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spk12: Greetings and welcome to INQ's incorporated third quarter 2022 earnings conference call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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.
spk00: Good afternoon, everyone, and welcome to INQ's third quarter 2022 earnings call. My name is Jordan Shapiro, and I am the Vice President of Financial Planning and Analysis and Head of Investor Relations here at INQ. I am pleased to be joined on today's call by Peter Chapman, INQ's President and Chief Executive Officer, Thomas Kramer, our Chief Financial Officer, Dr. Chris Monroe, our Co-Founder and Chief Scientist, and Dr. Jung-Sang Kim, our co-founder and chief technology officer. By now, everyone should have access to the company's third quarter 2022 earnings press release issued this afternoon, which is available on the investor relations section of our website at investors.inq.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. We are directed to our press release for reconciliation of such measures to GAAP. During the call, we will discuss our business outlook and make forward-looking statements. These comments are based on our predictions and expectations as of today. Actual events or results could differ materially due to a number of risks and uncertainties. including those mentioned in our most recent filings with the SEC. Now, I will turn it over to Peter Chapman, President and CEO of INQ.
spk03: Peter?
spk04: Thanks, Jordan.
spk07: This has been a fantastic quarter, and I'm excited to dive into the details with you. But to start, I'd like to contextualize where INQ stands today after a year of being public. To date, our system performance has consistently outpaced every other quantum computer available to the public. As you'll hear today, we're continuing to hit our technical milestones, and we believe that we are building the winning approach for quantum computing. We're translating our technology into meaningful business impact for our customers, and are currently on track to hit all of our commercial milestones for 2022. We also have a strong balance sheet, which we view as a competitive advantage in the quantum computing industry, especially in this market. While we are disciplined in managing our costs, having this cash allows INQ to accelerate while others may have to pull back. The market is noticing, customers are noticing, governments are noticing, and talent is noticing. The results are increasingly clear. INQ is the place to be for quantum computing. We believe we have a clear plan to continuing leading the quantum industry and to make quantum computing a ubiquitous technology. Our focus is to win the quantum space race by reducing the time to market for quantum computers that rival the best supercomputers. With that context, let's jump into the Q3 results. This quarter was another record quarter on so many levels. First, I'll start with a financial recap. We generated a strong $16.4 million of new bookings. That brings INQ to $21.2 million of bookings as of the end of the third quarter and puts us firmly on track to achieve our annual bookings number of between $23 and $27 million. As a result, we expect 50% year-over-year growth in annual bookings based on us hitting the midpoint of $25 million. We recognize $2.8 million in revenue for the quarter, which we believe supports our full-year 2022 revenue range of $10.2 to $10.7 million. This compares to $223,000 in the prior year period. More importantly, we believe our bookings will set us up for a very strong continued year-over-year revenue growth in 2023. I will turn the microphone over to Thomas in a few minutes to discuss the full financial story. But before doing so, we have lots to discuss on our technical progress for the quarter. I would refer you to our public roadmap published two years ago in December 2020 which covers algorithmic qubits, or AQ, the core technical benchmark for our systems. The roadmap shows us progressing from an AQ of 6 we'd had in 2020 to a goal of 25 AQ this year, growing to 64 AQ in 2025. I am very happy to announce we have achieved our goal for this year of 25 algorithmic qubits on our ARIA class machine. This announcement continues our success in hitting our public roadmap. 