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spk07: Greetings. Welcome to INQ's second quarter 2023 earnings call. At this time, all participants are in 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 from your telephone keypad. Please note this conference is being recorded. At this time, I'll turn the conference over to Jordan Shapiro, Vice President, FP&A, and Head of Investor Relations. Jordan, you may now begin.
spk00: Good afternoon, everyone, and welcome to IonQ's second quarter 2023 earnings call. My name is Jordan Shapiro, and I'm the vice president of financial planning and analysis and head of investor relations here at IonQ. I am pleased to be joined on today's call by Peter Chapman, our president and chief executive officer, Thomas Kramer, our chief financial officer, and Dr. Jung-Sang Kim, our co-founder and chief technology officer. By now, everyone should have access to the company's second quarter 2023 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 be considered in isolation, or as a substitute for the financial information presented in accordance with GAAP. You are directed to our press release for reconciliation of adjusted EBITDA to its closest comparable GAAP measure. During the call, we will discuss our business outlook and make forward-looking statements. These comments are based on management's 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. Peter?
spk06: Good afternoon, everyone, and thank you for joining our second quarter 2023 earnings call. It's been another outstanding quarter here at INQ as we continue to push ahead and further our lead over our competitors. We finished the quarter with 5.5 million in revenue, which was well above the high end of our guidance range of 4.1 to 4.5 million. At the same time, we built upon our momentum in the private sector by closing our first major deal designed to put not just one, but two generations of future INQ systems in Europe. This commercial milestone brings our year-to-date bookings to 32 million, and puts us in striking range to achieve our previously stated goal of 100 million in cumulative bookings during the first three years of our commercialization efforts. As we'll discuss, this quarter's success gives us the confidence to once again raise the midpoint of our bookings guidance for the full year from our previous outlook of 50 million up to 52.5 million. Our momentum here at INQ is accelerating with our groundbreaking technical progress driving our commercial wins. Last quarter, we shared that our team had already accomplished our technical goal for 2023 over seven months ahead of schedule by achieving a record-breaking 29 algorithmic qubits, or AQ, on our INQ Forte system. We have added approximately one AQ per month on average since going public in September 2021. With AQ29 achieved, we are now focused on reaching AQ35 and AQ64. Building on that technology success, we have now closed IMQ's largest commercial deal to date. In June, we announced that we will be partnering with Quantum Basel, a Switzerland-based industry group, to bring two of our future systems to Europe. These systems will follow our technical roadmap, with the first one expected to reach AQ35, and the second system expected to reach up to AQ64. We plan to use these systems to serve European industry, government entities, and research institutes with local access to INQ's powerful quantum systems. The beauty of this partnership is that as our first planned on-premise hardware project in Europe, we will retain some capacity on each system, allowing us to serve other prospective customers in the region from our new European data center. Our Quantum Basel partnership is significant to INQ in a few ways. First, we noted in prior earnings calls that a large sale could create a significant boost in INQ's near-term bookings. This is such a sale. Additionally, this partnership represents our first deal involving future INQ systems and is a strong third-party validation of INQ's ambitious technical roadmap. Looking forward, at AQ64, INQ quantum computers will be able to explore a useful computational space of 2 to the power of 64 for running quantum algorithms. In a fraction of a second, this system will be able to explore a computational space of 18 quantillion. As a reminder, a quantillion is one with 18 zeros after it. To put that in perspective, the Frontier supercomputer at Oak Ridge National Laboratory can calculate 1.1 quantillion floating point operations per second. At AQ64, classical computers will no longer be able to fully simulate an I&Q system. And as a result, we believe these systems will enable customers to tackle certain problems that even the best classical supercomputers can't solve. We currently expect to deliver AQ64 by the end of 2025. We are committed to achieving quantum advantage and believe we can reach this at AQ64. Though the technical challenges on the road to this goal are significant, our team is pursuing more than one path to arrive at this historic milestone, which enhances our confidence in doing so. While these milestones are just around the corner, we are seeing belief in our roadmap driving tangible commercial adoption for INQ today. We believe INQ is the only public company today that is executing against a roadmap that can deliver these technical results and sell systems in this time period. We are seeing increased demand