Rigetti Computing - Q3 2023

Transcript

Operator (participant)

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. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. 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.

Subodh Kulkarni (President and CEO)

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 31, 2022, our Form 10-Q for the 3 and 9 months ended September 30, 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 third quarter of 2023, I'm pleased to report that we continue to grow our QPU system sales. In the third quarter of 2023, Rigetti expanded its QPU customer base with its 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, SQMS. We were awarded a 5-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 IMPACT contract to advance quantum algorithms for solving combinatorial optimization problems. Our DARPA IMPACT 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 will specifically address 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, in 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 Centre. 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 two-qubit fidelity with our 9-qubit system, 98% median two-qubit fidelity with our 24-qubit system, and higher than 97% median two-qubit fidelity with our Ankaa-2 84-qubit system. Our plan continues to be to get to 98% median two-qubit fidelity with our Ankaa-2 84-qubit system and over 99% median two-qubit fidelity in 2024. Thereafter, we intend to develop the 336-qubit Lyra system and to demonstrate NQA, Narrow Quantum Advantage, in 2 to 3 years. And with that, I'll turn the call over to Jeff, who will review our third quarter 2023 financial performance.

Jeff Bertelsen (CFO)

... 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. The 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 forward agreement for the Ampere warrant increased G&A expense by $1.1 million in the third quarter of 2023, compared with the $387,000 reduction in G&A expense in the third quarter of 2022. In the third quarter of 2023, stock compensation expense totaled $3.7 million, and depreciation, 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 earn-out and derivative warrant liabilities of $1.7 million and $3.4 million, respectively. Net loss for the third quarter of 2022 was favorably impacted by the non-cash change in the fair value of the earn-out 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 Securities. 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-$94 million at the end of 2023. Thank you. We would now be happy to answer your questions.

Operator (participant)

As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from Krish Sankar with TD Cowen. Your line is open.

Speaker 4

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

Subodh Kulkarni (President and CEO)

Sure. Thanks, Steven. So as we described, the Air Force Research Lab contract is an IDIQ contract, which by definition means it's indefinite in its duration. 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, it's 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.

Speaker 4

Okay, it does. Thanks. And I guess another follow-up to sort of the QPU sales that you recognized in the last two quarters. Just kind of like big picture question is, just given that, you know, there's a number of government agencies that are interested in purchasing QPUs, and I think previously you said, there's the potential to sell more even going to next year. And just given the sizable investment that these government agencies need to make to support the superconducting modality system, you know, with the necessary infrastructure, like dilution refrigerators. I assume it's a long-term investment.

So I guess, does this say anything about these national labs and their views on superconducting modalities versus, let's say, other competing modalities with respect to the maturity of superconducting or the scalability of it compared to the other modalities?

Subodh Kulkarni (President and CEO)

Sure. So, Superconducting modality certainly is one of the leading contenders for quantum computing, although 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 range, so we certainly are significantly higher than other competitive modalities already, 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, we are about 2-3 years from demonstrating Narrow Quantum Advantage, which means performance and/or cost benefits compared to classical computing on many practical applications. The government organizations, both 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 was 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, in first in Q2 and second in Q3. So it's 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 our 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. They can do hands-on research, they can get firsthand experience with how do you do not only computations with quantum computing, but also how do you optimize, how do 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.

Speaker 4

Okay, perfect. Just the last question, if I could. Wanted to-

Subodh Kulkarni (President and CEO)

Sure.

Speaker 4

Ask about your, 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, you know, it's, it's still, you know... I, I think just given your, the strategic shift in focus to, fidelity rates and, and all the progress you've made, so far this year, have 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, to deliver a QCS in?

Subodh Kulkarni (President and CEO)

So sure. For quantum service through the cloud, we obviously have relationships with AWS, Azure, as well as our own cloud, and also ORNL offers on quantum computer to select government organizations. Commercial interest is definitely there, but still relatively low compared to national labs and university researchers. Most likely it is because we are still away from quantum advantage. As we approach narrow quantum advantage in the next 2-3 years, we definitely expect commercial interest to soar, and that's where the potential explosive growth opportunity comes in in 2-3 years from now. But as of today, most of the usage is from researchers and national labs and university researchers still dominate the usage of quantum computing today.

Speaker 4

Okay, great. Thank you so much, and nice job on the quarter.

Subodh Kulkarni (President and CEO)

Thank you, Steven.

Operator (participant)

One moment for our next question. Our next question comes from David Williams with The Benchmark Company. Your line is open.

David Williams (Senior Equity Research Analyst)

Hey, Dylan. 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 wanted to see 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 the future. Thank you.

Subodh Kulkarni (President and CEO)

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 SQMS Center at Fermilab. That happened in Q2 of this year. We sold another QPU in Q3 of this year to another premier national lab. We 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 goes up dramatically when you go from 9-qubit to 24-qubit to 84-qubit.

Overall, I've been very pleased with the reaction we are getting for QPU, on-premises QPU specifically. And again, most of the applications are for research purposes, where 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 that answers your question.

David Williams (Senior Equity Research Analyst)

No, no, that's very helpful. Thank you. And then maybe if you just kind of think about, you know, 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 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 any different today, I guess, given some of this interest on the QPUs, versus where you would have thought whenever you came in some time ago.

Thank you.

Subodh Kulkarni (President and CEO)

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 are talking 9-qubit QPUs, we are talking more than 98%, closer to 99% fidelity. When 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 remarkably good numbers considering where we started the year. 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'll continue to focus on that. That is the core mission and objective of the company, is to improve the error rates, because that's what gets you to Narrow 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, the 9-qubit QPU is 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 quantum cloud as a service.

Certainly exciting potential to keep growing sales 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.

David Williams (Senior Equity Research Analyst)

Thank you very much.

Subodh Kulkarni (President and CEO)

Thank you, David.

Operator (participant)

This concludes the question and answer session. I would like to turn the call back