Greetings, and welcome to IonQ's second quarter 2022 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 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, Vice President of Financial Planning Analysis and Head of Investor Relations. Please go ahead, sir.
Good afternoon, everyone, and welcome to IonQ's second 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'm 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 second 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.
This call discusses certain non-GAAP measures, and you are directed to our press release for a reconciliation of such measures to GAAP. Before we begin, please note that some of our remarks on this call will be forward-looking.
Therefore, please refer to the cautionary statement in today's press release for additional details about these remarks. Please note that these forward-looking statements made during this conference call speak only as of today.
Please refer to today's press release and to the company's quarterly report on Form 10-Q for the fiscal quarter ended June 30, 2022, which was filed with the SEC, and other filings with the SEC for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Now, I will turn it over to Peter Chapman, President and CEO of IonQ. Peter?
Thank you, Jordan, and thank you everyone for joining us today. We had quite the quarter, and I'm excited to fill you in on the tremendous progress we've made here at IonQ. With respect to our technical progress, we had previously reported six months ago that our Aria class of quantum computers had achieved a record 20 algorithmic qubits.
As you'll remember, algorithmic qubits is a benchmark consisting of common quantum algorithms that represent the kind of jobs customers want to run. The algorithms used in the benchmark were defined by the quantum industry group QED-C with input from various hardware companies and users. Today, I am excited that we are bringing to the cloud a computer with more than 130,000 times the computational power of our previous cloud offering.
Specifically, we have been hard at work to dramatically improve Aria's performance, and I can share today that we have achieved a record-breaking 23 algorithmic qubits. Every time you add an algorithmic qubit, you double the computational power, which is the useful computational space for running algorithms.
Moving from 20 to 23 is therefore an 8x increase in Aria's computational power, all in just 6 months since February of this year. This further cements Aria's lead as the most powerful known quantum computer in the world in terms of its ability to run useful quantum algorithms.
This is significantly better than what we initially had expected for Aria. In other words, we're well on our way towards meeting our 2022 technical goal of 25 algorithmic qubits and are confident of hitting that target.
Initial tests show that our next-generation systems that we've discussed on prior earnings calls are already outperforming even the best Aria data on several key metrics. With Aria exceeding expectations, we believe the future is even brighter for our next generation. As you may remember, we plan to offer Forte to initial customers later this year for those who are interested in using IonQ's latest and greatest.
Moreover, with the progress we are making on our Barium systems, we expect even better performance and have a high degree of confidence in meeting our technical milestones in the coming years.
Meanwhile, we are thrilled to announce that IonQ Aria, which we believe to be the most powerful commercial quantum computer in the world with 23 algorithmic qubits, will be available tomorrow to all users of Microsoft Azure Quantum. Anyone with access to Microsoft's platform can process jobs on Aria.
It takes only a few minutes to set up an Azure account and to start programming on our IonQ quantum system. This announcement furthers our commitment to making industry-leading hardware publicly accessible to current and future generations of quantum programmers. IonQ systems are performing best in class and customers have noticed.
Existing customers are expanding their engagements with IonQ, and we've recently added new customers, including Airbus and Dow. Airbus is leveraging IonQ to use Aria to explore optimization problems that are at the core of their aerospace business, such as how to efficiently load cargo on aircraft.
The quantum algorithm we're developing with Airbus will account for a number of critical aviation variables that make this problem particularly difficult for classical algorithms to solve. Dow, a global leader in chemistry and material science, is using Aria to explore the boundaries of quantum computing applications in materials discovery research.
They join other IonQ customers who are partnering with us to explore the intersection of quantum machine learning, material science, and chemistry. We continue to see compelling results on the projects we have initiated to apply our systems to real business problems, both internally and with customers.
In June, we announced the results of our partnership with GE Research to develop a quantum algorithm that manages financial risk exposure. Our work used a large dataset to generate the risk models across up to 4 variables.
This technique is broadly applicable to industries which have risk management needs, such as finance, insurance, and supply chain management. Recently, we also signed a formal agreement to collaborate with the University of Maryland on a project for the National Science Foundation.
For this, IonQ will build and host a quantum router as part of a new quantum network, the Mid-Atlantic Region Quantum Internet, spanning UMD's campus and the surrounding area. The work is not only important for quantum communications but also continues our work towards connecting multiple quantum computers together to form even more powerful systems.
