IONQ - NYSE

Greetings, and welcome to IonQ's Third Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Jordan Shapiro. Thank you. You may begin.

Good afternoon, everyone, and welcome to IonQ third quarter 2024 earnings call. My name is Jordan Shapiro, and I'm the Vice President of Financial Planning and Analysis and Head of Investor Relations here at IonQ. I'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; and Dr. Dean Kassmann, our Senior Vice President of Engineering and Technology. By now, everyone should have access to the Company's third quarter 2024 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 adjusted EBITDA to its closest comparable GAAP measure. During the call, we will discuss our business outlook and make forward-looking statements. These comments are based on our beliefs as of today. Actual events or results could differ materially from the outlook and other forward-looking statements due to a number of risks and uncertainties, including those mentioned in our 10-Q filing with the SEC this week. We undertake no obligation to revise any statements to reflect changes that occur after this call, except as required by law. Now, I will turn it over to Peter Chapman, President and CEO of IonQ. Peter?

Thanks, Jordan, and thank you to everyone joining today's earnings call. We have a lot to talk about, so let's dive in. On the financial front, we are leading the industry with our commercial trajectory. In the third quarter, we exceeded our expected range on revenue, raising our annual revenue guidance and brought in $63.5 million of new contract bookings. We are making game-changing announcements on the development of quantum applications with Astra

Thank you, Peter. It has truly been an exciting quarter on the applications and commercial front and our financials are no exception. Let's walk through this quarter's financial results in more detail. As Peter mentioned, we had a strong revenue quarter, recognizing $12.4 million, which is above the high-end of the range we previously provided. This over performance was primarily due to our ability to make more progress than previously anticipated on some of our contracts that use percentage of completion revenue recognition. We also booked $63.5 million of sales in the third quarter. As we have mentioned in prior earnings calls, we anticipate lumpiness in our bookings, since it is difficult to predict quarter-to-quarter or even in some cases year-to-year, exactly when a particular sale will materialize. We remain confident in our bookings target for the year. Moving down the income statement. Our total operating costs and expenses for the third quarter were $65.5 million, up 36% from $48.3 million in the prior year period, but within our plan for the year. To break this down further, our research and development costs for the third quarter were $33.2 million, up 35% from $24.6 million in the prior year period. Recall that, we are investing heavily in R&D and growing our R&D headcount to support our roadmap and customer commitments. Our sales and marketing costs in the third quarter were $6.6 million, up 31% from $5 million in the prior year period. This increase was due to our growing both our marketing and our sales teams, as we continue investing into our commercial efforts. Our general and administrative costs in the third quarter were $14.3 million, up 3% from $13.9 million in the prior year period. These increases were primarily driven by an increase in payroll related expenses. All of this resulted in a net loss of $52.5 million in the third quarter compared to $44.8 million in the prior year period. Accounting for warrants can be confusing, so we've always pointed out the impact they have on our results. This Q3 loss includes a non-cash loss of $3.9 million for the third quarter related to the fair value of our warrant liabilities. These results also include growth in stock-based compensation expense related to our headcount growth, which was $24.6 million for the third quarter compared to $17 million for the prior year period. We saw an adjusted EBITDA loss for the third quarter of $23.7 million compared to a $22.4 million loss in the prior year period. We continue to project an adjusted EBITDA loss for the year of $110.5 million. Turning now to our balance sheet. Cash, cash equivalents and investment as of September 30, 2024, were $382.8 million. We continue to believe this cash position is the strongest of any publicly-traded company focused on full stack computing. Importantly, while we have increased IonQ's run rate in recent years, we are offsetting this by beginning to collect large payments from IonQ's customers, including those who have purchased systems. Our run rate increases are largely related to employee costs as we have worked rapidly to bring the best quantum talent to IonQ. It is also worth mentioning that, a significant portion of our investment in setting up manufacturing is now behind us. IonQ's Board and management team are focused on being the leading business in both the rapidly expanding quantum computing and quantum networking segments. Our corporate goals in the coming years are profitable growth, positive free cash flow and commercial quantum market leadership. Now turning to our financial outlook. We are pleased to announce that, we will be raising our revenue guidance for the full year 2024 to a range of $38.5 million to $42.5 million, reflecting our confidence in our progress on our percentage of completion based contracts. We currently expect revenue for the fourth quarter of between $7.1 million and $11.1 million. We remain confident in our 2024 bookings guidance of between $75 million to $95 million. Back to you, Peter.

