Thank you for standing by and welcome to the Rigetti Computing first quarter 2023 financial results conference call. At this time, all participants are in listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star one one on your telephone. To remove yourself from the queue, simply press star one one again. As a reminder, today's program is being recorded. Now I'd like to introduce your host for today's program, Dr. Subodh Kulkarni, President and CEO. Please go ahead, sir.
Good afternoon, thank you for participating in Rigetti's earnings conference call covering the first quarter of 2023. Joining me today is Jeff Bertelsen, our CFO, who will review our results in some detail following my overview. Our CTO, David Rivas, is also here to participate in the Q&A session. We will be pleased to answer your questions at the conclusion of our remarks. We would like to point out that this call and Rigetti's Q1 2023 press release contain forward-looking statements regarding current expectations, objectives and underlying assumptions regarding our outlook and future operating results.
These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described and are discussed in more detail in our Form 10-K for the year ended December 31st, 2022, our Form 10-Q for the three months ended March 31, 2023, and our subsequent filings with the SEC and other filings with the Securities and Exchange Commission. We urge you to review these discussions of risk factors. Turning now to the business of the first quarter of 2023. I'm pleased to report that we believe we are on track and progressing towards the nearer term strategic priorities and technology roadmap we announced in February 2023.
We are starting to see positive impacts following the implementation of our updated business strategy we announced in February 2023, which is designed to improve our focus, operating efficiency and preserve cash resources. Our next generation 84-qubit Ankaa-1 system, which is built using new architecture of square lattice and tunable couplers, was deployed internally within Rigetti for testing in March 2023. Ankaa-1 is achieving 96%-97% median 2-qubit fidelity and 65 nanosecond-70 nanosecond gate speeds based on our internal testing. Our prior generation 80-qubit Aspen M-3 system achieved 94%-95% median 2-qubit fidelity and 185 nanosecond-190 nanosecond gate speeds. We believe these metrics demonstrate the superior performance of Ankaa-1 as compared to Aspen M-3, and confirm our belief that the chip used in Ankaa-1 system is a leap forward in architectural design.
As previously disclosed, we currently anticipate launching Ankaa-1 to select customers in mid-2023. We continue to work to improve Ankaa-1 performance with the goal of reaching median 2-qubit fidelity of 98% to support the anticipated Ankaa-2 84-qubit system. Our Ankaa-2 84-qubit system with anticipated improvements in design and performance is expected to be deployed and made available to external customers in the fourth quarter of 2023. We remain committed to working to achieve 2-qubit fidelity of 99% with the anticipated Ankaa-2, which we expect to be achieved in 2024, and development of the 336-qubit Lyra system thereafter.
We recently released the results of application and development work that demonstrates the progress the company is making towards improving its hardware and software capabilities, which we believe reflects advancement towards potentially achieving narrow quantum advantage. Using quantum inspired classical simulations, we were able to demonstrate the computational power of quantum methods compared to the classical alternatives. At the Quantum Tech Conference in April, we presented the results of new application work undertaken with Moody's and Imperial College London that illustrates a novel approach to addressing the problem of forecasting recessions using cutting-edge machine learning techniques that combine classical signature kernel methods with quantum enhanced data transformations. By using noiseless quantum simulation, we were able to demonstrate that the quantum enhanced version of our model outperforms the classical version, as well as standard models used for this class of problems in accurately predicting a recession.
As part of our ongoing DARPA project, we released a manuscript that presents a new quantum algorithm for solving optimization problems with NASA that provides performance assurances even with noise, and outperforms several classical and quantum approaches for solving the same problems. At our current stage of development, we believe that executing towards our roadmap and achieving our technology milestones are key to fueling our goal of achieving quantum advantage. We remain focused on meeting our objectives. With that, I'll now turn the call over to Jeff, who will review our first quarter 2023 financial performance.
