Rigetti Computing, Inc. (NASDAQ:RGTI) Q4 2022 Earnings Call Transcript

Rigetti Computing, Inc. (NASDAQ:RGTI) Q4 2022 Earnings Call Transcript March 27, 2023

Operator: Thank you for standing by, and welcome to the Rigetti Computing Fourth Quarter and Full Year 2022 Financial Results Conference Call. At this time, all participants in a listen-only mode. After the speakers’ presentations there’ll be a question-and-answer session. As a reminder, today’s call is being recorded. I will now turn the conference to the host Dr. Subodh Kulkarni, President and CEO. Please go ahead.

Subodh Kulkarni: Thank you, Valerie. Good afternoon, and thank you for participating in Rigetti’s earnings conference call covering the fourth quarter and full year 2022. 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 Q4 and year-end 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-Q for the three and nine months ended September 30, 2022, and our subsequent filings with the SEC, including our Form 10-K for the year ended December 31, 2022, 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 fourth quarter of 2022, I would like to start by sharing a few words about myself and my thoughts on leading Rigetti and the opportunity ahead of us now. My career for the past 30-plus years has been with the semiconductor industry, starting with IBM Research and within an IBM fab, after completing my Master’s and PhD at MIT in Chemical Engineering. Later, I served as CEO for Prism Computational Sciences. For the past nine years, I’ve been CEO of CyberOptics, a semi cap company that was successfully acquired by Nordson Corporation in November of 2022. While quantum is a new world, the heart of the technical work is basically a semiconductor device. The fundamental principles that are used in semiconductors are the same in the quantum world.

It centers on the interactions of the zeros and ones and the supporting of both states. That being said, quantum is a brand new way of doing computing that is mathematically more powerful than the way computing is currently done. In my time here at Rigetti, I found the team to be very passionate, and technically impressive. Our mission is to build the world’s most powerful computers to help solve humanity’s most important and pressing problems. You don’t get these kinds of chances that often. It has been about 50 years since there has been this type of opportunity, where there is potentially a full paradigm change in the way information can be processed and problems solved. At Rigetti, our energy today’s focused on fidelity. The newest roadmap development relates to our next generation qubit chip, known as Ankaa-1 84-qubit chip, with its new architecture of square lattice and tunable couplers, which is now deployed internally for testing.

This chip is a leap forward in architectural design, and is already showing superior performance compared with our prior generation 80-qubit Aspen M3 system based on our internal analysis, and initial performance demonstrates improved Median 2-Q Fidelity, and faster gauge speeds compared to the Aspen M3 system. We’ll continue to work on to improve Ankaa-1 performance over the next few months, with a goal to reach Median 2-Q Fidelity of 98% and anticipate making it available for select customers in mid-2023. Ankaa-2 with anticipated improved design and further implemented performance is expected to be deployed in Q4 2023. Assuming we reach Ankaa-1 Median 2-Q Fidelity of 99%, which we currently expect to reach in 2024, we plan to move to tiling four Ankaa chips to enable the three 336-qubit Lyra system.

We expect this milestone to enable vastly greater scale and is a key and exciting step to bring Rigetti significantly closer to quantum advantage. What we are doing is taking a single die and building a cell out of that with certain number of qubits arranged in a lattice. We are taking one or more of those dies and connecting them together. So the critical issue to have happen there is you have to have those 2-qubits on different dies communicate with each other. They have to entangle in the language of quantum mechanics. It’s near neighbor electrons entangling with each other and photons entangling with each other across those dies. It’s a non-trivial thing to do, yet we have done it. This ability to scale gets us out of the business of what we have been doing in the past, and what most of the rest of the industry and some in superconducting are doing, which is building larger and larger dies on entire wafers.

As previously outlined, in 2023 and 2024, we will continue to focus on improving Ankaa performance, primarily in fidelity, and also other important metrics, including gate speed and coherence time. Additionally, we continue to make good progress with our software stack. We believe we will be able to demonstrate narrow quantum advantage with significantly superior performance and cost over classical computing in two to three years. Notably, we believe we have already demonstrated in our lab the existence principle, with Median 2-Q Fidelity of 99.5% on a few qubits. We are now working on the important step of bringing our median averages to that level for all 84-cubits. This is a technical challenge for the entire industry. And we believe Rigetti’s superconducting approach is optimal for users as they factor quantum advantage into their computing solutions.

