Rigetti Computing Inc

NASDAQ:RGTI

Earnings Call Transcript 2023-Q2

[Operator]

Good day and welcome to the Rigetti Computing Second Quarter 2023 Financial Results 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.

I’d like to turn the call over to Subodh Kulkarni. You may begin.

[Dr. Subodh Kulkarni, President and CEO]

Good afternoon, and thank you for participating in Rigetti’s earnings conference call covering the second 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 at Rigetti's Q2 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 and six months ended June 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 the second quarter of 2023. I'm pleased to report our beliefs that we remain on track to reach our year-end technology milestones with our fourth-generation system.

After having launched Ankaa-1 internally, we are excited to have our long-time partner Riverlane as the first external partner using the system to work on improving error correction techniques on our new architecture. We also look forward to making our most innovative quantum system available to the general public in Q4 of this year. As previously disclosed, we are continuing 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 median 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 also recently announced that we signed a collaboration agreement with ADIA Lab to design, build, execute, and optimize a quantum computing solution intended to address the probability distribution classification problem, which has many direct applications to practical use cases in the investment industry.

Tackling real-world computationally challenging problems like this is an important part of working towards narrow quantum advantage. I'm also very pleased to announce that we recently completed our first QPU sale, which went to a national lab. We delivered a 9-qubit QPU and associated hardware to the lab, which features a square lattice with tunable couplers that can perform entangling 2-qubit gate operations.

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.

At our current stage of development, we believe that executing towards our road map 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 second quarter 2023 financial performance.

[Jeff Bertelsen, CFO]

Thanks, Subodh. Revenues in the second quarter of 2023 were $3.3 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 second quarter of 2023 came in at 82%, up from gross margins in the second quarter of 2022 of 59%. The improvement in total gross profit is primarily due to the significant variability in the pricing in terms of our development contracts. On the expense side, total OpEx in the second quarter of 2023 was $19 million, compared to $27 million in the same period in the prior year.

The year-over-year decrease was primarily due to a reduction in stock compensation expense. Other decreases in the second quarter of 2023 included lower professional fees and lower employee wages and benefit costs, resulting from our February 2023 reduction in workforce. The change in the fair value of the forward agreement for the ampere warrant increased G&A expense by $44,000 in the second quarter of 2023, compared with a 2.1 million reduction in G&A expense in the second quarter of 2022.

In the second quarter of 2023, stock compensation expense totaled $3.4 million, and depreciation and amortization expense totaled $2.2 million, compared to $11 million and $1.6 million in the second quarter of 2022 respectively. Operating loss for the second quarter of 2023 was $16.2 million, compared to an operating loss of $25.8 million for the same period of 2022.

Net loss for the second quarter of 2023 was $17 million or $0.13 per share, compared to a net loss of $12.3 million or $0.11 per share for the same period of 2022. Net loss for the second quarter of 2022 was favorably impacted by changes in the liability for the urn out and derivative warrant liabilities of $6.6 million and $8 million respectively. Cash, cash equivalents, and available for sale investments totaled $105.5 million as of June 30, 2023, compared with $122 million as of March 31, 2023.

During the second quarter of 2023, we raised $2.348 million from the sale of 1.869 million shares of common stock under our common stock purchase agreement with B. Riley. Based on our current operating plan, we expect to have cash, 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 Regetti 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.

[Operator]

Thank you. [Operator Instructions] Our first question comes from Quinn Bolton with Needham & Company. Your line is open.

[Quinn Bolton]

Hey, guys. Congratulations on the technical progress in the quarter. Great to see your sell-on track for the 98% to qubit. I guess Subodh wanted to ask, kind of great to see the first QPU sale in the second quarter, wondering a couple of things. First, of the 3.3 million, can you quantify how much of that is more development contracts versus the QPU sale? Then perhaps a more important question looking forward, are you now starting to see greater interest from national labs, other government agencies, and perhaps even on the commercial side, growing interest in the sale of complete systems, and could that become a meaningful portion of the revenue stream for the business going forward? Thank you.

[Dr. Subodh Kulkarni, President and CEO]

Thanks Quinn. Excellent questions. So first question regarding the revenue breakdown, majority of it is still coming from research contracts, although the QPU sale obviously contributed. We don't want to quantify the exact price of 9-qubit QPU for obvious reasons, but suffice it to say for customers who have dilution refrigerators in their position, the price for a 9-qubit QPU is going to be under a million dollars. So that gives you a frame of reference of what we are talking about here. So the majority of the revenue still comes from DOE, DOD type contracts, and cloud service obviously, AWS Azure as well as our cloud, they all contributed as well during the quarter.