Thanks, Subodh. Revenues in the first quarter of 2023 were $2.2 million, compared to $2.1 million in the same period of 2022. Revenue variability is to be expected at this stage of the company's evolution, given the nature of contract timing with major government agencies. Our development contracts also primarily consist of technical milestone-based work or cost share arrangements, with revenue recognition varying according to the timing of deliverables. Gross margins in the first quarter of 2023 came in at 77%, virtually in line with gross margins in the first quarter of 2022 of 80%. On the expense side, total OpEx in the first quarter of 2023 was $23.7 million, compared to $27 million in the same period the prior year.
The year-over-year decrease was mainly due to expenses recorded in the first quarter of 2022 related to the business combination, including $8.9 million of cumulative deferred stock compensation expense related to satisfaction of a liquidity condition that was resolved by virtue of the business combination in March 2022, and $2.1 million of transaction bonuses. We also recognized $1.3 million of expense in the first quarter of 2022 for a prior period catch-up of electric utility fees. The change in the fair value of the forward agreement for the Ampere Warrant increased G&A expense by $1.1 million in the first quarter of 2023, compared with a $3 million reduction in G&A expense in the first quarter of 2022.
We recognized expenses totaling $2 million in the first quarter of 2023 for restructuring and contractual base severance for executive officers that were terminated during the quarter. Other increases in the first quarter of 2023 when compared to the same period of 2022 included higher costs per headcount, primarily in the R&D area, a $742,000 impairment charge for deferred offering costs, and higher costs for legal fees and D&O insurance, mainly related to being a public company for the entirety of the first quarter of 2023. In the first quarter of 2023, stock compensation expense totaled $1.7 million, and depreciation and amortization expense totaled $2.1 million, compared to $11.5 million and $1.4 million in the first quarter of 2022 respectively.
Operating loss for the first quarter of 2023 was $22 million, compared to an operating loss of $25.3 million for the same period of 2022. Net loss for the first quarter of 2023 was $23.4 million, or $0.19 per share, compared to a net loss of $17.6 million, or $0.33 per share for the same period of 2022. Cash, cash equivalents, and available for sale investments totaled $122 million as of March 31, 2023, compared with $142.8 million as of December 31, 2022. Based on our current operating plan, we expect to have cash equivalents, and available for sale securities of between $65 million and $75 million at the end of 2023.
At this time, based on our current operating plan, we anticipate that Rigetti will need to raise additional funding by late 2024 or early 2025 to continue its research and development efforts and achieve its business objectives. Thank you. We would now be happy to answer your questions.
Certainly. As a reminder, ladies and gentlemen, if you have a question at this time, please press star one one on your telephone. One moment for our first question. Our first question comes from the line of Gianmarco [Viale] from Deutsche Bank. Your question, please.
Hey, guys. Thank you. It's Gianmarco on for Sidney. I guess to start with the progress on Ankaa, Subodh, it's certainly encouraging to hear about the performance improvements that you guys have made. I was hoping you could speak a little bit more to what are your expectations in terms of customer adoption once the system is deployed in mid 2023? Sort of how have your conversations with customers been proceeding? Just a quick follow-up, if you could speak to sort of the rate of utilization of your QCS and where do you see that go once Ankaa is deployed? I have a follow-up.
Sure, sure. Thanks for your questions. Certainly, we are very pleased with the performance of Ankaa. As we have said before, it is a new architecture. It is a denser lattice, a square lattice with tunable couplers. So that it took a lot of effort to get the chip built and bring the chip up, and it is working right now. We have reported the numbers for fidelities of 2-qubit, median fidelity of 96%-97%. Pretty impressive gate speeds of 65 nanoseconds-70 nanoseconds. We certainly have more work to do in other metrics and continue to improve our fidelity.
Our expectation is that Ankaa will continue to improve as the year goes on, and we should be in the 98%+ range for median 2-qubit fidelity by the end of this year, and 99%+ range sometime in 2024. That's the high-level plan. As we have already said, and, yeah, that was where your question was going, we are going to start making Ankaa available to select customers middle of this year. Right now, it's all internally tested. Once we are done with our internal testing and feel more confident to get all the customer access, we'll do that. Initially, it will be available to our select customers like the DOE, DOD labs, and a few others that we have right now. General interest from a customer standpoint remains very high.
