RGTI - NASDAQ

Good day, and thank you for standing by. Welcome to Rigetti Computing Third Quarter 2023 Financial Results Conference Call. At this time all participants are in a listen only mode. After the speaker's presentation there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Subodh Kulkarni. Please go ahead.

Good afternoon, and thank you for participating in Rigetti's earnings conference call covering the third 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 Q3 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, or Form 10-Q for the three and nine months ended September 30th, 2023 and our subsequent filings with the SEC and other filings with the Securities and Exchange Commission. We are here to review this discussion of risk factors. Turning now to the business of third quarter of 2023. I'm pleased to report that we continue to grow our QPU systems sales. In the third quarter of 2023 Rigetti expanded its QPU customer base, which is delivery of a 9-qubit quantum processing unit QPU to another premier National Laboratory. This follows our first QPU sale in the second quarter of 2023 to Fermilab in which we delivered a 9-qubit QPU as part of our partnership with the superconducting quantum materials and systems center as QMS. We were awarded a five-year indefinite delivery, indefinite quantity IDIQ contract with the Air Force Research Lab AFRL information directorate to supply AFRL researchers with Quantum Foundry Services. This contract allows AFRL to leverage Rigetti’s fabrication and manufacturing capabilities to build customized quantum systems. Within the scope of the contract, we will be able to provide quantum integrated circuits, quantum limited amplifiers, cryogenic microwave components, and 9-qubit QPUs. This contract builds on the existing relationship between Rigetti and AFRL to harness our fabrication capabilities for quantum networking, hardware, research and development. We are thrilled that leading government agencies and national labs are beginning to choose Rigetti’s established fabrication capabilities to advance their quantum computing research and development. By providing hands on access to our QPUs, we believe that we are enabling greater progress towards narrow quantum advantage and quantum technology breakthroughs. I'm pleased to report that we were recently awarded a DARPA IMPAQT contract to advance quantum algorithms for solving combinatorial optimization problems. Our DARPA IMPAQT project seeks to develop a novel and efficient encoding of optimization problems onto qubits, with the goal of enabling larger problems to be mapped to currently available NISQ-era quantum computers. The project was specifically addressed scheduling problems, which are among the best known and most pervasive types of combinatorial optimization problems across numerous industries, as well as some of the most challenging to solve. Additionally, into October, 2023, we were awarded an Innovate UK Grant as part of the feasibility studies in quantum computing applications competition. Joining Rigetti in this work is HSBC, the quantum software lab based at the University of Edinburgh, and the National Quantum Computing Center. Together the consortium aims to enhance existing money laundering techniques by using quantum machine learning techniques, with the goal of improving the performance of current state of the art machine learning algorithms. On the technology front, we are continuing to work to improve the system performance of our fourth-generation chip architecture, which features a square lattice and tunable couplers to support our anticipated Ankaa-2 84 qubit system. Our Ankaa-2 84 qubit system is expected to be deployed and made available to external customers in the fourth quarter of 2023. We continue to make good progress with fidelity on our fourth-generation systems. We have achieved higher than 98% median 2-qubit fidelity with our 9-qubit system, 98% median 2-qubit feet a day with our 24-qubit system and higher than 97% median 2-qubit fidelity with our Ankaa-2 84 qubit system. Our plan continues to be to get to 98% median 2-qubit fidelity with our Ankaa-2 84-qubit system and over 99% median 2-qubit fidelity in 2024. Thereafter, we intend to develop the 336-qubit Lyra system and to demonstrate and NQA, Narrow Quantum Advantage in two to three years. And with that, I'll turn the call over to Jeff who will review our third quarter and 2023 financial performance.