Now for the more important and exciting part of your question is to what do we think will happen to the QPU sales pipeline, if you will, that's what you are getting at. Suddenly we are very, very excited to see the interest we saw from the first sale we did with the national lab and the pipeline that seems to be coming along. Lot of customers are expressing interest in a 9-qubit QPU, particularly with the tunable coupler and the performance you get with the 9-qubit.

Most of the applications are research applications, so for things like optimized control and pulse design, or materials research, or simple algorithmic research, basic characterizations, measurements, student training, that kind of stuff. So primarily research, we certainly still are not anywhere close to quantum advantage or even narrow quantum advantage, so it's mostly being used for research purposes. But there are many customers who are interested in having an on-premise QPU for various reasons, security, trying to see how the hybrid climate works in their environment, and so on.

So certainly we are very excited to see the interest that seems to be emerging with the 9-qubit, and we definitely think it will be a good contributor to our sales and margins. At the price points I mentioned, we make fairly healthy margins, so we feel pretty comfortable that this will be a good potential revenue stream that could help us with our cash situation. Hopefully that answers your questions.

[Quinn Bolton]

Yes, no, that was great. I guess a couple of follow-ons. First, you mentioned, customers, if they're buying a QPU, they have to have their own dilution refrigerator. I know dilution refrigerators are pretty expensive, so I'm assuming that this is just for the QPU, the dilution refrigerator is purchased directly by the customer that's not included in the sale.

[Dr. Subodh Kulkarni, President and CEO]

Yes, in general. I mean, we can obviously sell them the whole system if they want to, but many customers that we are talking about, as I said, it's primarily for research purposes, they already have purchased a dilution refrigeration system, so no point in trying to sell them the whole thing when they already have it, and we can ship them a finished QPU, if you will, in a FedEx or UPSI box, and literally it just has to be plug-and-play kind of a system where they can immediately attach it to their existing dilution refrigeration system and get it working fairly quickly.

So it's a fairly simple operation to ship and get it plugged into their environment and get it going. If they want to buy the whole system from us, including the DR, obviously the price point will be higher, roughly in the 22.5 in the range for the 9-qubit system, but we are primarily focused on customers who already have a DR and are interested in just buying the QPU from us.

[Quinn Bolton]

Got it. And my last question is, you mentioned a 9-qubit QPU and a square lattice, I guess, sort of begs the natural question, if you're doing a nine square lattice, is there a road map in this QP business to do a 16 square lattice or 25-qubit or 36-qubit, kind of, etc., etc., to give QPUs with greater capability to this customer base so that they can do more complex, you know, gate circuits?

[Dr. Subodh Kulkarni, President and CEO]

Excellent question. And we debated internally a lot as to the right way to go forward with our road map. As we have already described, our Ankaa-1 is not a square lattice. It's not a square structure, if you will. It's 84-qubit. But when we say a square lattice, it is the actual structure of the qubit. So Ankaa-1 is still a square lattice, just in a 12 by 7 layout, if you will. So when we say square, it is the exact location of the 9-qubits and how the squares style up with each other.

Certainly, if we can look at nine going to 60 and going to 81, and that's an approach we debate internally should we be looking at that versus 84. But at this time, we want to stay with the 84-qubit 12 by 7 in a square pattern with tunable coupler. And by the way, that is the more important part is a tunable coupler, more than the square lattice. It certainly leads to much higher performance than the fixed couplers that some others are doing in the super conducting qubit camp. And we actually published a blog today getting into the details of why we believe tunable couplers are significantly better than fixed couplers that other companies are trying to do.

So I certainly encourage you to take a look at that blog that is on our website right now. So anyway, so our roadmap is get 84-qubit to 98% fidelity, median-2 qubit fidelity by the end of this year, get it to 99% sometime next year, and then scale up are going from 84 to 168 and 336 and so on. But certainly if we can look at square lattice and just go 9, 16, 81, and so on, we are open to that if that makes sense.

[Quinn Bolton]

Got it. Thank you.

[Dr. Subodh Kulkarni, President and CEO]

Thanks, Quinn.

