Greetings. And welcome to the IonQ First Quarter 2023 Earnings Call. At this time all participants are in a listen-only mode. [Operator Instructions]. As a reminder, this conference is being recorded. I would like to turn the conference over to your host Jordan Shapiro, Vice President FP&A and Head of Investor Relations. Please go ahead.

Good afternoon, everyone, and welcome to IonQ’s first quarter 2023 earnings call. My name is Jordan Shapiro and I am the Vice President of Financial Planning & Analysis and Head of Investor Relations here at IonQ. I am pleased to be joined on today's call by Peter Chapman, IonQ’s President and Chief Executive Officer; Thomas Kramer, our Chief Financial Officer; Dr. Chris Monroe, our Co-Founder and Chief Scientist; and Dr. Jungsang Kim, our Co-Founder and Chief Technology Officer. By now, everyone should have access to the Company's first quarter 2023 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, and 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 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 predictions and expectations as of today. Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in our most recent filings with the SEC. Now I will turn it over to Peter Chapman, President and CEO of IonQ. Peter?

Thanks, Jordan. Good afternoon everyone. And thank you for joining us for our first quarter 2023 earnings call. We finished the first quarter with $4.3 million in revenue, which was above the high end of our expected range. Meanwhile, we booked $4.1 million in new contracts and are maintaining this year's annual booking guidance. Thomas will share more details on our commercial activity and financials later in the call. We continue to move forward at full speed at IonQ trailblazing in our industry. In our view, we have distanced ourselves from the pack of pure play quantum computing companies, by having the best cash position by a wide margin. We also believe we are sufficiently funded to get the company to profitability based on our current roadmap. IonQ will continue to focus on achieving quantum advantage and developing commercial applications for our customers. At IonQ, our primary focus has been not on the quantity of qubits in the system, but on the quality of the qubits and their operations. For quantum computers this quality, also known as fidelity, is the key differentiator in successfully completing computational tests. We measure the fidelity of our systems using an application oriented benchmark we call algorithmic qubits, or AQ. AQ is based on work pioneered by the quantum Economic Development Consortium, an independent industry group, and evaluates quantum computers utility in real world settings. Last year, we achieved our goal of hitting 25 AQ. This year, we set an even more ambitious goal of hitting 29 AQ by the end of the year. Recall that every additional AQ corresponds to roughly doubling useful computational space, meaning we can run much more powerful quantum algorithms. Today, I am excited to share that we have hit our 29 AQ target, meeting our 2023 technical goal seven…

Thank you, Peter. Now, let's walk through this quarter's financial results in more detail. As Peter mentioned, we had an excellent quarter, recognizing $4.3 million in revenue, which was above the high end of the outlook we previously provided. This reflects to us being able to complete work ahead of schedule for some of our milestone dependent revenue. While we experienced some accelerated revenue recognition from Q2 into Q1, we anticipate that the full year impact will be lower given how projects and milestones are distributed between periods. We exited the quarter with $4.1 million in bookings, which is a great start towards our expectations of between $38 million to $42 million for the full year. Given that we are still at the beginning of our commercialization phase, I want to reiterate my comments from premier earnings calls that we expect bookings to continue to be lumpy for quite some time. Moving down the income statement. For Q1 2023, our total operating costs and expenses for the first quarter were $32.3 million, up 60% from $20.2 million in the prior year period. That well within our plan for the year. To break this down further. Our research and development costs for the first quarter were $16.2 million, up 121% from $7.3 million in the prior year period. Recall that we are investing heavily in R&D, and given anticipated demand, are especially focused on investing in our manufacturing capabilities to build more systems than previously anticipated this year. Our sales and marketing costs in the first quarter were $2.7 million, up 43% from $1.9 million in the prior year period. This increase was due to us growing our go-to market function, and additional sales and support personnel. As we continue our investment into our commercial efforts. Our general administrative costs in…

Clearly, we have been hard at work and executing diligently against our technical and business roadmap. Our early foundations as a company and our underlying Trapped Ion architecture are yielding the dividends we expected. The naturally high fidelity of our approach has laid the groundwork for us to begin solving the engineering problems around scalability. Our technical achievements are driving exceptional demand for more IonQ computers, which we are fulfilling with new systems like Aria 2. Meanwhile, we are trailblazing in system performance and manufacturability. We are seeing excellent progress on the commercial side of the business, adding new customers and adding value to existing ones, particularly in the growing area of Quantum Artificial Intelligence. The time to figure out how quantum computing can accelerate your business is now. And with that, I would like to turn the call back over to our operator for the Q&A session. Operator?

[Operator Instructions] Our first question comes from the line and Scott Fesler, with Morgan Stanley, please proceed.

