Operator

Operator Instructions. And our first question comes from the line of Jean-Marc from Deutsche Bank.

Unidentified Analyst, Analyst

Hey, guys. Thank you. This is Jean-Marc on behalf of Sidney. I guess to start with the progress on Ankaa, Subodh, it's certainly encouraging to hear about the performance improvements that you guys have made. But I was hoping you could speak a little bit more to what your expectations are in terms of customer adoption, once this system is deployed in mid-2023 and sort of how have your conversations with customers been proceeding? And then, just a quick follow-up, if you could speak to sort of the rate of utilization of your QCS and where do you see that go once Ankaa is deployed. And then, I have a follow-up?

Dr. Subodh Kulkarni, CEO

Sure. So, thanks for your questions. Certainly, we are very pleased with the performance of Ankaa. As we have said before, it is a new architecture. It is a denser lattice, a square lattice with tunable couplers. So that it took a lot of effort to build the chip and bring it up, which is working right now. We have reported the numbers for fidelities of 2-Q, median fidelity of 96% to 97%, and pretty impressive gate speeds of 65 to 70 nanoseconds. We certainly have more work to do in other metrics and continue to improve our fidelity. Our expectation is that Ankaa will continue to improve as the year goes on, and we should be in the 98 plus percent range for median 2-Q fidelity by the end of this year and in the 99 plus percent range sometime in 2024. That's the high-level plan. As we have already said, we are going to start making Ankaa available to select customers in the middle of this year. Right now, it's all internally tested. Once we complete our internal testing and feel confident to give customer access, we'll do that. Initially, it will be available to select customers like the DOE, DOD labs, and a few others that we have right now. General interest from a customer standpoint remains very high. A lot of customers that we currently have and potential customers are very interested in our 84-qubit square lattice tunable coupler chip. I would say that the higher the fidelity, the better obviously from their application standpoint. So, as we reach 98% fidelity, we’ll continue to improve, and certainly at 99 plus percent next year, the interest will be significantly higher. Overall, we are pleased with our current position, what we are hearing from our existing and potential customers, and the evolution of this project. I hope that answers your question.

Unidentified Analyst, Analyst

Absolutely. That's very helpful. Thank you, Subodh. And then, I guess, if I can squeeze one more in for you, Jeff, maybe on cash burn. If you can help us think about the sort of the linearity of cash burn through 2023. And do you have a better sense of what CapEx could be as we go through the year? That's it for me. Thank you.

Jeff Bertelsen, CFO

Yes. I mean, as we said in today's release, we expect to have between $65 million and $75 million of cash on hand at the end of the year. When I think about cash burn, obviously, we had a restructuring here in Q1. So, we would expect to see expense reduction from that action fully kick in starting in Q2. We also incurred severance and restructuring costs this quarter in Q1, which won't recur in Q2. So, from a linear perspective, we would certainly think that expenses would go down from here. Additionally, you have the 10-K and annual reporting type costs in the first quarter. So, from a linear perspective, we aren't giving any specific CapEx guidance, but certainly our focus is to be very cautious on CapEx spending to stay focused on that and ensure we are spending our dollars wisely. So, I think going forward, and also tied into the reduction in headcount, we should expect some cautious CapEx spending moving forward.

Operator, Operator

Operator Instructions. And our next question comes from the line of David Williams from the Benchmark Company. Your question please?

David Williams, Analyst

Hey. Good afternoon. Good to speak with you both. Just a couple of quick questions, I guess, and you will forgive me. I missed a bit at the beginning of the call here. But it sounds like things are progressing as you expect making some good progress on the fidelities. But I guess is there anything that has surprised you over the last several months in terms of just the improvement in fidelities or giving you more confidence towards the technology side?

Dr. Subodh Kulkarni, CEO

It's a tricky question, David, when you don't know what all it's going to take to get to 99% fidelity, sitting here. But we are pleased with the initial fidelities that we have measured with Ankaa. I mean, with our Aspen M-3 system, we were close to 95% median 2-Q fidelity. Whereas with Ankaa, we are starting off with 96% to 97%, which is a notable jump, particularly considering it's a new architecture with a square lattice and the tunable coupler. Certainly, we know where the issues are coming from. Right now, we have data. We are systematically analyzing that data and examining where the errors are coming from, and we are addressing them in a very systematic manner, using an analytical approach which is quite common in the semiconductor industry. So, we are advancing methodically. That's what gives me the confidence that by the end of this year, Ankaa will be close to 98 plus percent median 2-Q fidelity. And certainly, we already know what it will take to reach 99 plus percent fidelity next year. So, I have high confidence our team will be able to achieve those numbers based on the starting point for Ankaa. What we have seen is contributing to errors right now, and what actions we have already taken and are planning to implement in the next few months to rectify those issues. So, hopefully that answers your question.