[Operator]

Thank you. Our next question comes from [indiscernible] with TD Cowen. Your line is open.

[Unidentified Analyst]

Hi, thanks for taking my questions. This is Steven calling on behalf of Chris. Actually, some follow ups as well on the QPU sales.3 I guess in terms of the associate hardware that you're referring to in terms of the overall QPU sale, I assume some of the computing control hardware that's associated with couplers, that's part of the package. And so is there any follow on service or maintenance contract revenues that might be associated with the QPU sale and the official ones? And similarly for the ADIA Labs, Abu Dhabi partnership, any comments on sort of the revenue profile over a long-term period and also the profile for that?

[Dr. Subodh Kulkarni, President and CEO]

So thanks, Steven, for your questions, good questions. So regarding the QPU sale itself, this is a large national lab that we deal with. So it's certainly they wanted to get a QPU on-premise. That's what this sale was about. Leads to exciting opportunities, as I mentioned with Quinn in the previous answer with other research organizations, national labs, academic institutes, and other organizations. Long term, certainly we think service is a big contributor to the revenue stream.

When you start selling QPUs, because these are going to be complex systems, they will need service support. So definitely expect a service stream to go with the QPU sale long term. I think it's too early to talk about short term, because we are dealing with large national labs who have hundreds of researchers on-premise on their location. Many of them are quite capable of doing service.

And in fact, they want poor know-how from us, but they want to do their own optimizations and tuning and stuff like that. So we really are not discussing service to this national life of customers in the short term, but long term, definitely service is a significant portion of the revenue stream.

Your second question was about ADIA lab, and the collaboration we announced. Exciting partnership with ADIA. ADIA is obviously a large organization focused on research on many different things, one of them being the financial areas and in specific the time series with the probability distribution functions. These are extremely complex problems, as we mentioned in our press release, to take on the classical computation. They approached us and they are giving us some money. We haven't disclosed how much. It's again small in the big scheme of things. It's more of a strategic partnership that we are excited about. We want to work with them. We want to show them that quantum computing makes a difference.

With quantum computing, you get a distinct advantage over classical computing in solving these complex problems. Our goal was really to demonstrate narrow quantum advantage or as close a proximity to narrow quantum advantage as we can for these complex problems. It wasn't really done with a service or with a revenue specifically in mind. Long term, certainly ADIA is a fantastic partner to build our partnership with long term. We hope the real opportunity comes from the financial, vertical market, not just organizations like ADIA. Hopefully that answers your question.

[Unidentified Analyst]

It does. Thank you so much for that. Just as my follow-up, regarding the announcement of Riverlane, working with your systems for error correction, I guess can you talk about the longer term implications of that? Since I know internally you guys are more focused on to gate fidelity, but is Riverlane's efforts supplementing any of your own internal error correction development efforts? Are there any expectations that if Riverlane makes big progress on the error correction front, whether or not that leads to opens more doors for additional QPU system sales or additional development contract signings with potential more lab projects? Thanks.

[Dr. Subodh Kulkarni, President and CEO]

Yes. Certainly error correction is a very important part of any computing system, even including classical. I mean, we routinely use error corrections in any classical system today, so we definitely expect error correction to be key component of quantum computing system long term. Riverlane is an excellent company focused specifically on error correction. We have partnered with them in the past and definitely we are excited to partner with them right now with the Ankaa-1 system. We are working on in general error areas ourselves, but certainly that doesn't preclude us from looking at partnerships like with Riverlane and with others, and we are talking to others too. Any advancement, whether we do or they do or in this area is generally will be received positively by the whole quantum computing community.

As I mentioned before, when the fidelities are much lower than 99%, frankly error correction doesn't make that big a difference. It does make some difference, obviously, but the overall errors are dominated by the intrinsic fidelity of your system.

As you increase your fidelity to 98% and 99% and certainly 99.x% range, error corrections start becoming a big determining factor in your overall performance of the system, and that's really why we have started the partnership early. As we improve our fidelity from our side, they will obviously see the benefit in the final results that they get. So hopefully that answers your question.

[Unidentified Analyst]

Thank you so much for that. [indiscernible] in the quarter. Thank you.

[Dr. Subodh Kulkarni, President and CEO]

Thank you.

[Operator]

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

[David Williams, Benchmark Company]

Hey, good afternoon. And Subodh, I just wanted to extend my congratulations on your success. You've definitely done, I think, a fantastic job turning things around and putting things back on track. So congratulations on your progress.