Thank you, Thomas. As we have evidenced since IPO, near our customer wins and our fantastic third quarter, IonQ is demonstrably leading the commercialization of quantum computing and quantum networking worldwide. The quarter's bookings were on par with our entire last year of bookings combined. We are making great strides with our collaborations with Astra

[Operator Instructions] Our first question comes from David Williams with The Benchmark Company.

Hi. Good afternoon, everyone, and thanks for taking my question. Lots of really interesting exciting things going on. It's hard to find a place to start. But maybe first, Peter, can you speak to just the Qubitekk acquisition? What that technology brings? And how does that kind of merge synergistically with what you've been doing internally?

Yes, I'd be happy, David. Several things here. One is that, as we've kind of talked about it in the past, the way that IonQ will get to scale is by photonically networking our quantum computers together. Qubitekk is doing something similar not exactly the same, but they have the same kind of rough skill sets in terms of people. The other side is, it gives us another product line as well to go after. It's a new market for us. So it's both complementary and also expands the TAM that we can go after.

Okay, fantastic. And just kind of thinking about you have the networking efforts now and you also have the computing side. How do you think about the sensing pillar in terms of quantum and is that an area we should anticipate that you might be looking to enter at some point?

Yes. One of the nice things is that often sensing requires quantum networking, we'd be able to transport the quantum information. So again, it enables another piece of infrastructure in the three different markets that kind of makes up quantum. Its quantum sensing, quantum networking and quantum computing.

Sure. Okay. And then just one last one if I may. You've talked about applications this quarter and before you alluded to it. We've seen before other application or other areas where you partnered with manufacturers or different industries to work on a specific problem. Can you talk maybe about how this application develops over time and how you think about that relative to maybe the one off things you've done in the past?

You've kind of expressed actually the core of it. A lot of times we've worked with companies sometimes for a one-off or maybe an R&D kind of project. We largely put an end to those about 18-months ago. And so, we said, okay, it's time to now really to focus on the applications that will be the first applications that we put into production. And so, we didn't want to get started on the application software. When we had the hardware done, we want the software to come along at exactly the same time as when the hardware is ready to run those applications. So we're timing those two things together. What the two announcements that are today with both Ansys and Astra

Our next question comes from Richard Shannon with Craig-Hallum.

Hi, guys. This is Tyler Anderson on for Richard Shannon. Congratulations on the quarter and M&A. I'm very surprised. It's amazing. And thank you for taking my questions. I was wondering, does the hardware from Qubitekk require distillation or node-to-node swap operations? And then also, will the chip-scale ion trap from the imec partnership be used within the AFRL contract? And could you describe the price of the Qubitekk acquisition and expected incremental OpEx?

Okay, I'll start. This is Dean. There's a lot to unpack on your question. The first piece is, with regards to the technology and regards to the swap and other things that we expect to need to use to basically generate two trap entanglement or two QPU entanglement. That is not part of the fundamental technology stack that we have with the Qubitekk and the QKD work that they have. There is similarity though associated with the milestone that we just actually announced with our photonic interconnects in terms of like the Bell state analyzer and the photon entanglement. There is analogies between the work that we're doing with the photonic interconnect as well as what's being done in those quantum networks. So there is parallel technology, some of it in the component technology is one and the same. But right now, they are operating at different frequencies. And so, what we need to do for our photonic interconnects is fundamentally different than what you would need is currently being done as state-of-the-art in many of the QKD solutions. Your second question was associated with imec and some of the PIC development and its relationship to our AFRL work. The overall AFRL work is focused on development of our particularly the most recent large item was first associated with frequency conversion. So, this goes back actually to relate to the Qubitekk acquisition, where we're looking at conversion of wavelengths from barium and other computing frequencies down to telecom frequencies to be able to push the entanglement over long distances. The second piece of that is the -- I would say photonic switching that work there, the prototypes there. And then the third is really component ruggedization. The imec work has the potential to play in all of those areas, but not in the near-term, but instead in far term. So as we think about our technology stack, as we think about putting optics down on to chip-scale devices, that is where we expect to see that. None of the activities right now within the period performance of our current AFRL contract.

