IonQ, Inc. (NYSE:IONQ) Q3 2022 Earnings Conference Call November 14, 2022 4:30 PM ET
Company Participants
Jordan Shapiro – IR
Peter Chapman – President, CEO & Director
Thomas Kramer – CFO
Jungsang Kim – Co-Founder & Chief Technology Officer
Christopher Monroe – Chief Scientist
Conference Call Participants
Quinn Bolton – Needham & Company
David Williams – The Benchmark Company
Richard Shannon – Craig-Hallum
Kevin Garrigan – WestPark Capital
Operator
Greetings, and welcome to IonQ’s Inc. Third Quarter 2022 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to your host, Jordan Shapiro. Thank you. You may begin.
Jordan Shapiro
Good afternoon, everyone, and welcome to IonQ’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 IonQ. I am pleased to be joined on today’s call by Peter Chapman, IonQ’s President and Chief Executive Officer; Thomas Kramer, our Chief Financial Officer; Dr. Chris Monroe, our Co-Founder and Chief Scientist; and Dr. Jungsang 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.ionq.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. You are directed to our press release for a 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 IonQ. Peter?
Peter Chapman
Thanks, Jordan. 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 IonQ 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 are 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 IonQ 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. IonQ 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 IonQ 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 million 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 recognized $2.8 million in revenue for the quarter, which we believe supports our full-year 2022 revenue range of $10.2 million 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 road map published 2 years ago in December 2020, which covers algorithmic qubits, or AQ, the core technical benchmark for our systems.
The road map shows us progressing from an AQ of 6 it had in 2020, with 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 RIA class machine. This announcement continues our success in hitting our public road map. 29, 35 and 64 AQ are next, a huge shout-out to the technical team at IonQ who not only hit the milestone, but did so ahead of schedule. As you know, every time you add an algorithmic qubit, you double the computational power, which is a useful computational space for running algorithms.
We started the year with an AQ of 6 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 road map, we believe this critical milestone is a mere 2 to 3 years from now, which is just around the corner. It takes time to develop Quantum applications. IonQ is providing leading companies the hardware and applications expertise to invest in Quantum now, less they’d be left behind in the near future. Occasionally, people are confused when they hear other quantum technologies posting much higher physical cubic counts than IonQ’s.
We believe the algorithmic qubit 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. IonQ systems are exceeding every other universal gate at 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, IonQ 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 Multilayer Glass Trap or MGT. We believe this technology should enable higher cubic count per chip going beyond the capabilities of our EGT to fit hundreds of cubics in a multi-core arrangement. Additionally, we have been developing photonic integrated circuits or PIC 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 PIK 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 cubic 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 PICs 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 IonQ 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 ARL 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. IonQ 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. IonQ 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 IonQ is now a trusted quantum compute provider to Dell Technologies. IonQ and Dell have formed this new partnership to offer a world-class hybrid computing solution, combining the best of quantum computing, IonQ’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 IonQ’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 IonQ’s to Microsoft Azure Quantum cloud, meaning that anyone with an Azure account can now access IonQ’s most powerful quantum computer. new capacity of 25 algorithmic qubits will be available to customers in the near future. This was a phenomenal third quarter for IonQ 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 IonQ 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. Thomas?
Thomas Kramer
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 million to $27 million for the full year. Given that we are still at the beginning of our commercialization phase, I want to reiterate my comments from our last earnings call 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 noncash loss of $1.2 million for the third quarter related to the fair value of our warrant liabilities. We saw an adjusted EBITDA loss for 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 investments 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 road map. 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 million and $10.7 million, and we expect bookings of between $23 million 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 order technology industry is currently experiencing. In these difficult market conditions, many companies have retreated from their earlier financial projections.
In contrast, IonQ 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. IonQ is taking actions like making our data centers government compliant so that we can try to capture a portion of that opportunity. We, at IonQ 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.
Peter Chapman
Thank you, Thomas. In summary, once again, IonQ 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 IonQ for years, we appreciate your support and hope you are pleased with how we have furthered our goals since going public just 1 year ago. So those of you who are new to the IonQ story or have been waiting to dig in, we invite you to join us as we continue to take IonQ and the quantum industry to new heights.
And with that, I’d like to have the operator open the line for questions.
Question-and-Answer Session
Operator
[Operator Instructions]. Our first question comes from Quinn Bolton with Needham & Company.
Quinn Bolton
[Technical Difficulty] the multilayer glass trap. What increase in cubic count do you think you’ll be able to achieve? And how important is that to getting to the 60% for algorithmic qubit target by 2025?
Christopher Monroe
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 the — 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.
Quinn Bolton
And you mentioned the PIC technology that I think probably involves the lasers used to implement the gates. Is that also — how important is that new PIC technology to get in at 64 hours.
Christopher Monroe
PIC 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.
Operator
Our next question comes from David Williams with Benchmark.
David Williams
And congrats on all the progress and hitting on the milestones. That’s definitely refreshing to see. I guess Peter, maybe first to you and others can jump in. But just Thinking about maybe the balance sheet strength and the bookings that you’re receiving, everything is 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 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.
Peter Chapman
It’s a great question. And in fact, we are. There’s a number of different aspects here. First, it’s a difficult environment for sometimes for little start-ups right now. So that provides opportunities for buying, gets some bargain, 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 it in the next year to hear more about that.
