Rigetti Computing Inc

NASDAQ:RGTI

Earnings Call Transcript 2023-Q1

[Operator]

Thank you for standing by. Welcome to the Rigetti Computing First Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentations, there'll be a question-and-answer session. [Operator Instructions] As a reminder, today's program is being recorded.

And now, I’d like to introduce your host for today’s program, Dr. Subodh Kulkarni, President and CEO. Please go ahead, sir.

[Dr. Subodh Kulkarni, President and CEO]

Good afternoon, and 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 31, 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% to 97% median 2-qubit fidelity and 65 to 70 nanosecond gate speeds based on our internal testing. Our prior generation 80-qubit Aspen M-3 system achieved 94% to 95% median 2-qubit fidelity and 185 to 190 nanosecond gate speeds. We believe these metrics demonstrate the superior performance of Ankaa-1 as compared to Aspen M-3 and confirm our believe 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 modems 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.

And with that, I'll now turn the call over to Jeff, who will review our first quarter 2023 financial performance.

[Jeff Bertelsen, CFO]

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 expenses 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 based 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 cost 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, cash equivalents and available for sales 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, 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.

[Operator]

[Operator Instructions] And our first question comes from the line of Jean-Marc [ph] from Deutsche Bank.

[Unidentified Analyst]

Hey, guys. Thank you. This is Jean-Marc [ph] 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. But I was hoping you could speak a little bit more to what are your expectations in terms of customer adoption, once this system is deployed in mid-2023, and sort of how have your conversations with customers been proceeding? And then, 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. And then, I have a follow-up?

[Dr. Subodh Kulkarni, President and CEO]

Sure. So, 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 bring the -- get the chip built and bring the chip up, which is -- and it is working right now. We have reported the numbers for fidelities of 2-Q, median fidelity of 96% to 97%. Pretty impressive gate speeds of 65 to 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 plus percent range for median 2-Q fidelity by the end of this year and 99 plus percent range in -- sometime in 2024. That's the high level plan. As we have already said and yes, 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 confident to get all the customer access, we'll do that. Initially, it'll be available to 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. So, as we get to 98% adoption, we’ll continue to improve. And certainly at 99 plus percent next year, they just will be significantly higher.

So 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.

[Unidentified Analyst]

Absolutely. That's very helpful. Thank you, Subodh. And 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. And do you have a better sense of what CapEx could be as we go through the year? That's it for me. Thank you.

[Jeff Bertelsen, CFO]

Yes. I mean, as we said in today's release, we expect to have between $65 million and $75 million of cash on hand at the end of the year. When I think about -- or when we think about cash burn, obviously, we had a restructuring here in Q1. So, we would expect to see expense reduction 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. So, from a linear perspective, we would certainly think that expenses would go down from here, plus you also have the 10-K and annual reporting type costs in the first quarter. So that's from a linear perspective. 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 are spending our dollars wisely. So, I think going forward and also tied into the reduction in headcount, I think we will see some -- hopefully, see some cautious -- and expect to see cautious CapEx spending going forward.

[Operator]

[Operator Instructions] And our next question comes from the line of David Williams from the Benchmark Company. Your question please?

[David Williams, Benchmark Company]

Hey. Good afternoon. Good to speak with you both. Just a couple of quick questions, I guess, and you will forgive me. I missed a bit at the beginning of the call here. But it sounds like things are progressing as you expect making some good progress on the fidelities. But I guess is there anything that has surprised you over the last several months in terms of just the improvement in fidelities or giving you more confidence towards the technology side?

[Dr. Subodh Kulkarni, President and CEO]

Hey. 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. But we are pleased with the initial fidelities that we have measured with Ankara. I mean, with our Aspen M-3 system, we were in the close to 95% median 2-Q fidelity. Whereas with Ankaa, we are starting off with 96% to 97%, which is a nice jump up, particularly considering it's a new architecture with a square lattice and the 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 -- analysis kind of approach, which is quite common in semiconductor industry. So, 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 plus percent median 2-Q fidelity. And certainly, we already know what it'll take to take us to 99 plus percent fidelity next year.

So, 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. So, hopefully that answers your question.

[David Williams, Benchmark Company]

No, it does. And thanks so much for that. Certainly helpful. And I guess secondly, now that you've had a little more time in the seat as CEO, what are you hearing from customers and 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? And has there been any changes, maybe improvement or otherwise?

[Dr. Subodh Kulkarni, President and CEO]

Good questions, 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. And our work with Moody’s certainly has gotten more customers interested in us. In our QPU and our algorithms. So, we are talking to more financial customers because of those kinds of things. Also, our work with DARPA and NASA on the optimization is pretty really good work demonstrate how QPU can be used to improve combinatorial optimization problems.

And 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.

So, I think it's a combination of not only an improved Ankaa chip and 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.