Thanks, Subodh. Revenues in the third quarter of 2023 were $3.1 million, compared to $2.8 million in the same period of 2022. Revenue variability is to be expected at this stage of the company's evolution given the variable nature of contract deliverables and timing with major government agencies. Gross margins in the third quarter of 2023 came in at 73% up from gross margins in the third quarter of 2022 of 72%. On the expense side, total OpEx in the third quarter of 2023 was $19.1 million compared to $33.4 million in the same period in the prior year. Year-over-year decrease was primarily due to a $11.5 million reduction in stock compensation expense. Other decreases in the third quarter of 2023 included lower employee wages and benefit costs resulting from our February, 2023 reduction in workforce. The non-cash change in the fair value of the Ford agreement for the ampere warrant increased G&A expense by $1.1 million in the third quarter of 2023. Compared with a $387,000 reduction in G&A expense in third quarter of 2022. In the third quarter of 2023, stock compensation expense totaled $3.7 million and depreciation and amortization expense totaled $2.1 million, compared to $15.1 million and $1.8 million in the third quarter of 2022 respectively. Operating loss for the third quarter of 2023 was $16.8 million, compared to an operating loss of $31.3 million for the same period of 2022. Net loss for the third quarter of 2023 was $22.2 million or $0.17 per share, compared to a net loss of $18.8 million or $0.16 per share for the same period of 2022. Net loss for the third quarter of 2023 was negatively impacted by the non-cash change in the fair value of the earnout and derivative warrant liabilities of $1.7 million and $3.4 million respectively. Net loss for the third quarter of ‘22 was favorably impacted by the non-cash change in the fair value of the earnout and derivative warrant liabilities of $4.9 million and $8.1 million respectively. Cash, cash equivalents and available for sale investments totaled $110.2 million as of September 30, 2023. Compared with $105.5 million as of June 30, 2023. During the third quarter of 2023 we raised $12.7 million from the sale of $6.3 million shares of common stock under our common stock purchase agreement with B. Riley. Based on our current operating plan and assuming no additional capital is raised in the three months ending December 31, 2023. We expect to have cash, cash equivalents and available for sale securities of $88 million to $94 million at the end of 2023. Thank you we would now be happy to answer your questions.

[Operator Instructions]. Please standby, while we compile the Q&A roster. And our first question comes from Krish Sanka with TD Cowen. Your line is open.

Hi there. Thanks for taking my questions. This is Steven calling on behalf of Krish. Yeah, as the first question I had, I think for Subodh, wanted touch more details on the Air Force Research Lab, contract that you just highlighted. Any details you can provide on sort of the maybe like long-term value of that contract? And maybe how soon that -- some of the revenues might materialize for any kind of contingencies that might be based on whether it's technical or with timing of when you might be supplying some of those foundry components that you highlighted? That’d be great.

Sure. Thanks, Steven. So as we just described, the Air Force Research Lab contract is an IDIQ contract, which by definition means it's indefinite in its evaluation. They give us broad guidelines on what all they expect, certainly foundry services QPU, and affiliated services are included in the contract. It's hard to put a monetary value on it, because by definition is indefinite. Certainly AFRL is a huge organization committed to quantum computing. They get funding out of DOD. So we certainly expect it to be sizable, but we cannot quantify sitting here right now. Regarding monetization of the contract that has already started, we booked some dollars from that contract already in Q3, we definitely expect that value to increase in Q4 and in the subsequent quarters. Hopefully that answers your question.

Okay, thanks. And I guess another follow-up to sort of the QPU sales that you've recognized in the last two quarters, just kind of like big picture question is, just given that there's a number of government agencies that are interested in purchasing QPUs and I think previously you said, there's the potential sell more you can go into next year, just given the sizable investment that these government agencies need to make to support the superconducting modality system, the necessary infrastructure and service refrigerators. I assume it's a long-term investment. So, I guess, doesn't say anything about international labs and the views on superconducting modalities versus the other competing modalities with respect to the maturity of superconducting with a scalability that compares with other modalities.

Sure, so superconducting modality certainly is one of the leading contenders for quantum computing. Also, there are other competitive modalities as you know, certainly we believe superconducting modality has the huge advantage of scalability. As you can already see, we are at 84-qubits other competitors in superconducting are in the similar vein. So, we certainly are significantly higher than other competitive modalities are very and we have the benefit of scaling up. Having said that, all of us are still significantly off the quantum advantage area. As we have said, they are about two to three years from demonstrating narrow quantum advantage, which means performance and or cost benefits compared to classical computing on many practical applications. The government organizations for DOE, DOD are committed to investing in different modalities. We will definitely benefit when they invest in superconducting regarding the QPU sales. In Q2, we sold our first QPU and now we can disclose that goes to the SQMS center at Fermilab. In Q3, we shipped another QPU, to another premier National Lab, we cannot disclose the name right now. Hopefully, we'll be able to disclose that soon. But it's exciting. As far as we know, we are the only company that has actually sold a working quantum computer to any organization. And now we have done two in a row, first in Q2 and second in Q3. Just a huge milestone for the company. We are super excited about it. We are proud of that accomplishment. The pipeline continues to build we are talking to a number of customers. So national labs, university researchers and those kinds of organizations who have significant interest in getting an on-premise quantum computer. There's a lot of value in doing that. We can do hands-on research, we can get first-hand experience with how do you do -- not only computations with quantum computing, but also how do you optimize, how you do algorithm developments and so on. So, there are many reasons why customers are interested in getting a quantum computer on-premise. The way we have enabled a 9-qubit quantum computer. It's a simple module that essentially gets plugged into an existing dilution refrigerator. And many national labs and university researchers have already purchased a dilution refrigerator. So, for them, it's a relatively straightforward change to take off some components and put in our quantum computer and they can be up and running fairly quickly. So, it’s a relatively simple process to get somebody enabled with a quantum computer and get them hands on experience. And that's what we are focused on right now. Besides the technology development part, of course.