David Williams, Analyst

No, it does. And thanks so much for that. Certainly helpful. And I guess secondly, now that you've had a little more time in the seat as CEO, what are you hearing from customers and are you still feeling like the adoption and maybe some of the programs, the folks that maybe were kicking the tires previously? Are they still looking at Rigetti? And has there been any changes, maybe improvement or otherwise?

Dr. Subodh Kulkarni, CEO

Good questions, David. I mean, certainly as we improve fidelity, the interest continues to increase. I would say definitely some of the announcements we made and papers we published on the NQA side, specifically the work we published with Moody’s, has generated a lot of traction, not only obviously with Moody’s, but with other financial organizations. Everyone is eager to see how we can improve the predictability of recessions or bankruptcies. There's significant interest in those types of algorithms. Our work with Moody’s has certainly attracted more customers to us. In our QPU and our algorithms. So, we are engaging with more financial customers because of these developments. Additionally, our work with DARPA and NASA on optimization has yielded compelling results that demonstrate how QPU can be employed to enhance combinatorial optimization problems. This is opening unique opportunities across various vertical markets beyond just financial markets, as many industries require solutions for combinatorial optimization problems. Our work lays a strong foundation for broader market engagement. So, it’s a combination of both an improved Ankaa chip and fidelity, and gate speeds, along with the optimization and NQA work we are doing, that continues to generate significant interest from customers. In general, I would say customers are very interested in quantum computing and want to evaluate using it to understand its practicality. As we showcase practical benefits like the Moody's work or the DARPA NASA work, that certainly increases their interest to discuss further what other practical challenges we can tackle together. So hopefully that answers your question.

David Williams, Analyst

It certainly did. I appreciate the color and congrats on the progress again, and best of luck on the continued success.

Operator, Operator

And our next question comes from the line of Quinn Bolton from Needham. Your question please.

Unidentified Analyst, Analyst

Yes. Hey, guys. This is Trevor on for Quinn. Thanks for letting me ask some questions here. So, to start, I'm wondering if there are customers that you are currently engaged with that are waiting on the sidelines for Ankaa fidelities to improve before actually becoming a paying customer. And to add to that, do you expect an incremental step-up in revenue, once 99% fidelities are achieved and Ankaa is introduced to the cloud? Thanks.

Dr. Subodh Kulkarni, CEO

Thanks, Trevor. At a high level, certainly as fidelities improve, the interest among customers is going to increase, that goes without saying. Exactly how the revenues ramp up with fidelity is hard to determine. I think in the entire quantum computing world, certainly all the revenues currently being generated are primarily from researchers or government national labs kind of customers. Most of it revolves around testing QPUs and algorithms to see how they could be relevant in the future. So, none of us have reached the stage where we can definitively say quantum computers are significantly better than classical computers in performance or cost at this point. That's the goal here. The real ramp-up in revenues will happen only when we achieve that quantum advantage stage, which is roughly 2 to 3 years from now. So, at a high level, once we achieve 99% fidelity next year in 2024, will there be more customer interest? Yes. Will we see increased financial engagement for these research projects? Likely, but it will be minimal in the grand scheme of things. The key inflection point in revenues for quantum computing companies, including us, will occur once we surpass that quantum advantage, which is expected to take at least another 2 to 3 years from now. Hopefully that clarifies your question.

Unidentified Analyst, Analyst

Yes, it does. But I guess to the first part of my question, I was asking if you are engaging with any customers that are interested in using your QPUs, but they are waiting until Ankaa hits a certain fidelity to start working with you? So they are not paying customers yet, but they plan to be. Do you see any of that, or are more of these universities and government agencies? Are they just working with you regardless of what system is available?

Dr. Subodh Kulkarni, CEO

We are certainly in talks with government organizations and universities, but we are also engaging with commercial customers regularly. Many of them are current paying customers, either directly through our cloud service or via AWS or Azure. However, has anyone explicitly told us that they would sign a specific contract contingent on fidelity reaching 98% or 99%? I don’t recall anyone categorically stating that. The interest is high, and everyone wants to understand more. Once we reach 99% fidelity, certainly more applications will open up. Overall, interest is significant, but I cannot specify that we have a number of customers who have said they will sign a contract as soon as we achieve a specific fidelity.