A lot of customers that we currently have and potential customers are very interested in a 84-qubit square lattice tunable coupler chip. I would say that the higher the fidelity, the better, obviously from their application standpoint. As we get to 98% adoption will continue to improve, and certainly at 99%+ next year, the interest will be significantly higher. We are overall, we are pleased with where we are right now, what we are hearing from our existing and potential customers, and where this thing is going to evolve. I hope that answers your question.
Absolutely. That's very, very helpful. Thank you so much. Then I guess if I can squeeze one more in for you, Jeff, maybe on cash burn, if you can help us think about the sort of the linearity of cash burn through 2023. Do you have a better sense of what CapEx could be as we go through the year? That's it for me. Thank you.
Yeah. Yeah. I mean, I, you know, as we said in today's release, we, you know, expect to have between $65 million and $75 million of cash on hand at the end of the year. You know, when I think about or when we think about cash burn, obviously we had a restructuring here in Q1. You know, we would expect to see, you know, expense reduction, you know, from that action fully kick in starting in Q2. We also incurred severance and restructuring costs this quarter in Q1, which won't recur in Q2. From a linear perspective, we would, you know, certainly think that expenses would go down from here. Plus, you also have, you know, the 10-K and, you know, annual reporting type costs in the first quarter.
That's, you know, from a linear perspective. You know, we aren't giving any specific CapEx guidance, but certainly our focus is to be very cautious on CapEx spending to stay focused on that and to make sure we're spending our dollars wisely. I think, you know, going forward and also, you know, tied into the reduction in headcount, you know, I think we'll hopefully see some cautious and expect to see cautious CapEx spending going forward.
Thanks, guys.
Thank you. One moment for our next question. Our next question comes from the line of David Williams from The Benchmark Company. Your question please.
Good afternoon. Good to speak with you both. Just a couple of quick questions, I guess, and you'll forgive me, I missed a bit of the beginning of the call here. You know, it sounds like things are progressing as you expect, making some good progress on the fidelities. I guess, is there anything that has surprised you over the last several months in terms of just the improvement in fidelities or given you more confidence towards the technology side?
Yeah. That's a, it's a tricky question, David, when you don't know what all it's going to take to get to 99% fidelity, sitting here. We are pleased with the initial fidelities that we measured with Ankaa. I mean, with our Aspen M-3 system, we were in the close to 95% median 2-qubit fidelity. Whereas with Ankaa, we are starting off with 96%-97%, which is a nice jump up, particularly considering it's a new architecture with a square lattice and a tunable coupler. Certainly we know where the issues are coming right now. We have data.
We are systematically analyzing that data and looking at where the errors are coming from, and we are going after them very systematically, using the cross Pareto analysis kind of approach, which is quite common in semiconductor industry. We are going at it systematically. That's what gives me the confidence that by the end of this year, Ankaa will be close to 98%+ median 2-qubit fidelity. Certainly, we already know what it will take to take us to 99%+ fidelity next year. I have high confidence our team will be able to get to those numbers, based on the starting point for Ankaa and what we have seen is contributing to errors right now and what actions we have already taken and are planning to take in the next few months to address those problems.
Hopefully that answers your question.
No, it does, and thanks so much for that. Certainly helpful. I guess secondly, now that you've had a little more time in the seat there as CEO, what are you hearing from customers? Are you still feeling like the adoption and maybe some of the programs, the folks that maybe were kicking the tires previously, are they still looking at Rigetti? Has there been any changes, maybe improvement, or otherwise?
Good question, David. I mean, certainly as we improve fidelity, the interest continues to increase. I would say definitely some of the announcements we did and papers we published on the NQA side, the narrow quantum advantage side, such as the work we published in Moody's, that is getting a lot of traction, not only obviously with Moody's, but other financial organizations. I mean, everyone's excited to see what can be done to improve the predictability of recessions or bankruptcies. There's a lot of interest obviously in those kinds of algorithms. Our work with Moody's certainly has gotten more customers interested in us, in our QPU and our algorithms.