for INQ systems, and we now hope to sell a number of systems over the next 18 months in various configurations based on customer needs. Our guidance for this year is a probability weighted average of our pipeline, and it already accounts for the 2023 portion of these potential sales. Thomas will provide more details on our guidance later in the call. At Quantum World Congress on September 27th, we will share a more detailed technical roadmap and upcoming product details. We will live stream this presentation, and I encourage anyone interested in learning more about our roadmap or accessing our upcoming systems to use the link in our press release to sign up for the broadcast. Additionally, we are excited to be hosting an Analyst Day from our College Park office next month with presentations that will also be live streamed via our website. Stay tuned to our investor website for more details on registering for the Analyst Day. To prepare customers to use the upcoming systems on our roadmap, we're working with forward-looking groups to help get their workforces and economies ready for Quantum. As an example, we recently signed a memorandum of understanding with South Korea's Ministry of Science, or ICT, to become a core provider of quantum education for Korean students, researchers, and industry professionals. We also had the honor to meet with South Korea's president to discuss how INQ quantum computing might be able to accelerate the nation's economy. We could not be more thrilled to partner with the South Korean government on this initiative. We believe customers across the globe are partnering with INQ, seeking access to our powerful new systems in order to prepare for the potential of our near-term AQ64 systems. In June, we took another step towards broad accessibility of our platform when we announced that INQ Forte and the full power of its AQ29 is available to all our customers worldwide via direct access. Previously, this machine was only available to select partners, but now INQ Forte can be accessed by any of our direct customers. Last week, we published a manuscript with our partners at Oak Ridge National Laboratory on modeling the benzene molecule. Benzene is a commonly used industrial solvent, and its molecular structure is a widely used benchmark to evaluate quantum chemistry algorithms. We believe our work with Oak Ridge represents the most accurate benzene model run on a quantum computer to date. Clearly, we have had another strong quarter as we continue to expand to additional institutions around the world. Last quarter, we delivered on our promise of AQ29 seven months ahead of schedule. And now we have translated that progress to phenomenal bookings growth. We believe INQ has a clear path to scale with buy-in from institutions and corporations around the world. We could not be more optimistic about the future of INQ and quantum computing as a whole. Now I'd like to turn over the call to Thomas for a more detailed review of the numbers. Thomas?
spk04: Thank you, Peter. Before we dive into our financial results, we are pleased to announce that in addition to our groundbreaking partnership with Quantum Basel, we will be opening up our first European corporate office also in Switzerland. This location will allow us to service future customers in the European region and represents a major milestone in the international expansion of INQ operations. Now let's walk through this quarter's financial results in more detail. As Peter mentioned, we had an excellent quarter, recognizing $5.5 million in revenue, which was above the high end of the outlook we previously provided. This reflects us being able to complete work ahead of schedule for some of our milestone dependent revenue. We exited the quarter with $32.2 million in bookings year to date. representing excellent progress towards our newly revised expectations of between $49 million to $56 million for the full year. While we already increased our bookings range in June, our pipeline of new business has come into clearer focus since that time. Thus, we consider it prudent to raise the range again to accurately reflect what we believe is the most likely weighted average outcome for our bookings in 2023. Given that we are still at the beginning of a commercialization phase, I want to reiterate my comment from previous earnings calls that we expect bookings to continue to be lumpy for quite some time. Moving down the income statement, for Q2 2023, our total operating costs and expenses for the second quarter were $38.6 million, up 79% from $21.5 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 second quarter were $19.9 million, up 106% from $9.7 million in the prior year period, Recall that we are making significant investments in R&D and given anticipated demand are especially focused on investing in our manufacturing capabilities to build more systems than previously anticipated in the near term. Our sales and marketing costs in the second quarter were $3.6 million, up 68% from $2.1 million in the prior year period. This increase was due to us growing our go-to-market functions and bringing on additional sales and support personnel as we continue our investment into our commercial efforts. Our general and administrative costs in the second quarter were $10.9 million, up 45% from $7.6 million in the prior year period. All of this has resulted in a net loss of $43.7 