Hi, guys. Congrats on a great quarter. Congrats on adding Aria 2 to the cloud as well. I assume this is a reflection of how well Aria 1 has gone on the cloud. With the achievements you guys have made around Forte as you said 16 times more powerful than Aria. Has there been any discussion of bringing that to the cloud as well?

Hey, Scott, this is Peter. So certainly the reason we built Aria 2 was because of demand. And with Forte as while we are looking at what we want to do next with that there, that too we have customers clamoring to get access to that as well. We haven't made a decision yet as to when we will put it out on the cloud or versus internal. But certainly that -- the demand for that system is seems exceptional as well.

Thanks. And if I could get a quick follow up in as well. You've just you've discussed on prior calls, the expectation of making a full system sale this year. Could you maybe discuss any updates around that?

Well, we're continuing there’s quite a bit of interest, especially as these systems become more powerful as we start to get into AQ 35 and 64 customers understand that the means that we're getting to a point where we can do things to get their quantum advantage. And so there's a lot of interest in the systems now, especially now that we've gotten beyond 29. And so we're not ready to report deals close but there's obviously conversations going around in the background.

We should also clarify that we did not actually specify that there would be a system sale in this calendar year, only that we expected one to happen in the next 12 to 24 months. And also that there are elements of hardware sales baked into our forecast, it may or may not be a full system sale. But we continue to see interest in that this from several parties and actually in several segments of the market. So we continue to believe that this is indeed going to happen in a timeframe that we previously mentioned.

Understood. Thank you.

These are the big ticket sale. So there -- they take a little longer.

Okay, understood. Thanks.

Our next question comes from the line of Richard Shannon with Craig-Hallum. Please proceed.

Well, hi, guys, thanks for taking my question as well. I guess my first question is a two-parter here. I realize I'm kind of comparing things that aren't similar. But on the seam of getting Forte 29 AQ ahead of time, and then also, more tactically, or near term accelerating some milestones a lot easier to recognize a bit more revenues in the first quarter. What's kind of the dynamics here that's driving this acceleration? Maybe you can kind of compare and contrast any themes that might be consistent over those two dynamics, that'd be great? Thank you.

On the on the technology side, I think we have been making investments for the last few years in thinking about how to continue to improve the performance of our system. And I think that it's paying off, it's paying off in a way that we make strides, and get to get to these technical milestones ahead of time.

And when it comes to revenue recognition that reflects the fact that two things actually, earlier, we've had a predominance of quantum as a service, which is more or less like SaaS and revenue gets straight line, which means that it will be very simple to forecast. But we have started to move over to a more of a percentage complete type of revenue recognition contracts, which means that when we're able to start the work earlier and implement more of it earlier, we will also be able to implement or get more revenue recognition early. And that's what we particularly saw in Q1, and which has been good. And we anticipate that most of that will actually flow through to an increase in the end of year revenue. But there are some acceleration that we think that that was merely an acceleration from Q2 to Q1. So it wouldn't persist throughout the all the next periods. That we are happy to announce that this does mean that we're able to raise our revenue recognition guidance.

Okay, fair enough. Thanks for all that detail. My second question is, I assume the last conference call about system sales and whether they be government or academic or commercial customers? And I remember your answer from that. And kind of following-up with one of the previous questions here about systems sales. I've seen some evidence of kind of RFIs for government contracts, I think, like nine figures kind of dollars here that could include the possibility of quantum hardware sale or some of the potential or earliest possibilities for system sales. Are those related to any government contracts that you're aware of either published or not, are they another kind of other dynamic striping that interest?

We have interest both in governments, both nationally, internationally, and also enterprise customers when it comes to system sales. So there's interest from multiple parties. And obviously, in both in a national budget point of view, there's quite a bit of money for quantum and systems and we're competing for those dollars.

Okay, fair enough. Appreciate all the detail guys. Thanks.

Our next question comes from the line of Quinn Bolton with Needham and Company, please proceed.

Yes, hey guys, this is Trevor on for Quinn. And congrats on the 29 AQ. That's exciting to see. And I guess to start, I know the next goal is 35 AQ in 2024. And I don't want to put pressure on you. But with your progress doing one AQ a month, could this milestone be reached in the first half of '24?

So, we're not changing the roadmap, but at the same time, obviously, we're executing well, up to this point on hitting the milestones early and we continue to expect that we will execute well.

I guess would you say that gap from 29 to 35 is much more difficult from 25 to 29?

No, the answer is no.

It is going to be -- in this case, we're increasing by 6. So we'll be 64 times more powerful in terms of competence base. So there will be some work involved. But we feel quite confident that 35 in '24, in 2024, is a goal we can accomplish.

There isn't anything major to getting to 35. Just hard work.

Okay. And do you expect the integration of the second Aria device in the cloud to have a material impact on revenue growth. I'm trying to get a grasp of the impact that system downtime and waiting queues may have on current revenues, and if this system will help alleviate some of those problems.