We are talking to more financial customers because of those kinds of things. Also our work with DARPA and NASA on the optimizations are pretty really good work to demonstrate how QPUs can be used to improve combinatorial optimization problems. That is opening up some unique doors with other vertical markets besides financial markets. Many industries, as you know, need combinatorial optimization problems, and our work is pretty ground basic work that lays the foundation pretty well for many other vertical markets to take a look at. I think it's a combination of not only an improved Ankaa chip with fidelity and gate speeds, but also the optimization. The NQA work we are doing with our software stack. That continues to generate a lot of interest amongst customers. Customers are still.
In general, I would say customers are very interested in quantum computing. They definitely want to kick the tires, using your phrase, to make sure that it works as they think it should. As we demonstrate practical benefits like the Moody's work or the DARPA/NASA work, that certainly piques their interest to talk more about what other practical problems can we look at in conjunction with them. Hopefully that answered your question.
It certainly did. I appreciate the color and congrats on the progress again and best of luck on the continued success.
Thank you.
Thank you. One moment for our next question. Our next question comes from the line of Quinn Bolton from Needham. Your question please.
Hey, guys. This is Trevor on for Quinn. Thanks for letting me ask some questions here. To start, I'm wondering if there are customers that you're currently engaged with that are waiting on the sidelines for Ankaa fidelities to improve before actually becoming a paying customer. To add to that, do you expect an incremental step up in revenue once 99% fidelities are achieved and Ankaa is introduced to the cloud? Thanks.
I mean, thanks, Trevor. At a high level, certainly as fidelities improve, the interest among customers is going to improve. That goes without saying. Exactly how the revenues ramp up with fidelity, hard to tell. I think in the whole quantum computing world, certainly all the revenues that all of us are getting right now are from researchers or government, national labs kind of customers. Most of it is testing out QPUs and algorithms and seeing how they could be relevant in the future. None of us are at a point where we can clearly say quantum computers are significantly better than classical computers in performance or cost yet. That's the goal here.
I think the real ramp-up of revenues happens only when you reach that quantum advantage stage, which we have said is roughly two to three years from now. At a high level, once we get to 99% fidelity next year in 2024, will we get more customer interest? Yes. Would we get more dollars for this research kind of projects? Likely, yes. It's really going to be small potatoes, if you will, in the big scheme of things. The real inflection point in revenues for quantum computing companies, all of them, certainly us, is going to happen once we are beyond that quantum advantage, which is at least two to three years from now. Hopefully that gives you some color on your question.
Yeah, it does. I guess to the first part of my question, I was asking, like, are you talking to any customers that are interested in using your QPUs, but they're waiting until Anka a hits a certain fidelity to start working with you? They're not paying customers yet, but they plan to be. Do you see any of that or more of these universities and government agencies? Are they just working with you no matter what system is available?
Well, we are certainly talking to the government, organizations and universities, but we are talking to commercial customers as well all the time. Many of them are current paying customers, if you will, either directly with our cloud service or through AWS or Azure. But again, has anyone told us that they would give us a specific contract if fidelity reached 98% or 99%? I don't recall anyone having said that categorically.
Okay.
The interest is high. Everyone wants to be involved and understand. Once you are at that 99%+, certainly more applications open up. In general, the direction is there, but I cannot say that we have X number of customers who have said as soon as we hit 98% or 99%, they will sign a contract or anything along those lines.
Yeah. Okay. Thank you. A quick clarification: Will Ankaa-1 become available broadly to customers over the cloud platforms? Or is that just Ankaa-2 that's expected to become available over the cloud?
What we have said, Trevor, is that Ankaa-1, which is what is, what we are doing internal testing, we will make it available to select customers by the middle of this year.
Yeah.
By the end of this year, Ankaa-1 would have evolved into Ankaa-2, and our plan is to make Ankaa-2 available to the broader customer set once we are at that 98%+ level. We think the timing of releasing for general availability would be Ankaa-2 and 98% type fidelity. That's what we have announced.
Okay. Awesome.
Okay.
Thank you.
Thank you.
Thank you, Subodh.