million in the second quarter compared to $1.7 million in the prior year period. It's important to note that these results include a non-cash loss of $15.5 million for the second quarter related to the change in fair value of our warrant liabilities. As a reminder, these warrants are sitting on our balance sheet as a result of our business combination in 2021. When our stock price increases, the change in fair value contributes to a steeper gap net loss. Conversely, when our stock price decreases, we see a lower gap net loss. And importantly, we find that these non-cash gains and losses are less helpful for investors looking to understand IMQ's operational performance, which is why at this stage in our growth, we believe adjusted EBITDA is a more helpful metric. We saw an adjusted EBITDA loss for the second quarter of $19.4 million compared to an $11.6 million loss in the prior year period. Note that we projected an adjusted EBITDA loss for the year of $80.5 million. So, accounting for this quarter's loss, we believe we are still on track to hit our prior 2023 projections. Turning now to our balance sheet. Cash, cash equivalents and investments as of June 30th, 2023 were $509.2 million. We continue to believe that this cash position, which we understand to be the strongest of any public quantum pure player, positions us well to execute on our current roadmap with the current nascent industry structure. Now turning to our second quarter and full year 2023 outlook. We are pleased to increase our revenue outlook for the full year 2023 to a range of $18.9 million to $19.3 million. This represents our expectation that we will be able to accelerate delivery against milestones on some of our customer contracts throughout the year. We are also introducing third quarter revenue guidance of between $4.8 million and $5.2 million. As we mentioned, we are increasing our bookings outlook for the full year 2023 to a range of $49 million to $56 million. And with that, I would like to turn the call back over to Peter.
spk06: Thank you, Thomas. And thank you to everyone who has joined us today. And of course, to the entire INQ team around the globe who continue to push forward on our mission of a quantum future. Now I'd like to hand the call over to our operator for Q&A. I'd just like to say that, and I should have said this earlier, but I wanted to say thank you to Thomas and the rest of the management team for all their hard work. The company is executing very well. I very much look forward to the years ahead and working with this team to continue and accelerate our progress. I'll now turn over the call for Q&A.
spk07: 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. The 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. One moment, please, while we poll for questions. Thank you. Thank you, and our first question is from the line of David Williams with Benchmark Company. Please receive your questions.
spk03: Hey, good afternoon, and congrats to Peter and Thomas and the team. You guys are doing a great job, but congrats on the progress.
spk09: Thank you.
spk03: I guess maybe first, Thomas, when we think about you mentioned multiple potential machines in the next 18 months, how should we think about that in terms of a maybe a more realistic way to think about how many machines you could potentially sell and what kind of revenue we should think about over the next 18 months from that.
spk04: So we gave our guidance for this year, and we will come back to our guidance for next year on the Q4 call. But recognize that we are accelerating our sales, and we're doing very well. We don't know exactly how many machines we will sell at any given point in time. What we do know is that we have a lot of inbound requests for this, and we actually, we have seen this much faster than what we thought. As you recall, when we went public, we talked mostly about access via the cloud, and we said that it would become realistic one day to be selling machines and putting them on premise. We're just seeing that happening a lot faster than what we thought.
spk03: Okay. Certainly appreciate the help there. And then can you maybe quantify the magnitude of the interest you've had, not just on the system purchases, but maybe just since you released AQ29 and the progress that you've had I guess over the last six months, how have you seen the inbound interest improve and is there a way to quantify that in terms of what level of interest you're seeing?
spk06: I guess what I would answer here is as we get closer to AQ64, it's clear that there's a lot of interest there. As we said, we're well beyond simulation at that point. And so customers are starting to recognize that that's going to be, you know, what I would say is kind of Quantum's chat GPT moment, if you will, if you know what that means. You know, kind of people are going to wake up to Quantum. So we're seeing that, and it's now, you know, we're starting to see that excitement come through in terms of inbound.
spk03: And just one last one, if I can. When you're speaking with customers, if there is hesitation, what do you think causes customers to not move forward? Or what do you hear most often as reasoning? It seems like everyone would want to move this direction, but do you ever hear, I guess, what are the negatives or what makes somebody not want to move forward? Is it expense? Is it cost? Or just lift?