So, it will certainly alleviate the challenge of always having uptime. And this was planned for us because it takes us some amount of time to build these systems. And the revenue from that system is built into our forecast for the year.

Okay, awesome. That's all I have. Thanks, guys.

Our next question comes from the line of David Williams with Benchmark Company. Please proceed.

Hey, good afternoon, and congrats on these executions and the progress here. I want to touch a little bit just to as you think about that transition from 29 to 35. And maybe, or even just to getting to that 29. What are the w keys, I guess is it, what areas are you improving? Is it around the system? Is it the optical side? Is it the IO? Where are the improvements coming from? Or is it just better higher quality qubits during the manufacturing process? Just to understand where this is -- where you're getting the benefits?

Yes, as we have said in the past, our qubits are individual atoms, they aren’t getting any better. I think it's really about how we control our systems and operate them. So as we have discussed some time ago, Forte, actually has an improved optical system to drive our gates. And I think we're really seeing the benefits of that design upgrade. But also, we're actually learning how to operate these systems more optimally. So a lot of this is really coming from improving the quality of our gates, and our ability to run longer circuits without any unexpected degradation in the performance.

For the most part, it's these things are often the large part of the benefit is often in software, not in hardware. So it's, we're doing a better job of controlling it in software.

Okay, very helpful. Thanks. Thanks. So I'm sure there's quite a few areas to within that topology that you can tweak to gain that performance as well, is that correct assumption?

That is certainly correct. I mean, there's, all the hardware is under control of software, to how good a job you do everything from pulse shaping of light to the timing, and all the rest of that fall under control. So we can build a better piece of software and we can get better performance out of this. Sometimes it requires hardware changes every once awhile, if somebody says, we can replace XY and Z and we can get better, but it's often mostly in software.

Okay, very good. And then I guess lastly, for me, maybe it's a two-part, but just kind of thinking about the AI regulation has been proposed. How do you see that and then secondly, can you kind of talk about maybe what Pat does in terms of your R&D efforts and what your expectations are there?

Yes. So, there are obviously the regulations for AI we expect as we get into that field, more than they, some part of that would be quick, control kind of what we do in the future and we're supportive of an intelligent government regulation. I'm not sure if that -- does that exist? But you get the concept. And then Pat's experience at Lab 126, Lab 126 was the group that did all the hardware for Amazon. And prior to Lab 126, he was over at Apple working on their hardware. So he very much has both R&D background, physics background, and also very much a product background. He's used to helping build real products. And if you look at the evolution of IonQ, we are kind of started off as an academic organization, we're moving to an engineering organization. And now the next the last transformation is to a product organization. Pat is going to take on the challenges related to R&D that have a little bit longer timeframe, the engineering organization is always being pressed to build that next system to hit the next AQ number. And Pat will have a little more time, his time horizons is probably closer to three to four to five years. So he can take on more ambitious goals, which are necessary to be able to hit numbers beyond AQ 64.

[Operator Instructions] The next question will come again from the line of Scott Fessler with Morgan Stanley, please proceed.

Yes, thanks for the additional question. So as your existing contracts start to roll off over the next year or two, we'll call it. How should we expect pricing to change maybe general for gen as you offer some way more higher powered hardware to your customers?

Now that is an excellent question. What we like to see is that we provide more value to our customers. And we want to continue to create more and more value. We don't think that this is time to start gouging our customers, we want actually to partner with them. But there's definitely room for price to drift up as we provide more and more value to the market.

And like any kind of traditional hardware, what you're seeing is kind of last year's hardware is being offered more cheaply. And the latest generation is usually at least as expensive maybe more, especially here where you've got such huge leaps in computational power.

Got it. And then one more if this time allows. As you move from 29 AQ to 35 next year. Can you just talk about some of the big headline applications that you think open up once you hit that 35 AQ number?

It's very much quantum machine learning, is the things that we think in roughly 35. So we are investing heavily on the application side. The other aspect that we expect is not just in ML, but also in AGI. So we started invest investment in investigation that more than a year ago, which was the first part of that was the paper we just produced, which ran on our hardware, but we're investing in that as well. So we expect, you know, strong AI or AGI to be even better on quantum hardware going forward. So I don't know yet if 35 will be enough, but we're investing in that we do feel very strongly that in QML, quantum ML, that you'll start to see quantum advantage in those applications.

Thank you for that. Appreciate it.

Thank you. Ladies and gentlemen, we have reached the end of the question and answer session. I like to turn the call back to Peter Chapman for closing remarks.

I want to thank everyone for joining us today. And thank you for all the thoughtful questions. Finally, I want to thank the entire IonQ team for their hard and diligent work that allowed us to achieve the key technical and business milestones including 29 AQ this quarter. We truly believe that we're changing the world one day at a time. And I look forward to speaking with all of you very soon. Thank you.

Thank you. This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.