David Williams
Okay. Great. And then maybe — and you talked about the obvious increase from 6 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 the 500,000 times increase in power. Can you help me understand, are there any metrics you can put around that may be a little easier to wrap my head around?
Peter Chapman
Maybe Jungsang or Chris, I will talk — maybe you could talk about how to visualize that one.
Jungsang Kim
Yes, I can help with that. This is Jungsang. So the way we consider the power of quantum computing is in terms of what computational space that is access 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. We measure that by being the ability to run some benchmark algorithms, and that capability is measured in algorithm qubit. So going from algorithmic qubit of 6 means you can actually run algorithms or 36 qubits some level of complexity and algorithmic qubit of 25 as you’re actually now using 25 qubits and running on 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 0.5 million times more to be able to do that. And of course, upon computers do that with the power of quantum.
Operator
[Operator Instructions]. Our next question comes from Richard Shannon with Craig-Hallum.
Richard Shannon
Maybe a quick one on your Air Force Research Lab contract you announced at the end of September. Any way you can describe over what time this might be recognized and is this a ratable recognition. Or are there milestones specifically that could make that revenue recognition somewhat lumpy?
Peter Chapman
Thomas, do you want to take that?
Thomas Kramer
Absolutely, I can take that. So this is a multiple-element contract, and there are 2 existing parts. One is an access agreement, which will be ratably recognized over 3 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.
Richard Shannon
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 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?
Thomas Kramer
So these are very separate agreements, and we have not been involved with this other company. and their agreement.
Richard Shannon
Okay. That is helpful. I did want to follow up on a previous question on the PIC here, twofold. My first one on my own here is what PIC is this a silicon photonic PIC? 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 road map that will be required?
Jungsang Kim
Yes. This is Jungsang 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.
Richard Shannon
Okay. That’s fair enough. My last question, I’ll jump on the line since we have both the Jungsang and Chris, I’ll ask — just the progress over the year that you’ve been public here in terms of qubit arrogate using your trap in 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 quote and summarize the research that you’ve seen over the last year and where are rates play out versus other technologies and even other companies versions of their technologies and and otherwise, that would be great. That’s all for me.
Christopher Monroe
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 road map. 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 . They’re not inherent errors. They’re not so-called decoherence. And that means that we can expand the scope of air correction, and there’s many different types of ways to mitigate that error. And Jungsang, why don’t you step in if you want to add to that?
Jungsang Kim
Sure. So in the research arena, I think we — including my research group at the University and my colleagues have really had gained a much deeper understanding of what the dominant control aero sources are. And we’ve also been inventing control techniques to actually overcome those in many different [Technical Difficulty].
Unidentified Company Representative
I think we lost our speaker.
Christopher Monroe
Yes, I think Jungsang stepped off. But I’m well aware of Jungsang’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 air mitigation. And we know air correction is something that we will be deploying as we scale our AQ numbers up. But air 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 , 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 continue along that vein.
Operator
Our next question is from Kevin Garrigan with WestPark Capital.
Kevin Garrigan
Let me echo my congrats on the progress. I apologize for any background noise. I’m in the airport now. So just one quick question for me. Regarding your partnership with Dell, can you give us a sense of how the conversations with Dell went and how you were able to capture that partnership? Do they believe ion-trap is the future for quantum computing architecture? Or is your performance what they were looking for? Any color there would be great.
Peter Chapman
Yes, 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 what is typically called hybrid, quantum supercomputing. And obviously, Dell is a leading player in that marketplace. So they’re seeing 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 2 of us to get the software ready to go so that the hardware would be working together. And at Super Compute ’22 is the — is the combination 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.
Operator
Our next question is from [indiscernible].
Unidentified Analyst
This is Trevor on for Quinn Bolton. He had to jump. But real quick, on the second ARS 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?
Peter Chapman
Yes, I can take that. The next ARIA system will be ready roughly towards the end of your first quarter is when it will start to come online. And then this will probably be the last ARIA system that we built. After this, it will be Forte and other technologies, rather – we built the second one for both redundancy and also be able to hit customer demand.
Unidentified Analyst
Okay. And do you expect the glass trap to help fidelities at all? Or is that more for just the scaling?
Peter Chapman
Chris or Jungsang, would you like to take that?
Christopher Monroe
Yes, 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. They’re almost a fraction of a millimeter away and atoms are very small thing. 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 the magnetically levitated train, the train tracks are not directly influencing the performance of the trains. And that’s really what we have here.
Unidentified Analyst
Awesome. And then just one quick one. Did Harmony’s AQ increase as well like it did last quarter?
Peter Chapman
Not that no, we brought it up to an EQ of 6, but that’s where it stays today. It would probably need hardware modifications to get better.
Jordan Shapiro
We’ve read the end of the question-and-answer session. I’d now like to turn the call over to Peter Chapman for closing remarks.
Peter Chapman
Well, just thanks, everyone, for your time today. It’s obviously been 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 at the — for the Q4 call in the spring. Thanks, everyone. Appreciate the time.
Operator
This concludes today’s conference. You may disconnect your lines at this time, and we thank you for your participation.
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