Certainly at a high level, customers are still -- in general, I would say customers are very interested in quantum computing. Then they definitely want to kick the tires using your face 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 peaks their interest to talk more about what other practical problems can we look at in conjunction with them. So hopefully that answered your question.

[David Williams, Benchmark Company]

It certainly did. I appreciate the color and congrats on the progress again, and best of luck on the continued success.

[Operator]

And our next question comes from the line of Quinn Bolton from Needham. Your question please.

[Unidentified Analyst]

Yes. Hey, guys. This is Trevor on for Quinn. Thanks for letting me ask some questions here. So, to start, I'm wondering if there are customers that you are currently engaged with that are waiting on the sidelines for Ankaa fidelities to improve before actually becoming a paying customer. And 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.

[Dr. Subodh Kulkarni, President and CEO]

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. So, most of it is testing out QPUs and algorithms and seeing how they could be relevant in the future. So 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 you have said is roughly 2 to 3 years from now. So, 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. But it's really going to be small potatoes if you will in the big scheme of things. The year inflection point in revenues for quantum computing companies, all of them and certainly us is going to happen once we are beyond that quantum advantage, which is at least 2 to 3 years from now. Hopefully that gives you some color on your question.

[Unidentified Analyst]

Yes, it does. But 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 are waiting until Ankaa hits a certain fidelity to start working with you? So they are 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?

[Dr. Subodh Kulkarni, President and CEO]

We are certainly talking to the government organizations and universities, but we are talking to commercial customers as well, all the time. And many of them are current paying customers, if you will, either directly with our cloud service or through AWS on 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. The interest is high, everyone wants to be involved and understand. Once you are at that 99-plus-percent, certainly more applications open up. So, 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.

[Unidentified Analyst]

Yes, okay. Thank you. And 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?

[Dr. Subodh Kulkarni, President and CEO]

So 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. 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 plus percent level. So, within the timing of releasing for general availability would be Ankaa-2 and 98% type fidelity. That's what we have announced.

[Operator]

[Operator Instructions] And our next question comes from the line of Krish Sankar from TD Cowen.

[Unidentified Analyst]

This is Steven [ph] calling on behalf of Krish. Subodh, Maybe, I had a question -- or a few for you regarding Ankaa-1 and also sort of the underlying infrastructure that supports that development. I guess first, in terms of Ankaa-2 that comes out here this year, and specifically the tape-out timeline. I guess just wanted to understand what are some of the potential risks to tape-out and that project or that next shift and for to come out in Q4. For example is it an incremental design that is already largely set or is it dependent on the progress of Ankaa-1 reaching that 98% fidelity rate before it tapes out? And so, if you could talk about sort of how that Ankaa-2 chip is expected to come to the R&D pipeline and to [indiscernible]. That'd be helpful.

[Dr. Subodh Kulkarni, President and CEO]

Sure. So, thanks for your question. I mean, you're getting into the details of exactly how we do the technology development. And then, 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 experimented chips and some lots that are targeted for Ankaa-2 at this time. And frankly, some lots even talking about Ankaa-3 and what we are doing. So all those experiments are going in parallel. So 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 and we'll use that to build Ankaa-2. And 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 will 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 QPU system. So, 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. But we'll be running our Ankaa-2 design -- freeze Ankaa-2 design, if you will, sometime in the next couple months. And 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. So, we are already running some early experiments on Ankaa-3 that will become a hopefully 99-plus-percent median 2-Q fidelity chip sometime in 2024 time period. So, you have to kind of plan this 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.

[Unidentified Analyst]

Yes. Thank you so much for that clarity. And then, my follow-up question is related to I guess, kind of CapEx related activities. I guess, very simply, is Ankaa-1 and Ankaa-2, is pretty much compatible with existing infrastructure that Aspen M-3 runs on? And if not, are there certain key pieces of, I guess, infrastructure whether it's some of the modular dilution from [indiscernible] or is it multiplexers for the control signal? If there is any new dependencies from an infrastructure standpoint, would be great if you can provide some more color on that. Thank you.

[Dr. Subodh Kulkarni, President and CEO]

Sure. So, 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. So, a lot of it needed a significant upgrading to move from Aspen to Ankaa.

Things will continue to evolve as we learn where there are circling from and what needs to change, obviously, we will keep changing. The hardware and the software, the hardware will obviously need some CapEx. So 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, but 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. But the big CapEx that we had last year to bring out Ankaa right now, I don't think you will see those numbers, as Jeff mentioned earlier, going forward. So we will be much more careful with what all we are going to be spending on.

So, a lot of the infrastructure for Ankaa-2 and Ankaa-3 is already here. But there will be some changes that we have to make, as we learn more and continue to optimize.

[Operator]

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.

[Dr. Subodh Kulkarni, President and CEO]

Thank you for your interest and questions. We look forward to updating you as the year progresses. Thank you.

[Operator]

Thanks you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.