And then, there was one other question which was price.

Yes. So the consideration for the acquisition is $22 million, which we have funded in cash from our balance sheet. The details are laid out in the quarterly disclosures. We evaluate the size and determined that the cash mix was manageable relative to the size of our cash position and we plan to close the transaction in the next six months.

And I'll just add one other little piece which is that the Qubitekk purchase also, given their existing contracts, they have a relationship with real world telcos. And so, it kind of moves our efforts out of the laboratory and now starting -- allows us to start to test in the field so to speak. Great questions by the way.

Awesome. Thank you guys. And then one more for me. Could you quantitatively frame the near-term government spending opportunity on a national and an international level? And then, where is your strength across the different types of opportunities as far as application, computation and networking? And what are the size of those different buckets?

We might need another whole meeting I think to get through that question.

Sorry.

I think maybe what we could probably best point you to, is to, some of the work that the BCGs and the McKinsey's of the world in terms of what the expected markets are for those things. Clearly, we have one of the things that I think most proud of at IonQ is we've kind of told the market even from the day -- first day of the IPO what it is we're going to do and we just do it. We keep on doing it and exceeding it. It's actually not much of a secret. We've been saying it since the 1st day of the IPO.

Okay. Then maybe just a little bit further, how would you weigh your focus between government and commercial monies moving forward with all of these acquisitions and the telco involvement?

In the near-term, it's been a good portion, which is towards government. But the beginnings now of these application projects, now it's switching. It's starting to switch over to enterprise. And that's always been the plan. Again, if you go back to the very beginning of the IPO, you'll see that we said, hey, it's really going to start to take-off as soon as we can start to bring these applications online.

[Operator Instructions] Our next question comes from Shadi Mitwalli with Needham and Company.

This is Shadi Mitwalli dialing in for Quinn Bolton. First off, congrats on an exciting quarter. Lots of unpack here. Earlier in the year, you guys knocked a major milestone in photonic interconnects and now with the partnership with, NKT Photonics. Its clear IonQ is making solid work on the photonics front. I just want to touch on how NKT Photonics systems will support the commercialization of IonQ's quantum computers?

You want to take it?

I'll take first from the technology perspective and Peter can take it from the business perspective. On the technology side, NKT has a different kind of different sets of different lasers and there's different laser technology, diode lasers, pulse lasers, fiber based lasers. And so, what we're looking for from a technology perspective in our laser kind of vendors and suppliers our robust lasers that operate at the frequencies and the wavelengths that we're interested in and lasers that simply just work, right? And so, part of this represents us both trying to put in place larger scale manufacturing and larger scale kind of supplier agreements, as well as trying to down select to technology partners that can provide the wavelengths that we need, the cost points that we need and the robustness and stability that we need for really 24x7 operation of the systems.

And I'll just add just a little bit on the business, which Dean kind of hinted at, which is, the question of the cost of these systems. Lasers are a significant portion of our overall cost. So when we sat down and said, look, we're going to be moving to production, one of the pieces to be able to reduce the cost also reduce the size. So this is investments that you see in both of these announcements today both with imec and also with NKT as us actually working towards that promise.

Great, great. Thanks for all that. And then, maybe on OpEx, you guys announced a number of new partnerships and awards this quarter and earlier in the prepared remarks, you guys talked about expanding the team to support all this growth. Just curious on how we should think about OpEx going forward. And then maybe talk about how much the team needs to expand to support all this growth.

I think that where we are on OpEx for the rest of the year is already laid out in what we have discussed earlier. We're not making any change to OpEx right now, and we will be discussing the OpEx for next year on the Q4 call, which I look forward to seeing everybody call into as well. What we are focusing on is, we've gone through rapid growth and it's time for us to think about growth, where it really matters and start making sure that we are always investing in only the best just that matter and that we re-funnel capital to areas where they can be the most invested.

Awesome. Thanks for all the color and congrats on the exciting quarter.

We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Peter Chapman for closing comments.

Thank you. I want to thank everyone for joining us today for your support and for all the questions. Finally, I want to thank the entire IonQ team for the continued diligent work that contributed to such a meaningful quarter for us technically and commercially. That continues to fuel everything we look forward to in the future. Thanks everyone.