We are also pleased to provide an update on the $multi-million-dollar DARPA contract awarded to Zapata Computing, for which IonQ is a participant. Over the last months, our subcontract was finalized, and our work with DARPA and Zapata is underway. Internally, we're investing in cutting-edge research for problems that we think will benefit the most from quantum computing and deliver near-term business value.
For example, we recently published a series of quantum methods for natural language processing, or NLP, a technology that is increasingly ubiquitous in voice interfaces like Amazon's Alexa, in email applications like Gmail, and in chatbot functionalities like those you may have experienced in customer support.
Our team created NLP algorithms to represent linguistic qualities like ambiguity, vagueness, and novelty on a quantum computer. These elements are notoriously difficult to represent, and no previously published work has demonstrated ambiguity resolution or language generation working on a live quantum hardware.
We think quantum techniques of this nature could eventually be embedded in these NLP applications, delivering a smoother and more powerful user experience. We are seeing a wealth of opportunities present themselves across enterprise, government, and academic customers. Each time we achieve remarkable results with our customers, they become advocates and case studies for the value of IonQ quantum computing.
This virtuous cycle is the cornerstone of the go-to-market flywheel that we're developing alongside our technology. Lastly, in July 2022, we welcomed Kathy Chou to the IonQ board of directors.
Kathy brings with her deep technical experience from her role as SVP of SaaS engineering at Nutanix, go-to-market experience as a sales and operations executive at VMware, and a background in mechanical engineering and manufacturing from Stanford.
Kathy joins Inder M. Singh, the CFO and executive vice president of Arm Limited, as our two newest independent board members. We're thrilled to welcome Kathy to our board. I will now turn the call over to Thomas for a more detailed review of the numbers and corporate initiatives. Thomas?
Thank you, Peter. Before I jump into our financial results, I wanted to touch on some important progress we made at the organizational level. I'm excited to share that we have identified a facility in Seattle to host our first assembly lines for manufacturing quantum computers. We're gearing up production to support anticipated customer demand and our quantum networking R&D.
To support our plans for production, we have hired Dean Kassmann as Vice President of Product Engineering. Dr. Kassmann joins us after leading systems engineering at PsiQuantum, where he oversaw teams throughout systems, R&D, and operations, and brings a robust understanding of quantum hardware with him.
Additionally, we are expanding our sales reach internationally with the creation of IonQ's first international entities in Germany and Israel. We also named Noam Zakai as our Managing Director, IonQ GmbH, to oversee our sales growth in Europe.
Noam Zakai joins us after almost three decades with IBM, most recently as the program director of IBM Quantum Europe. We are thrilled to welcome Dean Kassmann and Noam Zakai on board as we gear up to service a rapidly expanding market. As more and more organizations are starting to explore quantum, we are getting ready to capture this demand on a worldwide stage.
More than $24 billion was invested in quantum worldwide between 2016 and 2021, and the pace of investment is not slowing down. As a local example, U.S. government investment in quantum information science R&D nearly doubled from 2019 to 2022, going from a reported $449 million to a requested $877 million.
At IonQ, this manifests itself in increasing requests to participate in RFPs, which we expect will contribute to the commercial momentum we are experiencing. With both a larger number of inbound leads and the opportunities themselves being larger in size, our belief in the long-term market opportunity is as strong as ever.
Now, let's walk through the second quarter results in more detail. We outperformed our revenue projections for the quarter with $2.6 million in recognized revenue due to faster than expected implementation and increased usage. This compares to $93,000 in the prior year period and is above the high end of our previously provided range.
Moving down the income statement for Q2 2022, our total operating costs and expenses for the second quarter were $21.5 million, up 114% from $10.1 million in the comparable prior year period.
To break this down further, our research and development costs for the second quarter were $9.7 million, up 76% from $5.5 million in the prior year period. We continue to invest heavily in R&D and given anticipated demand, are building more systems than originally expected for this year. Our sales and marketing costs in the second quarter were $2.1 million, up 145% from $871 thousand in the prior year period.
We continue to believe investment in sales and marketing today will position us for increasing commercial momentum for years to come. Our general and administrative costs in the second quarter was $7.6 million, up 160% from $2.9 million in the comparable prior year period.
This change is largely attributable to an increase in stock-based compensation expense, which was $2.8 million for the second quarter, compared to $1.7 million in the comparable prior year period.