Following the anticipated successful introduction of Lyra, we then plan to move to deeper commercialization initiatives within our strategic agenda. In terms of production and cost, right now, we are making a relatively small number of chips and using a small number of dilution refrigerators. But the cost to do so remains high. And the reward of doing so we believe has the potential to be high as well. Before we turn to our financial results, I want to be clear that our priority at the company for 2023 will be on technology, and moving towards our goal of achieving narrow quantum advantage. As such, in the first quarter of 2023, we reduced our workforce to focus organization and preserve our cash resources. We value the contributions of all our employees, and we thank them for the tremendous work they have done to help Rigetti reach this important point in time.

We’ve also brought on a new CFO, Jeff Bertelsen. Jeff and I have worked together for nine years at CyberOptics, where he served as CFO and COO. Additionally, we are pleased to recognize David Rivas by promoting him to CTO. David is a technical leader at Rigetti who joined in 2019. Prior to expanding his role to CTO, he has been overseeing the engineering and operations of Rigetti’s quantum cloud services platform. Prior to Rigetti, David held executive technical roles at companies such as Nokia and Sun Microsystems. And with that, I’ll turn the call over to Jeff, who will review our fourth quarter and full year 2022 performance.

Photo by Campaign Creators on Unsplash

Jeff Bertelsen : Thanks, Subodh. Revenues in the fourth quarter of 2022 were $6.1 million, compared to $1.8 million in the same period in 2021. 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 with revenue recognition varying according to the timing of deliverables. Gross margins in the fourth quarter of 2022 came in at 87% versus 62% in the same period in 2021. The year-over-year increase in gross margin was mainly driven by the timing of revenue recognition, and the variable nature of our customer contracts. On the expense side, total OpEx in the fourth quarter of 2022 was $32 million, compared to $12.2 million in the same period, the prior year.

The year-over-year increase was mainly due to our investment in research and development, $5.4 million goodwill impairment charge, as well as higher costs related to being a public company. In the fourth quarter of 2022, stock compensation expense totaled $7.2 million, and depreciation and amortization expense totaled $2.2 million, compared to $375,000 and $1.4 million in the fourth quarter of 2021. The change in the fair value of the Ampere warrant recorded through G&A expense in the fourth quarter of 2022 was a gain of $300,000 compared to a gain of $170,000 in the fourth quarter of 2021. Operating loss for the fourth quarter of 2022 was $26.7 million, compared to an operating loss of $11.1 million for the same period of 2021. Net loss for the fourth quarter of 2022 was $22.9 million or $0.19 per share, compared to a net loss of $14.1 million, or $0.61 per share for the same period of 2021.

Cash, cash equivalents and available for sale investments totaled $142.8 million as of December 31, 2022, compared with $11.7 million as of December 31, 2021. As previously disclosed, in October 2021, we changed our year-end from January 31 to December 31 effective December 31, 2021. For the 12 months ending December 31, 2022, total revenues were $13.1 million, and the net loss was $71.5 million, or $0.70 per share. For the 11 months ending December 31, 2021, total revenues were $8.2 million, and the net loss was $38.2 million or $1.64 per share. Full year CapEx for 2022 was $22.7 million. In February 2023, the Board of Directors approved a reduction in workforce to align with the company’s updated business strategy and revised technology roadmap.

In the first quarter of 2023, we expect to incur restructuring charges of approximately $1.4 million, primarily for severance payments and temporary healthcare coverage for employees with respect to eliminated positions. We anticipate having cash, cash equivalents and available for sale investments of between $65 million and $75 million at the end of 2023. At this time, we anticipate that we will need to raise additional funding by late-2024 or early 2025 to continue our research and development efforts and achieve our business objectives based on our current business plans. At our current stage of development, we believe that executing toward our roadmap and achieving our technology milestones are key to fueling our goal of achieving quantum advantage.

Our financial strategy is aligned with this view and we remain focused on meeting our objectives. Thank you. We would now be happy to answer your questions.

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Q&A Session

Operator: Thank you. Our first question comes from the line of Sidney Ho of Deutsche Bank. Your line is open.

Unidentified Analyst: Good afternoon. Can you guys hear me?