[Dr. Subodh Kulkarni, President and CEO]

Thank you, David.

[David Williams, Benchmark Company]

I guess my first question is just around the interest that you're receiving, just given the success and what you've been able to accomplish in a short order, are you seeing that the interest level from customers has improved? And maybe what you're hearing in terms of feedback from those customers, the maybe pre-arrival, pre-urrival contracts, and then what you've done since then?

[Dr. Subodh Kulkarni, President and CEO]

Certainly, we are getting more interest from customers as our fidelity continues to increase. When I came in the company, as you know, we were dealing with our Aspen M-3 system. We were just about to launch our one system. And the fidelity is where on the lower side with Aspen and even when we started, we have continued to improve our fidelity is our customers see that as we approach 98% before the end of this year, we definitely expect the interest to increase.

And certainly at 99% plus next year, we definitely expect a lot more customers to be interested in our QPUs. So we see that firsthand right now. I mean, our fidelity are in the mid to high 90s with Ankaa-1. We continue to work on it. We are pretty confident with Ankaa-2. As we mentioned in our press release, we will be at 98% plus range before the end of this year.

And that directly correlates with the interest from customers in using our QPUs. So we expect, as we improve our fidelity, the interest from customers to use our quantum computers for our service or directly buy from us, that will continue to go up. They are definitely correlated.

Going forward, certainly, we are excited to get the first order and execute on it. So we already sold our first QPU as we disclosed. And that's a huge accomplishment. We are proud of what our team has accomplished in making that happen. We are dealing with the pipeline right now as we publish more results as the national lab who has, who is our customer, they publish more results and others see value in this 9-qubit QPU with the two-level couplers and square lattice.

We definitely expect more customers to be expressing interest going forward. And we will continue to increase both the size number of qubits as well as the quality of qubits. So Ankaa-2 chip is 84-qubit. So we are talking to some potential customers about 24-qubit and 84-qubit type systems. That's more in the long term. Near term, certainly, we will continue to talk to more customers or 9-qubit with the square lattice and two-level couplers. But anyway, exciting to see the interest in the global community in using something like this right away. We are definitely getting a lot of interest on a number of research customers right now.

[David Williams, Benchmark Company]

Okay, no, that's a great color there. And you mentioned this briefly, but how much interest do you have in terms of your latest generation? Are you seeing more interest around that research phase? Or do you see others that maybe have more interest in getting something closer to your latest 84 qubit Ankaa-2 potentially at the end of the year? Are you seeing a lot of interest there? And maybe what kind of price point would you be thinking about? And is that something you'd be interested in maybe doing as it's released? It's telling that right away.

[Dr. Subodh Kulkarni, President and CEO]

Excellent questions. I mean, right now, certainly, we are entertaining customers with 9-qubit and maybe 24-qubit type levels. We want to bring our own system up first with good fidelity with 84-qubit. So we definitely want to be the first user ourselves. And that will happen before the end of this year when we have a 84-qubit Ankaa-2 system with 98 plus percent median-2 qubit fidelity.

Beyond that, we will certainly entertain a request. Most customers would want to test it out in a cloud manner as a service first, before they want to bring it on premise. I mean, you can do a lot of good quality research within 9-qubit tunable coupler system today. As you know, this goes with exponential with 98% or 99% plus fidelity. A lot of research projects can be handled with even 9-qubits, because it's really to raise to that number. That is that is the level of the computational power you're getting.

So that's a huge amount of computing power you get, even with nine, 9-qubits at tunable couplers. Certainly, as the number goes up, you're dealing with an exponential power. So we will be happy to entertain customers. But it has to make sense for them. I mean, we just want to take on projects that are difficult for customers to understand and for us to execute. But we certainly will be talking to customers with higher number of qubits with better fidelity only next year. Hopefully, that answers your question.

[David Williams, Benchmark Company]

Thanks so much. And again, congrats on the progress.

[Dr. Subodh Kulkarni, President and CEO]

Thank you.

[Operator]

Thank you. There are no further questions at this time. I'll turn the call over to Subodh for any closing remarks.

[Dr. Subodh Kulkarni, President and CEO]

Thank you for your interest and your questions. We look forward to updating you with our progress next quarter. Thank you again.

[Operator]

Thank you for your participation. This does include the program and you may now disconnect. Everyone have a great day.