spk06: What I would say is it's probably like Sam Altman over at OpenAI two years before ChatGPT. There was a lot of people at that point who said that AI was never going to happen. And so, sure enough, they were wrong. So, you know, we still have disbelievers in our industry as a large. But, you know, we continue to execute against our tech roadmap, just as what we said we were doing. And so we will continue doing that. We're very confident in it.
spk09: Thank you for the time, and, again, congrats. Thank you.
spk07: Our next question comes from the line of Quinn Bolton with Needham. Please proceed with your questions.
spk05: Hey, guys. I'll echo the congratulations on another strong quarter, both technically and on the sales front. I guess, Thomas, now that you've had the quantum bezel transaction sort of behind you for a month or two, can you walk us through sort of how the accounting works? Is it sort of rev rec on shipment? Is it percentage of completion because it will take a little bit of customization and it's not all delivered at one time. And then a related question is, as you sell these systems, will there be sort of like an annual service and maintenance contract that could actually represent a recurring revenue sale alongside of the hardware?
spk04: absolutely so while we actually haven't earned out the accounting quite yet because this will extend into several periods into the future we have a pretty good idea of how it's going to look for the remainder of this year and we are actually starting up with an access contract so that they can familiarize themselves with the power of our flavor or quantum computing and before they actually have an on-prem machine. But this one will probably take a slightly different flavor of percentage of complete because of us also having the opportunity to resell some of this capacity ourselves and using this as a go-to-market entry point for Europe with localized service. But we will get back to that probably already on the next call when we can get into more details of how the recognition will work. But there will be ongoing service already today, but that will be remote. When we install the systems on-premise in Europe, we will also have ongoing maintenance and actually people on the ground there.
spk05: Perfect. And for Peter, you know, you guys hit AQ 29 seven months in advance. You've been sort of advancing AQs about one per month. So hitting 35 seems like you're well on track. And, you know, we've got still multiple months left in this year. So maybe even surprise us on timing of AQ 35. But I guess as I look forward to AQ 64, that seems like it's you know, where you might start to achieve quantum advantage on certain applications. It's obviously an acceleration in the AQs per month. And so how are you feeling about hitting AQ64 in 25? What are the biggest milestones? Is it the laser system? Is it the type of ion you're using in the ion traps? You know, what are kind of the biggest challenges to hitting AQ64 in a couple years' time? Thank you.
spk06: Well, first is we do feel quite confident about hitting it in 25, and we have kind of here customer validation by Quantum Basel buying one of those machines, which is great. There is a technical challenge. I don't want to make it sound like it's easy, but it is out back. They kind of have taken all the various technical challenges and have multiple – approaches to be able to de-risk the roadmap. So for Outback, there's kind of an appropriate risk analysis that's going on, and we're investing in multiple different ways to do it to be able to make sure that we hit that milestone. And it is a whole range of things, everything from quality of lasers to optics. It runs a gamut. But we are very confident in hitting and just like we've done so far, hitting our roadmap into the future.
spk09: Great. Thank you.
spk07: Our next question is from the line of Trevor Dynoski with Goldman Sachs. Please proceed with your questions.
spk01: Yeah. Hi, all. This is Trevor. Thanks for letting me ask some questions here, and congrats on all the progress. So just to start with a clarification, with bookings being $28 million in the quarter and the Quantum Basel system sales equaling $28 million, does this mean there were no other bookings in the quarter, or how should we think about this?
spk04: It does not mean that. The reason is due to rounding and also foreign currency conversion. But it does mean, of course, that the majority of the bookings came from Quantum Basel.
spk01: Okay. Yeah, that makes sense. And another one on the systems. So with your quantum basal agreement for two systems being $28 million, I guess we can infer about $14 million for each system, give or take. But you're also managing 50% of these systems. Does that mean that the ASP of a single system could be $28 million if you're not managing all of it? or any of it at all, and what could the gross margin be for a single system sale where you are not co-managing the system?