Take you one moment for our next question. Our next question comes from the line of Krish Sankar from TD Cowen. Your question, please.
Hi. Thanks for taking my questions. This is Steven calling on behalf of Krish. Subodh, maybe I had a question or two for you regarding Ankaa and also, sort of the underlying infrastructure that supports that development. I guess first, in terms of, you know, Ankaa-2 that comes out later this year, and specifically the tape-out timeline. I guess just wanted to understand, you know, what are some of the potential risks to tape out and that project with the next ship and for it to come out in Q4? For example, is it an incremental design that is already largely set?
Is it dependent on, you know, the progress of Ankaa-1 reaching that 98% fidelity rate before it tape-outs? If you could talk about, you know, sort of how that Ankaa-2 ship is expected to come through the R&D pipeline and to first tape-out, that'd be helpful.
Sure. Thanks for your question. I mean, you're getting into the details of exactly how we do the technology development. As you can imagine, we own our own fab, as you probably know, so we are running chips all the time, various different versions of experimental chips and some lots that are targeted for Ankaa-2 at this time. Frankly, some lots even talking about Ankaa-3 and what we are doing. All those experiments are going in parallel. Right now we definitely keep looking at Ankaa-1 data as we bring it up, as we optimize it. We look at the error, where the errors are coming from, take all that learning.
We try to incorporate, all, everything that we can learn. We'll use that to build Ankaa-2. That will be available by the end of this year. For all practical purposes, we believe that Ankaa-2 chip that will become Ankaa-2 may be going through the fab as we speak right now, because it takes certain amount of months to get the chip ready and make it into a QPU system. We are incorporating all the learnings from Ankaa-1, putting it into Ankaa-2. We'll incorporate some more learnings in the next, couple months. We'll be running our Ankaa-2, design. We'll freeze Ankaa-2 design, if you will, sometime in the next couple of months. That will become Ankaa-2 by the end of this year.
While Ankaa-2 is being brought up and we are doing evaluations and learning from that, the work, as I said, for Ankaa-3 has already started. We are already running some early experiments on Ankaa-3 that will become a hopefully 99 %+ fidelity, median 2-qubit fidelity chip, sometime in 2024 time period. You have to kind of plan these things several months ahead of the actual launch, obviously. That's what we are going through as we speak. Hopefully, that gives you some color on the timelines.
Yes, yes. Thank you for so much for that clarity. My follow-up question is related to, I guess, you know, kind of CapEx related activities. I guess, I guess, very simply is Ankaa-1 and Ankaa-2, is it pretty much compatible with existing infrastructure that Aspen M-3 runs on? If not, are there certain key pieces of, I guess infrastructure, whether it's, you know, some of the modular dilution fridges from Bluefors or is it, you know, multiplexers for the control signals? If there's any new dependencies from a, from an infrastructure standpoint, be great if you can provide some more color on that. Thank you.
Sure. Certainly, to go from Aspen to Ankaa, it was a big design change, to the square lattice tunable couplers, and that involved several other pieces of equipment, not only in the fab, but even outside the fab. The amplifiers, the cables, the fridges. A lot of it needed a significant upgrading to go from Aspen to Ankaa. Things will continue to evolve as we learn where the errors are coming from and what needs to change. Obviously, we'll keep changing the hardware, and the software. The hardware will obviously need some CapEx. It's not like all the capital that we needed for Ankaa-2 and Ankaa-3 is already there.
I believe most of it is already there. There will be some additional pieces we may need based on what we learn in the next few months that is needed for Ankaa-2 and Ankaa-3. The big CapEx that we had last year to bring out Ankaa-1 right now, I don't think we'll see those numbers, as Jeff mentioned earlier, going forward. We'll be much more careful with what all we are going to be spending on. A lot of the infrastructure for Ankaa-2 and Ankaa-3 is already here. There will be some changes that we have to make as we learn more and continue to optimize.
Great. Thank you so much.
Thank you.
Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Dr. Kulkarni for any further remarks.
Well, thank you for your interest and questions. We look forward to updating you as the year progresses. Thank you.
Ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.