29, 35, and 64 AQ are next. A huge shout out to the technical team at INQ, who not only hit the milestone, but did so ahead of schedule. As you know, every time you add an algorithm at Qubit, you double the computational power, which is a useful computational space for running algorithms. We started the year with an AQ of six available on the cloud. The latest achievement is an increase in computational power of more than 500,000 times in a single year. We continue to believe that around 40 AQ, early quantum machine learning applications, will demonstrate clear quantum advantage over classical hardware. Based on our roadmap, we believe this critical milestone is a mere two to three years from now. which is just around the corner. It takes time to develop quantum applications. INQ is providing leading companies the hardware and applications expertise to invest in quantum now, lest they be left behind in the near future. Occasionally, people are confused when they hear other quantum technologies boasting much higher physical qubit counts than INQ's. We believe the algorithmic qubits benchmark resolves that leveling the playing field to show how useful a quantum computer is for real customers. So for the avoidance of doubt, let me be clear. INQ systems are exceeding every other universal gate set quantum computer we know of in terms of algorithmic qubits. We've covered our exciting news on the systems level, but now I'd like to switch focus down to the chip level. As those who follow us will know, INQ also develops a line of custom chips. Last year, we unveiled our first custom-made chip, the Evaporated Glass Trap, or EGT for short. The EGT utilizes a single layer to route wires across the chip and ushered in an unprecedented level of performance. Today, I'm happy to announce our next-generation custom chip called the Multi-Layer Glass Trap, or MGT. We believe this technology should enable higher qubit count per chip, going beyond the capabilities of our EGT to fit hundreds of qubits in a multi-core arrangement. Additionally, we have been developing photonic integrated circuits, or PICs for short, a technology that offers a robust and compact way to deliver laser light to trapped ion qubits. This quarter, we have received our first batch of PIC devices, We plan to integrate those into our future ion traps with the goal of increasing the integration levels of our ion trap chip. We believe this will help us scale up the number of qubits on a single chip while reducing system size, complexity, and per qubit cost. We expect that the MGT chip will allow us to fit a greater number of physical qubits into a single quantum processing unit. We believe the PIX will allow us to deliver light in a much more compact and robust way as we scale to multiple QPUs to deliver an even more powerful quantum computer. We look forward to providing future updates as we continue our scaling efforts for IAQ systems architecture. Back on the business side, I will end with some of our commercial milestones, another area where we had an incredible quarter. In September, we announced our $13.4 million contract with the U.S. Air Force Research Lab, or AFRL. This multi-part contract will supply AFRL with cloud access to compute on our cutting-edge trapped ion systems and with hardware components to further their research in quantum networking. I want to clarify that this sale does not constitute a full system sale such as we had discussed on our prior earnings calls. We are actively pursuing full system sales with a number of interested parties, and we continue to believe that a sale of that nature could occur in the next 12 to 18 months. INQ also kicked off a second exciting new project with the U.S. government in Q3, this one with the Department of Energy's Oak Ridge National Laboratory. Our new agreement focuses on researching benchmark circuits to be used for the discovery of new quantum chemistry applications. INQ will provide cloud access as well as applications development research support to ORNL. We aim to break new ground in a variety of interesting new computational chemistry and physics applications. Our commercial success this quarter was not limited to working with the government. It is my pleasure to announce that INQ is now a trusted quantum compute provider to Dell Technologies. INQ and Dell have formed this new partnership to offer a world-class hybrid computing solution combining the best of quantum computing, INQ's ARIA system, with the best of classical computing, Dell's PowerEdge servers. With our combined forces, customers will now have the ability to seamlessly transition workloads between classical and quantum hardware. Beyond these new contracts, we've also signed several new contracts and renewed our partnerships with several existing customers. As INQ's commercial momentum picks up steam, we're also focused on making our systems increasingly accessible and usable, delivering a full-stack approach to quantum computing. This past quarter, we added INQ's ARIA to Microsoft's Azure Quantum Cloud meaning that anyone with an Azure account can now access INQ's most powerful quantum computer. ARIA's new capacity of 25 algorithmic qubits will be available to customers in the near future. This was a phenomenal third quarter for INQ on all counts. We hit our AQ goal, innovated on our quantum chips, and put ourselves within striking range of our financial targets. we could not be more thrilled about the road ahead. We are proud of the INQ team for the incredible hard work day in and day out, and we remain committed to building the world's most powerful quantum computers to solve the world's most complex problems. I'd now like to turn this call over to Thomas for a run-through of our financials, as well as updates on our corporate initiatives.