Okay, perfect. Just the last question, if I could, wanted to ask about your quantum cloud service. So, I know it's still very early innings for your QCS business. I guess in terms of non-government cloud service revenues. It's still, I think, just given your strategic shifts in focus to the fidelity rates and all the progress you've made, so far this year, I guess have you sensed any noticeable shift in commercial interest in using your QCS services, either from direct feedback from customers or maybe any indications from your ecosystem partners that you work with to deliver a QCS?

So, sure for Quantum service through the cloud, we obviously have relationship with AWS, Azure as well as our own cloud, and also our focus on quantum computer to select government organizations. Commercial interest is definitely there, but still relatively low compared to national labs and university researchers. And most likely it is because we are still away from quantum advantage. As we approach that quantum advantage in the next two to three years, we definitely expect commercial interest to so -- and that's where the potential explosive growth opportunity comes in, in two or three years from now. But as of today, most of the usage is on researchers, and national labs and university researchers to dominate the usage of quantum computing today.

Great, thank you so much. And nice job on the quarter.

Thank you, Steven.

Our next question comes from David Williams with the Benchmark Company. Your line is open.

Hey, good afternoon, and thanks for taking my question. Forgive me if this was asked or answered already, I'm a little late joining here. But just one of the things Subodh if you could talk a little bit about the QPU sale you had previously -- I know you mentioned another one that you can't disclose. But just I guess if you could talk maybe about the inbound activity and anything you're seeing there that gives you optimism of additional sales in future. Thank you.

So, sure. Thanks, David. So, we sold our first QPU in Q2. And as I mentioned earlier, as far as we know, that is the first time any company has sold a quantum computer to a customer. And that was to SCMS centric formula that happened in Q2 of this year. We sold another QPU in Q3 of this year, we'll do another premier national lab, it will hopefully be able to disclose the name soon. Pipeline for future QPU sales continues to build, we are talking to more than a dozen customers right now. Most of them are for 9-qubits, some have expressed interest in 24-qubit. And one has expressed interest in even 84-qubit. Certainly, the price point continues -- goes up dramatically when you go from 9-qubit to 24-qubit. Overall we are very pleased with the reaction we are getting for QPU, optimized QPU specifically. And again, most of the applications are for research purposes, that they can do things anything from fundamental understanding of quantum computing, to pulse shape optimization, to algorithm development, and many other applications that they can think of. So hopefully, I've answered your question.

No, no, that's very helpful, thank you. And then maybe if you just kind of think about this opportunity as you go forward, it feels like you've got multiple revenue stream potentials here in terms of the processor. And then also the quantum as a service and, and you've made some really great progress. I have to commend you on just the efficiency that you've definitely instilled in getting the 84 out and everything you've been able to achieve there. So, congrats on that. But I guess just if you could help us understand how you envision the business developing over time, and if they're any different today, I guess, given some of this interest on the QBUs versus where you would have thought whenever you came in some time ago. Thank you.

Thanks, David. So as we have stated before, our fundamental strategy right now is to focus on technology development and improve our fidelity to 99% and then scale up to 336-qubit from there. As we mentioned in our press release right now, we are making QPUs, when we have the 9-qubit QPUs, we are talking more than 98% closer to 99% fidelity, then we are dealing with 24-qubit, we are at about 98%. And then we are at 84-qubit, we are at about 97%. All these numbers are two qubit fidelities. And these are remarkable the good numbers considering when started the years. So, our error rates have essentially been slashed by a factor of two, which is a huge accomplishment. Since I've been in the company, we will continue to focus on that, that is the core mission and objective of the company is to include error rates, because that's what gets you to that quantum advantage. That's what enables the explosive growth opportunity. Having said that, in the meantime, we have latched on to this QPU sales opportunities for researchers who want to get their hands on and do experiments themselves. And as I mentioned, they 9-qubit QPUs already close to 99%. So, there are many practical things researchers can do and experiment with. And that's why they are I believe they are finding value and will continue to generate sales. But again, I don't want to -- sales will hopefully continue to grow for QPU and attract quantum cloud as a service. Certainly exciting potential to keep moving safe in the near term. But again, we are not focused on that. Our focus is clearly on developing technology, getting us as fast as possible to narrow quantum advantage, and then go for the explosive growth opportunities that come after that.

Thank you, very much.

Thank you, David

And this concludes the question-and-answer session. I would like to turn the call back over to Dr. Kulkarni for closing remarks.

Thank you for your interesting questions. We look forward to updating you after our Q4 results. Thanks, again.