All of this resulted in a net loss of $1.7 million in the second quarter compared to $10 million in the prior year period. It's important to note that these results include a non-cash gain of $16.1 million for the second quarter related to the fair value of a warrant liability.
Additionally, we saw an Adjusted EBITDA loss for the second quarter of $11.6 million compared to a $7 million Adjusted EBITDA loss in the prior year period. Turning now to our balance sheet, cash equivalents and investments as of June 30, 2022 were $571.3 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.
Focusing on our full fiscal 2022 outlook, we continue to have confidence in our full year 2022 revenue range of $10.2 million-$10.7 million. We expect third quarter revenue to be between $2.6 million and $2.9 million. We achieved $600,000 in bookings for the quarter compared to $57,000 in the Q2 2021 period.
As for full fiscal 2022, we are maintaining our expected range of $23 million-$27 million. This range reflects the high level of interest we have seen from customers and our confidence that the deals we are currently negotiating will close. As we have noted on prior calls, we continue to expect bookings to be lumpy for quite some time.
This means that while we have confidence in our overall economic performance, it can sometimes be hard to accurately predict exactly in which quarter deals will close. We believe providing bookings outlooks on an annual basis rather than on a quarterly basis will better capture our business outlook and intend to provide only annual outlooks moving forward.
While we believe we will achieve our booking forecast, we also feel it is prudent to acknowledge the risk associated with the present market conditions, which is leading to contracting delays across the technology sector. We have identified $12 million of late-stage opportunity in our booking forecast that we believe is likely to close, but precise timing is unclear, which may lead us to miss some or all of this value in 2022.
We nevertheless remain confident that these customers will contract with IonQ. We have noted the increase in demand we are seeing across the market. Our expectation is that large, late-stage opportunities in our pipeline will eventually be prevalent enough that this lumpiness begins to smooth out. In the meantime, our team is approaching the market with gusto to capture that demand for IonQ.
In summary, we are happy to say that even in these market conditions, we remain confident in our forecast and our ability to keep our spend in line with previous expectations. Our more than half a billion-dollar cash position continues to be a significant advantage for the company and enable us to make investments in R&D and manufacturing to continue delivering on market-leading systems.
Thank you, Thomas. The second quarter was marked by landmark technical progress on our systems and a rapidly expanding set of customer applications that are already delivering compelling results.
The future continues to be bright for quantum computing. We could not be more proud of the team, and we are grateful to have you alongside us for this journey. With that, I'd like to have the operator open the line for questions.
At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would 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 key. One moment please while we poll for questions. Our first question comes from Quinn Bolton with Needham & Company. Please proceed with your question.
Hi, guys. Congratulations on the nice results, especially on the 23 algorithmic qubits for Aria. I just wanted to start with the comment that you'll be bringing Aria to Azure Quantum beginning tomorrow.
Obviously, you've talked about bringing that computer to Azure this year, so congratulations on that achievement. I guess I'm wondering, since Aria or Harmony is available on other public clouds, how easy will it be to bring Aria to other public clouds later this year? Is that in your current plans? Then I've got a follow-up. Thanks.
Hey, Quinn. A good question. Just on the technical. I'll answer the technical part first, which is all the machines support the same API, whether it's an old machine or a latest generation. Largely there's kind of not much work on the cloud provider's part to get to the latest machine.
It's mostly configuration work that they have to do just inside their system administratively to say, "Hey, there's a new system," and those kinds of things. Actually, you know, to be honest, probably setting up new rates and those kinds of things are more difficult than it is actually integrating one of our new systems. That part's relatively easy. You know, we look forward to explore other avenues for Aria on other systems, but we're not making any comments on that today.
Understood. Then for Thomas, I know there have been some delays in government contracting this year just with COVID and work from home, et cetera. Wondering on the $12 million of late-stage bookings you identified that, you know, could be subject to delays, and slip out of 2022 into 2023. Can you comment, is that mostly government-related contracts? Is it heavily skewed to commercial? Just sort of what's the mix between government and commercial in that $12 million?
We're not actually breaking up segments. Given that we've always said we have a lumpy business, we have a small number of contracts, but they're often very large. Given that these contracts are still in negotiation, we would like to disclose as little as we can about them. It's a mix of contracts.
The good news for us is that we have buyers who are interested, and we continue our discussions. These are complex sales. It's not like you walk into the supermarket and grab a Snickers bar. Although we're negotiating with Safeway, if we can be listed there.
Okay. Thank you very much.