spk11: Thomas? Thank you, Peter. Now let's walk through this quarter's financial results in more detail. As Peter mentioned, we had an excellent quarter, recognizing $2.8 million in revenue, which is above the midpoint of the outlook we previously provided. We also exited the quarter with $21.2 million in bookings year-to-date, which puts us on track to hit our previously stated expectation of between $23 to $27 million for the full year. Given that we are still at the beginning of our commercialization phase, I want to reiterate my comment from our last earnings calls that we expect bookings to continue to be lumpy for quite some time. Moving down to the income statement, for Q3 2022, our total operating costs and expenses for the third quarter were $27.7 million, up 156% from $10.8 million in the prior year period, but well within our plan for the year. To break this down further, our research and development costs for the third quarter were $13.3 million, up 115% from $6.2 million in the prior year period. Recall that we are investing heavily in R&D, and given anticipated demand, are building more systems than previously projected this year. Our sales and marketing costs in the third quarter were $2 million up 54% from $1.3 million in the prior year period. This increase was due to us growing our go-to-market function as we continue our investment into our commercial efforts. Our general and administrative costs in the third quarter were $10.1 million up 304% from $2.5 million in the prior year period. This increase is largely attributable to a growth in stock-based compensation expense, which was $4.5 million for the third quarter, compared to $837,000 in the prior year period. All of this resulted in a net loss of $24 million in the third quarter, compared to a net loss of $14.8 million in the prior year period. It is important to note that these results include a non-cash loss of $1.2 million for the third quarter, related to the fair value of our warrant liabilities. We saw an adjusted EBITDA loss in the third quarter of $13.4 million compared to a $7.9 million loss in the prior year period. Note that we projected an adjusted EBITDA loss for the year of $55 million and have announced a loss of $35.3 million year-to-date, so we expect to remain well within our plan for the year. Turning now to our balance sheet. Cash, cash equivalents and investment as of September 30th, 2022 were $555.8 million. We continue to believe this gives us sufficient cash reserves to get to profitability without needing to raise additional funds given our current roadmap. Now turning to our full year 2022 outlook. We are pleased to be maintaining both our revenue and bookings outlook for the full year 2022. As a reminder, We anticipate revenue of between $10.2 and $10.7 million, and we expect bookings of between $23 and $27 million. For context, year to date, we have booked $21.2 million. Overall, we are incredibly excited about our commercial and financial progress year to date, as well as the state of the quantum computing industry as a whole. The market for quantum is currently growing rapidly, despite global market headwinds that much of the world of technology industry is currently experiencing. In these difficult market conditions, many companies have retreated from their earlier financial projections. In contrast, INQ has stood by our earlier estimates, and we continue to exceed our projections. Meanwhile, interest in quantum continues to be promising. Having a quantum strategy is becoming an existential imperative for corporations and governments. We believe investments in quantum is driven by factors that supersede spending limits in the down market, such as what we are seeing with government customers. We already achieved substantial support from the U.S. government this year, but it's worth to note that the DoD alone is expected to increase their investment in quantum information science from $661 million this year to $710 million requested for 2023. IMQ is taking actions like making our data centers government compliant so that we can try to capture a portion of that opportunity. We at IMQ could not be more pleased with the continued growth of the industry as a whole, and we believe we are well positioned to continue as a market leader in this space. And we are happy to report another quarter of meeting and exceeding our financial and commercial targets. Back to you, Peter.