Subodh Kulkarni : Yes, we can.

Unidentified Analyst: Hi, good afternoon, guys. And thank you for taking our question. This is for Sydney. I guess my first question is on the technology roadmap. And Subodh, when we look at the new plan that you guys laid out, there’s clearly a lot more focus on improving fidelities before moving to higher qubit count. But I guess my question is, how do you balance the focus on lowering error rates versus increasing number of qubits in order to maintain technological competitiveness?

Subodh Kulkarni : It’s a good question, and thanks for that question. Certainly, both are important, the total number of qubits and the quality of qubits, long-term. But in the short term that — by that we mean 2023, and even part of 2024, where we were, we decided that fidelity was our shortcoming, if you will, for the time being. We know we have already taken 240-qubit chips and put them together, tied them together, if you will, to get our 80-qubit, Aspen M3 system. So we know how to scale up fundamentally taking two different dies and stitching them together, if you will. But what we need to demonstrate is more than 99% 2-Q fidelity across all of the qubits. And that we haven’t done yet. We have in — as I mentioned, we have in principle shown that we can get 99.5% 2-Q fidelity on a few qubits, but not on the entire lattice.

The quality of qubits right now is critical, in my opinion across the whole industry. And this is not just a Rigetti statement. All of us need to improve the quality of qubits before we go up in just the number of qubits. There are many experts in the industry who have also said that, if you could get near perfect qubits, you can get a lot of computational power, even at 40 or 50 qubit, certainly with 84-qubits, and very good fidelity, we think we can demonstrate narrow quantum advantage type with some applications. Hope that answers your question.

Unidentified Analyst: Got it. That’s very clear. Thank you so much. And then I guess my second question is on these cost cutting measures that you announced earlier in February. I guess, when we look at the new technology roadmap, and these measures, should we expect any sort of impact to your industry partnerships that you announced last year, for example, the one with Ampere or any of your DARPA contracts?

Subodh Kulkarni : Again, good question. We already have several partnerships that we are working on, including the one with Ampere that you mentioned. We have several partnerships with DoE and DoD labs as well. We will continue to be engaged with our partners and seek more partners that makes sense. We have laid out and defined our roadmap. So long as the partnerships are consistent with the roadmaps, we would be very happy to be seeking new partners and staying with the current ones. If the partnerships are taking us in a different direction, we will choose to take different actions. But as of today, the partnerships we have in place, we feel very good about them and helping us accomplish our objective of narrow quantum advantage in the next two to three years.

Unidentified Analyst: Got it. Okay, that makes sense. And I guess if I can squeeze one last one in, I guess, if you could touch on sort of the level of engagement that you’re seeing among your customers given sort of like the tighter IT budgets, meaning are customers still willing to adopt quantum systems and instead of explore the technology at the states ? Thank you.

Subodh Kulkarni : Sure. So again, good question. I mean, we certainly see a lot of interest from our customers, including the ones who are using AWS, as well as Azure and our own cloud platform. Having said that, certainly we are still very much in the research stage of quantum computing. So the interest level from customers right now is to use our QPU, for some research purposes. It’s not really to try our QPU to for any commercial application, where they will see a benefit with respect to a classical computation. So we are seeing very high interest and very high awareness of where we are and where we are going. I certainly anticipate that as we get our fidelity up to 98%, later this year and 99% next year, the customer engagement will only continue to increase, because then they will be able to do more and more with those kinds of QPUs. So expect customer engagement to increase. Right now, as I said, it’s high, but primarily for research purposes.

Unidentified Analyst: Thanks, guys.

Subodh Kulkarni : Thank you.

Operator: Thank you. One moment, please. Our next question comes from the line of David Williams of Benchmark Company. Your line is open.

David Williams : Hey, good afternoon, and thanks for taking the question. So Subodh, I just want to touch briefly, but when we spoke last, I think — I feel today that you’re a lot more confident, in just kind of talking about the roadmap and where you are. I’m just kind of curious if there’s anything that’s changed that gives you that more comfort? Is it because you’ve just had a chance more time with the technology? Because I think you felt that it was very solid, but it does feel like even from the timelines that you and I had spoken about before, it feels like maybe some of that’s a little more advanced now. So just kind of any color there would be very helpful.