Thank you.
Our next question comes from Richard Shannon with Craig-Hallum. Please proceed with your question.
Hi, guys. Thanks for taking my question. I wanted to follow up on the bookings and maybe ask a different way, but I know you're not changing your revenue guidance for fiscal 2022, which is consistent with how you talked about those bookings on the last call.
Curious if you're seeing any impact to potentially your fiscal 2023 revenue outlook from some of these bookings push outs or just from the general market environment out there and broadly technology pushing out some of those contracts. I'm not asking for a number, obviously you haven't guided to that, but just curious qualitatively how you guys are thinking about whether that might impact your fiscal 2023 revenue.
We will get back to our 2023 outlook on the Q4 call, where we will give detailed expectations of it. What we're seeing here is that there is interest in our technology, and so far, we continue to have a great confidence in what we think is gonna happen in 2023.
Okay. Fair enough. I guess my second question on the improvement in the algorithmic qubits for Aria, could you talk a little bit more about what enabled that? If those improvements will translate to other systems like Forte, for example.
Absolutely. This is Jungsang responding to your question. There are many different fronts that we've been pushing. One is obviously improving the performance of the hardware, but we've also been making great strides in learning how to mitigate some of the errors that are in our systems in a more intelligent and effective way.
We've also been pushing on performance of our software tools, including compilers and optimizers. All of these things allow us to take the same algorithm and then make it more effectively executable on our machine and then with a higher probability to get the right answer. It's really a combination of all the technology developments on many fronts that have made this possible.
I'll just jump in on this, which is everything, which I think was part of your question, everything that we're learning on Aria, I think is some of it very directly, like the compiler work that Jungsang Kim mentioned, is applicable across everything we're doing. Even the things that we're learning on Aria is something that often translates into a next machine and gives us a hint as to what to do on the next one. It is kind of today and also tomorrow.
Got it. Thanks, guys.
Our next question comes from Toshiya Hari with Goldman Sachs. Please proceed with your question.
Hi. Good afternoon. Thanks so much for taking the question. I've got two as well. My first one, Thomas, I wanted to go back to the contracting delays you talked about. Just wanted to clarify, is this sort of macro-driven where your customers, whether it be, you know, private companies or government, you know, becoming a little bit more prudent and careful with their investments, or if it's something more tech-related, quantum related, any color there would be helpful.
Then as my second question on profitability, you know, you guys talked about building more systems this year and that driving, I think it was R&D spend a little bit higher. You also talked about your location in Seattle, and, you know, building out your presence in Germany and Israel.
I guess the question is, you know, should we be thinking about the timing of profitability being pulled in or pushed out relative to prior expectations or no change to how you're thinking about converting to profitability? Thank you.
Good to hear your voice again, Toshiya. Those are excellent questions. I'll just start from the back, so I don't forget. When it comes to our expenses, and a lot of this is also investments as opposed to just P&L expense, we have no changes in our plans. This is essentially what we had planned to do all along.
Yes, we have more machines in production. That doesn't really affect our P&L since a lot of that is capitalized. What it does do is it allows us to have more capacity come online in the near to medium future. Actually, make that medium future, because we're not planning to double our capacity overnight. We do want to be able to satisfy all the demand that's out there.
Right now, with the record-breaking performance that we have, it's just prudent of us to make more machines. On to your other question. Is this macro-related? I think some of it's macro-related, but some is also just that these are really large purchases, and they are purchases in a technology that the world essentially has not seen before.
You know, a lot of the time there are people like me on both sides, and we're like, we know the price of everything and the value of nothing. It just takes longer to get like all the number crunchers and the legal to get to it. We are not seeing a slowdown in demand.
Got it. Thank you.
Okay. As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Our next question comes from David Williams with Benchmark. Please proceed with your question.
Hey, you know, thanks so much for letting me ask a question, and congrats on all the progress.
Thanks, David.
One, what I wanted to ask, maybe quickly, and you kind of talked about the build-out of the hardware sales and the manufacturing there. Seems like you're moving fairly quickly. Just kind of curious, if you're thinking that maybe the Aria platform could be introduced in these machines or if that's for the next generation, and then maybe if there's any component of this that's related to the networking side versus the computing side.
David, excellent questions. We actually are building a second Aria system here in College Park and in record time. That's to meet, you know, upcoming demand as well. The answer, though, in the Seattle, maybe just even to help to break down as to what the two locations are gonna do, in the Seattle office, they'll be working on manufacturing of quantum computers and kind of bringing the Henry Ford effect, if you will, to that.