spk07: Thank you, Thomas. In summary, once again, INQ is meeting and exceeding all the expectations we have shared with the market. We finished the quarter with $7.3 million in revenue and $21.2 million in bookings year-to-date, putting us on track to hit our financial goals for the full year. Our cash, cash equivalents, and investments at the end of Q3 totaled $555.8 million, which we continue to believe will provide us with sufficient runway to get us to profitability without the need to raise additional funds. We achieved our 2022 core technical milestone of 25 algorithmic qubits ahead of schedule. We signed groundbreaking agreements with new customers in both the public and private sector. And despite the turbulent economic conditions currently facing the technology industry, we continue to solidify ourselves as the industry leader, capable of consistently executing on our ambitious vision. To those who have been tracking INQ for years, we appreciate your support and hope you are pleased with how we have furthered our goals since going public just one year ago. To those of you who are new to the INQ story or have been waiting to dig in, we invite you to join us as we continue to take INQ and the quantum industry to new heights. And with that, I'd like to have the operator open the line for questions.
spk12: Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
spk04: One moment, please, while we pause. Our first question comes from Quinn Bolton with Needham and Company. Please proceed with your question.
spk09: The multi-layer glass trap, what kind of increase in qubit count do you think you'll be able to achieve, and how important is that to getting to the 64 algorithmic qubit target by 2025?
spk04: Thank you. Hello? Mr. Jungsing, would you like to take that?
spk08: Jungsing on?
spk07: No, go ahead, Chris. Take it.
spk08: Okay, yeah. Hi, Chris Monroe, Chief Scientist. So our glass traps will allow us to have multiple zones on a single chip. We call that a multi-core architecture, and that will give us the ability to control many more qubits. And it's basically as simple as that. We know how to add qubits, and to get to 64 algorithmic qubits, to get to those numbers, We need higher fidelity, component fidelities on the qubits as well. We know how to make the qubits. It's more about how we control them all. And so the glass traps give us much more flexibility on scaling the number of qubits.
spk09: And you mentioned the PIC technology that I think probably, you know, involves the lasers used to implement the gates. Is that also, you know, how important is that new PIC technology to get in that 64-alpha qubits?
spk08: Pick technology is not immediately needed in the short term, but it's more of a research effort at the company right now. We anticipate needing this for further gains down the line, but not immediately.
spk04: Got it. Okay. Thank you.
spk12: Our next question comes from David William with Benchmark. Please proceed with your question.
spk05: Hey, good afternoon and congrats on all the progress and hitting all the milestones. It's definitely refreshing to see.
spk12: Thank you.
spk05: I guess, Peter, maybe first to you and others can jump in, but just kind of thinking about maybe the balance sheet strength and the bookings that you're receiving, everything's moving in the right direction. But I guess as I think about the landscape, and although your technology is a bit different, I think, than most others, I would assume there may be some IP assets or infrastructure or other components out there that could be beneficial to accelerate your progress. And I'm just kind of curious if you're seeing anything in terms of IP or any other maybe ways to consolidate and accelerate your path forward here, if that's something that you would be interested in doing.
spk07: It's a great question. And in fact, we are. There's kind of a number of different aspects here. You know, first, it's a difficult environment for sometimes for little startups right now. So that provides opportunities for, you know, buying, get some bargains, so to speak. And then the other thing is vertical integration in terms of the hardware itself. And we've started some of that as well. So you expect us in the next year to hear more about that.
spk05: Great. Thanks so much for the color there. And then maybe, and you talked about the obvious increase from six to the 25 on the qubit or algorithmic qubits. Can you help me understand exactly what that means? It's hard to, I guess, visualize a 500,000 times increase in power. Can you help me understand, are there any metrics you can put around that that may be a little easier to wrap my head around?
spk07: Maybe Zhengxing or Chris, I will kind of, you know, maybe you could talk about how to visualize that one.
spk01: Yes, I can help with that. This is Jung Sang. So the way we consider the power of quantum computing is in terms of what kind of computational space that is accessed during the computation, meaning how much, if you want to model this with classical memory, how much classical memory will be needed to actually finish that computation, And as our quantum computers get more and more powerful, we can actually access exponentially large computational space. And we measure that by the ability to run some benchmark algorithms, and that capability is measured in algorithmic qubits. So going from algorithmic qubits of six means you can actually run algorithms that fit on six qubits with some level of complexity, and algorithmic qubit of 25 It means you're actually now using 25 qubits and running quantum computation with much deeper complexity. And the amount of, if you were to simulate this with a classical computer, the amount of memory space you would need will have to be about half a million times more to be able to do that. And, of course, the quantum computers do that with the power of quantum. Okay, very good.