Unidentified Analyst, Analyst

Yes, okay. Thank you. And a quick clarification, will Ankaa-1 become available broadly to customers over the cloud platforms, or is that just Ankaa-2 that's expected to become available over the cloud?

Dr. Subodh Kulkarni, CEO

So what we have said, Trevor, is that Ankaa-1, which we are currently testing internally, will be made available to select customers by the middle of this year. By the end of this year, Ankaa-1 is expected to evolve into Ankaa-2, and our plan is to make Ankaa-2 available to a broader customer base once we reach that 98 plus percent level of fidelity. Therefore, the timing of general availability will be aligned with Ankaa-2 achieving that threshold. That's what we have announced.

Operator, Operator

Operator Instructions. And our next question comes from the line of Krish Sankar from TD Cowen.

Unidentified Analyst, Analyst

This is Steven calling on behalf of Krish. Subodh, I have a question or two for you regarding Ankaa-1 and the underlying infrastructure that supports its development. First, concerning Ankaa-2, which is set to be released this year, I wanted to clarify the tape-out timeline. What are some of the potential risks to the tape-out and the project for the upcoming Q4 release? Specifically, is it an incremental design that is mostly finalized, or does it rely on Ankaa-1 reaching that 98% fidelity rate before it can tape out? Additionally, could you elaborate on how the Ankaa-2 chip is expected to enter the R&D pipeline? That would be helpful.

Dr. Subodh Kulkarni, CEO

Sure. So, thanks for your question. I mean, you're delving into the specific details of technology development. And, as you can imagine, we own our own fab, as you probably know. We are continuously running chips with various versions for experimentation, and some lots are targeted for Ankaa-2 at this time. Frankly, we have even started looking into Ankaa-3 and what we are doing. All those experiments are happening simultaneously. We are continuously reviewing Ankaa-1 data as we improve it, optimizing it, analyzing the errors, and understanding where they originate. All those findings are being incorporated in our efforts to build Ankaa-2, which is scheduled for the end of this year. All practical considerations suggest the Ankaa-2 chip will go into production very soon. It takes a certain amount of months to prepare the chip and present it as a QPU system. We are integrating all learnings from Ankaa-1 into Ankaa-2. Additional insights will be realized in the coming months as well. We plan to finalize our Ankaa-2 design shortly, which will be launched by the end of the year. While we bring Ankaa-2 into focus and evaluate its performance, we have also commenced initial experiments for Ankaa-3, which is aimed at achieving 99-plus percent median 2-Q fidelity by 2024. Thus, we have to plan these advancements well in advance of actual launches.

Unidentified Analyst, Analyst

Yes. Thank you so much for that clarity. And then, my follow-up question is related to CapEx activities. Very simply, is Ankaa-1 and Ankaa-2, is it compatible with the existing infrastructure that Aspen M-3 runs on? And if not, are there certain key pieces of infrastructure, whether it's some modular dilution or multiplexers for the control signal? If there are any new dependencies from an infrastructure standpoint, it would be great if you can provide more color on that. Thank you.

Dr. Subodh Kulkarni, CEO

Sure. So, certainly, transitioning from Aspen to Ankaa involved substantial design changes including the square lattice, tunable couplers, and it required several updates in equipment, not only within the fab but also outside it. Things like amplifiers, cabling, and fridges required significant upgrades to make the transition from Aspen to Ankaa possible. As we continue to evolve, we are assessing the issues that arise and adjusting our hardware and software accordingly. Transitioning will involve some capital expenditures as we optimize processes. Not all capital needed for Ankaa-2 and Ankaa-3 is already in place. A significant part is currently available, but further adjustments may be necessary based on trials over the next few months for both Ankaa-2 and Ankaa-3. Overall, the bulk of the infrastructure for Ankaa-2 and Ankaa-3 is already established; however, we will need to make modifications as we gain more insight and continue to optimize our systems.

Operator, Operator

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Dr. Kulkarni for any further remarks.

Dr. Subodh Kulkarni, CEO

Thank you for your interest and questions. We look forward to updating you as the year progresses. Thank you.

Operator, Operator

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.