spk04: That's an excellent question. I think the, let's go backwards, the gross margin shouldn't be all that different because when you sell 100%, we aim to use the same pricing model for the second 50%. And when it comes to the actual pricing, there's a lot of different elements that goes into this. I mentioned already that Quantum Basel is already up and running on a remote access to our current service here in the US. And we will also have service and maintenance on the ground. And we prefer not to break out the specific elements and their pricing But you're in the right ballpark. These are not cheap machines, which I think we alluded to in an earlier call when we said that we do large deals and we look forward to doing more.
spk06: But for Trevor, for you, we're willing to set you up with a machine at a reasonable price right now. You can drive it off the lot as we're speaking. I'll just add a little bit to that is we have customers in the pipeline here who have different needs. And so there's different pricing. For instance, there's companies now which are working on quantum networking, and they have different needs, and those will be priced differently. They're not looking for AQ64 systems. They're looking for quantum memory to build quantum networks and the future quantum Internet. So each customer is a little different, and the pricing is a little different based on what the customer wants.
spk01: Okay. And one more, if I may. So are these customers that are coming to you that are interested in system sales, are they mostly considering the 35 and 64 AQ like Quantum Basel, or is there also interest in your ARIA 29 as well?
spk06: Well, in terms of system sales, you know, usually these are, as you know, kind of big-ticket items that you have to run through a budget year and also a manufacturing cycle so people are usually looking forward you know by at least a year and so they're looking at the roadmap so you know I what I say is people very much are interested in in a q64 they know they can't get that delivered next year so then they're thinking well can I get a access to an aq 35 system so I can get started and you know, start programming and get my application started. But, you know, people are really, I think we see lots of excitement for AQ64 systems.
spk09: Awesome. Thanks for the color, guys. Thank you.
spk07: As a reminder, if you'd like to ask a question today, you may press star one from your telephone keypad. The next question is from the line of Kevin Garrigan with West Park Capital. Please receive your questions.
spk02: Yeah, hey, Peter and Tom, let me echo my congrats on the strong results. Going off of David and Trevor's questions about customer interest, since you launched Forte for commercial use for everyone, can you give us a sense on how many new commercial customers you've signed up since and any to point out?
spk04: Happy you asked that question. As you know, we already have commercial customers on that system since late last year, and we continue to work with several customers on it. What we also want to make sure is for everybody else to know that we're open for business, and we welcome all incoming calls right after this earnings call.
spk02: Okay, got it. Yep, that makes sense. Okay, and then just as a quick follow-up, you know, with the announcement of the partnership with Quantum Basel and you guys providing two systems. Can you give us an update on how things are progressing with your manufacturing facility in Seattle?
spk06: Yeah, very much so. So as you know, probably when you're building a factory, the very first thing you have to do is get building permits. And so we were lucky enough to get those not too long ago. And so construction is hot and heavy as we speak in Bothell, Washington. And we expect to see this fall the first phase of the construction come to completion. And we've already got, I think, roughly 40 people in Seattle. And so they will start to be reporting to the Bothell office starting this fall. Oh, and it is, just to let you know, it's It's, you know, it's the timeline. We're hitting our timelines, and it's also on budget as well. Little did anyone know, but we're also a construction company as well. So we're visually managing, you know, building a manufacturing facility as well.
spk04: Yeah, if I might add, this is probably my 20th office build-up, and I was just there a couple of weeks ago, and it's beautiful. Like, it's, Very, very well done. It's orderly. Like when I started building offices, there was not a hard hat in sight. And now in order to actually even have the walkthrough put on a vest, you have a nice hard hat with the IMQ logo on. It's being done very, very professionally. And we look forward to the day when we can cut the ribbon.
spk08: Yeah, we're all looking forward to that as well. Okay, great. I appreciate the color. Thanks, guys.
spk09: Likewise.
spk07: Thank you. At this time, we've reached the end of the question and answer session, and I'll turn the call over to Peter Chapman for closing remarks.
spk06: Thank you, everyone, for joining us this afternoon. We look forward to the exciting times ahead for INQ and to seeing you at our Analyst Day and Quantum World Congress. Thanks, everyone. Thank you. Thank you.
spk07: This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.
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