spk03: That's very, very helpful. Thanks so much for that. And, Dylan, I'm back in the queue, but thanks for the help.
spk12: As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. One moment, please, while we poll for questions. Our next question comes from Richard Shannon with Craig Hallam. Please proceed with your question.
spk10: Well, hi, everyone. Thanks for taking my questions as well. Maybe a quick one on your Air Force Research Labs contract announced at the end of September. Any way you can describe over what time this might be recognized and is this a ratable kind of recognition, or are there milestones specifically that could make that revenue recognition somewhat lumpy?
spk04: Hi, Richard. Do you want to take this?
spk11: Absolutely. I can take that. So this is a multiple element contract, and there are two distinct parts. One is an access agreement, which will be ratably recognized over three years. And the other is where we're helping AFRL build a network node, which will be very important for this entire industry going forward. And that is milestone based. We will come back with projections for how this is recognized next year on the Q4 call.
spk10: Okay, that's helpful. And maybe a follow-on question on this topic here. If I caught it correctly, I think another quantum company also announced a contract with the Air Force Research Labs, I think a few weeks after yours. Can you differentiate what you're doing with them versus what the other company is, how that interoperates or is distinct from what they're doing, please?
spk11: So these are very separate agreements, and we have not been involved with this other company and their agreement.
spk10: Okay. Okay, that is helpful. I did want to follow up on a previous question on the picks here, kind of two-fold. My first one on my own here is, what kind of a pick is this? Is this a Silicon Botanics pick, or could you describe it in any more detail? And then in response to the last question, you said it's something down the road here. Can you give us a sense of where that intersection point within your roadmap, that will be required?
spk01: Yes, this is Jung Sang Kim. The answer, yes, this PIC will be based on, in general, scope of silicon photonics technology. And I think at this point, we are not in a position to guide exactly when this will be intersecting with our future products.
spk10: Okay, that's fair enough. My last question, I'll jump out of line since we both have both Jiangxing and Chris, I'll ask. Just kind of the progress over the year that you've been public here. in terms of qubit error gates using your trapped ion technology here. I think one of your thesis founding the company here in the public markets is error rates are better. Maybe if you can help kind of quote and summarize the research that you've seen over the last year and where error rates play out versus other technologies and even other companies' versions of their technologies, ion trap and otherwise, that'd be great. That's all for me. Thanks.
spk08: Maybe I'll start real quick. Chris Monroe here. Again, we know with the ion trap technology that there is a type of error we expect at some level, and we're not at that level yet. So what that means is all of our errors are not intrinsic to the quantum technology, the qubit itself. They are dominated by the controllers. And for us, that means optics. It means electronics and so forth. And this is all the time why we've had such confidence in our ability to execute on the roadmap. So over the last year, we've certainly learned that we can exploit the types of errors that we know are there that are dictated by control errors. They're not inherent errors. They're not so-called decoherence. And that means that we can expand the scope of error correction, and there's many different types of ways to mitigate that kind of error. And I would jump in. Why don't you step in if you want to add to that?
spk01: Sure. So in the research arena, I think we, including my research group at Duke University and my colleagues, have really kind of gained a much deeper understanding of what the dominant control error sources are. And we've also been inventing kind of control techniques to actually overcome those in many different ways.
spk04: I think we lost our speaker.