That team is very much focused on, you know, building rack-mounted quantum computers that can be easily manufactured. Here in College Park, they have a different charter, which is to work on improving the performance. Those are kind of the teams have different kind of goals, if you will, between the two locations.
Your insight about machines is spot on. If you wanna do networking, you have to have more than one quantum computer to do it. One of the reasons that we are building, gearing up manufacturing is to have enough free machines so that R&D can do experiments for quantum networking. We can get the software written for those things.
That's kind of part of it as well. You asked one last question, I think, which is kind of, will these be Aria machines? I think they're more than likely going to not be Aria machines into the future. That'll be a next generation, you know, Forte or better, it will be the first ones rolling off the assembly line in Seattle.
Great.
This is Christopher Monroe.
Oh, sorry. Go ahead.
Christopher Monroe here. I might add about your networking question. As you might know, we're gonna scale our quantum computers by networking many chips together. That's always been in our plans. We're starting to spin up that effort right now.
I would say, in our current systems, we don't need that yet, but this is what, you know, when our systems get more powerful, that's how we will do it. That said, also, we're just now kicking off a big program with the University of Maryland on developing protocols for networking, optically networking, ion trap quantum computer systems.
Okay. All very great color. Thanks for that. Certainly appreciate it. And then I know this question was asked earlier, but we're just gonna dig in a bit. You know, you talked about the performance improvements on the Aria system, and I know that was a bit of a surprise.
Maybe just digging in, is this? It doesn't sound like it's chip-specific. Are there areas, I guess, as you kinda look across your platform today, are there other areas that you could squeak out additional performance, maybe in the classical compute side or maybe even the algo side? Do you think there's additional room to optimize, or do you feel like you've kinda squeezed out all of your performance at this point?
I think we still have
Again, Christopher Monroe here. Go ahead, Jungsang.
Yeah. I think we have plenty of room to continue to squeeze. If you think about getting a very complex algorithm and getting executed on a very specific machine, there tends to be a lot of different steps that has to be taken, many of them in the software domain and many of them in improving the hardware.
We're finding quite a bit of opportunities, especially as we understand some of these applications deeper, and then you know, finding ways to improve the mitigation of errors in our systems. We continue to find opportunities, and many of these things actually carry into the future.
I think this is one of the areas where, as we focus on, kind of performance metric tied to realistic and practical algorithms, we're finding compounding opportunities to continue to improve the performance so that we can actually run bigger and more challenging problems on the same improving hardware.
I'll just add a little bit to this, which is, we had talked about improving the native hardware in the past. We talked about error correction. A burgeoning area of quantum at the moment is, kind of what we'll call, error mitigation, and that's kind of in the middle, which is a kind of a new field. In part, that's also what's happening here. It's one part of the reason that we've managed to get Aria to go further than we initially planned.
Again, adding to that, a little color is that the type of errors that our machines experience, without getting too technical, they're sort of miscalibrations. They don't destroy the quantum information. It's still in there.
The types of errors we have, and that's not true of all quantum computing systems, we knew we were able to mitigate, and we're seeing that now that our compilers and software are able to squeeze more out, you know, without doing active error correction. We're gonna do that too, but we, you know, we're gonna have the whole kind of spectrum of error mitigation and full-blooded error correction as our systems grow.
Again, all great, very, very good color. Certainly appreciate it. One last one, if I might, and just, on the Barium, any update there? How much performance advantage do you think you would have today if you were had that employed on the Aria system? Thank you.
Yeah. We continue to make progress and make an increasing effort in improving validating Barium systems. We have already expressed some of the progress we've seen to date, but we will actually share more as we have more concrete information. Not much more to concretely report at this time.
As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Our next question is from Martin Smith. Oh, looks like we lost him. One second. Ladies and gentlemen, we have reached the end of the question and answer session, and I would now like to turn the call back over to Peter Chapman for closing remarks.
Thanks, everyone. Thanks for listening in today and the great questions that were presented to us. We are very happy with the progress we made this quarter, and we continue to look forward to hitting our both earnings and bookings numbers as we outlined today.
I want to say a huge thanks to the IonQ team for making the technical progress that they've made so far. We look forward to talking to you all in 90 days or so. Thanks again. Have a great day.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.