spk08: Yeah, I think Jung Seng stepped off. But I'm well aware of Jung Seng's research in this area. And they've been able to isolate errors to such an extent that we know how to, in a sense, by algorithmic design, make the errors cancel themselves out. And that's one method of what we call error mitigation. And we know error correction is something that we will be deploying. as we scale our AQ numbers up. But error mitigation is, I think it's just another card we can play in taking care of those errors. And to get to your fundamental question, never did we talk about the fundamental errors of our qubits. And because they're atoms, because they're atomic clocks, we're not yet at the level where we're limited by those. So again, we're forging forward and we expect the next few years to sort of continue along that vein.
spk04: All right. Great. Thanks, guys.
spk12: Our next question is from Kevin Garrigan with West Park Capital. Please proceed with your question.
spk06: Yeah. Hey, guys. Let me echo my congrats on the progress, and thanks for taking my question. I apologize for any background noise. I'm in the airport right now. So just one quick question for me. Regarding your partnership with Dell, can you give us a sense of, you know, how the conversations with Dell went and how you were able to capture that partnership? I mean, do they kind of believe IonTrap is the future for quantum computing architecture or is, you know, your ARIA system performance what they were looking for? Any color there would be great. Thank you.
spk07: Yep, I can help with that. I think that the Dell HPC group in particular, who we've been working with, has seen a lot of interest in quantum from people who own HPC systems. This is, you know, what is typically called hybrid quantum, you know, supercomputing. And obviously Dell is a leading player in that marketplace. So they're seeing kind of customer demand and they reached out to us to inquire if we would be interested in working with them to work on a solution. So for the last roughly year or so, we've been working on the software back and forth between the two of us to get the software ready to go so that the hardware would be working together. And at Super Compute 22 is kind of the culmination of that, which is going this week. And you'll see us in the Dell booth talking about hybrid compute. Also, hybrid compute, this marriage between supercomputers and quantum computers, is a large focus of the DOE in terms of what to do next after the exoscale project. So it's also an important area for government and obviously for industry going forward.
spk12: Our next question is from Trevor Jansky with Needham. Please proceed with your question.
spk02: Yeah. Hey, guys. This is Trevor on for Quinn Bolton. He had to jump. But real quick, on the second ARIA system, can you give us a timeline on when that is going to be finished? And will this likely be the last ARIA system being built?
spk04: Um, yeah, I can, I can take that.
spk07: The, uh, the next ARIA system will be, um, ready, you know, roughly towards the end of your first quarter, um, is when it'll start to come online. And then, um, this will probably be the last ARIA system that we've built. Um, you know, after this, it will be Forte and other, um, you know, technologies rather We built the second one for both redundancy and also to be able to hit kind of customer demand.
spk02: Okay. And do you expect the glass trap to help Fidelity's at all? Or is that more for just the scaling?
spk04: Chris or Zhengxing, would you like to take that?
spk08: Yeah, I can take that. Chris here. No, we don't. In fact, the trap, itself that is the electrodes that can find the atoms they have almost no impact on the performance of the quantum system and again this harks back to the advantage of having suspended individual atoms the electrodes are miles away atomically speaking you know they're they're they're they're uh you know almost a you know a fraction of a millimeter away and atoms are very small things so having different electrode structures really don't affect the qubit directly. It's all about ease of control, being able to – I think of it like a magnetically levitated train. The train tracks are not directly influencing the performance of the train, and that's really what we have here.
spk02: Awesome. And then just one quick one. Did Harmony's AQ increase as well like it did last quarter?
spk04: Not that, no.
spk07: We brought it up to an EQ of six, but that's where it stays today.
spk04: Okay. It would probably need hardware modifications to get better. Okay. Sounds good. Thank you.
spk12: We've reached the end of the question and answer session. I'd now like to turn it over to Peter Chapman for closing remarks.
spk07: Well, just thanks, everyone, for your time today. It's obviously been a a fantastic quarter. We'll look to close out the year. We believe, obviously, that both on our projections for recognized revenue and bookings will be successful. And we look forward to talking with you for the Q4 call in the spring.
spk12: Thanks, everyone. Appreciate the time. This concludes today's conference. You may disconnect your lines at this time. and we thank you for your participation.
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