In a recent earnings call, D-Wave Systems Inc. (NYSE: QBTS) CEO Dr. Alan Baratz discussed the company's strong performance in the second quarter of 2024.
D-Wave, known for its annealing quantum computing solutions, announced significant growth in various sectors, including an expanded partnership with Zapata AI and the installation of a second quantum computer in the US. The company reported a 41% increase in revenue to $4.6 million and a 58% increase in bookings to $7.2 million for the first half of fiscal year 2024.
The call also covered the company's financial metrics, such as a substantial increase in gross profit and a decrease in operating expenses, leading to a net loss improvement. D-Wave ended the quarter with over $50 million in cash and joined the Russell 3000 Index, marking a milestone in its financial journey.
Key Takeaways
- D-Wave's Q2 2024 results show strong year-over-year growth in bookings for nine consecutive quarters.
- The company highlighted the placement of a second quantum computer in the US and advancements in technology, including the Fast anneal feature.
- D-Wave reported a 41% increase in revenue and a 58% increase in bookings for the first half of the fiscal year.
- Gross profit increased by 171%, while operating expenses decreased by 16%.
- The company's net loss improved, and it ended the quarter with a consolidated cash balance of $40.9 million.
- D-Wave joined the Russell 3000 Index, enhancing its visibility among investors.
Company Outlook
- CEO Baratz expects the effects of sales force realignment to dissipate by year-end, potentially accelerating bookings.
- The company aims for sustained profitability with less funding than competitors.
- D-Wave announced a $175 million S3 shelf registration statement and an equity line of credit of $82.1 million.
Bearish Highlights
- The company is still operating at a net loss, although it has shown improvement from the previous year.
Bullish Highlights
- D-Wave's technology has allowed for faster solutions and has achieved quantum supremacy, generating interest from government and commercial markets.
- The company's land and expand strategy has been successful, particularly in manufacturing, logistics, and government sectors.
Misses
- No specific revenue guidance was provided for upcoming quarters.
Q&A Highlights
- Baratz emphasized the company's focus on quickly delivering value in specific verticals, particularly noting increased government interest.
- Customers are primarily interested in the effectiveness of D-Wave's solutions for their problems.
- Revenue composition from Quantum (NASDAQ:QMCO) Computing as a Service (QCaaS) stood at 81%, with professional services accounting for 16%.
D-Wave Systems Inc. has showcased a strong performance in the second quarter of 2024, with its CEO Dr. Alan Baratz highlighting the company's growth and advancements in quantum computing technology. The company's financial metrics indicate a positive trajectory, with substantial increases in revenue and bookings, as well as an improved net loss. The earnings call concluded with a positive outlook for D-Wave's future, emphasizing the growing awareness and application of quantum computing in solving complex business challenges.
InvestingPro Insights
In the wake of D-Wave Systems Inc.'s (NYSE: QBTS) upbeat earnings call, it's important to consider a broader financial perspective provided by InvestingPro. D-Wave's reported revenue growth is indeed impressive, with a 36.87% increase in the last twelve months as of Q1 2024. This aligns with the company's strong performance highlighted during the call. Additionally, the gross profit margin stands at a healthy 60.79%, underscoring the company's ability to translate sales into profit.
However, InvestingPro Tips suggest a note of caution. Analysts have revised their earnings downwards for the upcoming period, indicating potential headwinds. Moreover, the company is quickly burning through cash, which could pose a challenge to its operational sustainability. This is further supported by the fact that analysts do not anticipate the company will be profitable this year, a sentiment that aligns with the net loss mentioned in the article.
InvestingPro Data also shows a market capitalization of $144.23 million, which, when considered alongside a P/E ratio of -1.78, suggests that investors are currently skeptical of the company's earnings potential. The stock price has experienced significant volatility, with a 1-week total return of -14.99% and a 1-year total return of -52.66%, reflecting the market's reaction to the company's financial position and future prospects.
For readers looking for a deeper dive into D-Wave's financial health and future outlook, InvestingPro offers additional tips. There are 13 more InvestingPro Tips available that provide valuable insights into the company's performance and potential investment opportunities. These tips can be found at https://www.investing.com/pro/QBTS, offering a comprehensive analysis for those considering D-Wave as an investment.
Full transcript - D Wave Quantum Inc (QBTS) Q2 2024:
Operator: Good morning, ladies and gentlemen and welcome to the D-Wave Second Quarter 2024 Earnings Call. [Operator Instructions] This call is being recorded on Thursday, August 8, 2024. I would now like to turn the conference over to Kevin Hunt from Investor Relations. Please go ahead.
Kevin Hunt: Thank you and good morning. With me today are Dr. Alan Baratz, our Chief Executive Officer and John Markovich, our Chief Financial Officer. Before we begin, I would like to remind everyone that this call may contain forward-looking statements and should be considered in conjunction with cautionary statements contained in our earnings release and the company’s most recent periodic SEC report. During today’s call, management will provide certain information that will constitute non-GAAP financial and operational measures under SEC rules such as non-GAAP gross profit, non-GAAP gross margin, non-GAAP adjusted operating expenses, adjusted EBITDA loss and bookings. Reconciliations to GAAP financial measures and certain additional information are also included in today’s earnings release, which is available in the Investor Relations section of our company’s website at www.dwavequantum.com. I will now hand over the call to Alan.
Alan Baratz: Good morning everyone, and thank you for joining us today. I’m excited to share our Q2 business results with you. As we continue to see positive momentum across the business. The world is waking up to the fact that annealing quantum computing is here. Now and it’s driving measurable outcomes for our commercial, government and research customers. We believe that D-Wave is single handedly, and I’ve said this before, single handedly, creating the market for commercial quantum computing. Let me illustrate our momentum with a quote from IDC analyst, Heather West, who recently wrote, and I quote because D-Wave Quantum’s quantum annealer is specifically built for solving optimization problems. Some may argue that the quantum annealer is limited in the type of problem that it can be used to solve. However, optimization problems are one of the most prevalent problems found in all industries. Hence, D-Wave Quantum technology provides an access point for all end users that are interested in using quantum computing to gain business value, both today and into the future. Again, that’s our IDC analyst, Heather West. So there is rapidly growing recognition of the value and potential of D-Wave and its unique annealing quantum computing solutions to one streamline and optimize business processes, including applications like workforce scheduling, vehicle routing and resource allocation, and two fuel important research breakthroughs in areas like material science. And there is a growing realization that annealing quantum computing can deliver results in these areas today, not 5 or 7 years from now, but today. For example, we’re being invited to engage in an increasing number of government meetings and conferences to provide government personnel with a better understanding of the capabilities of quantum computing technologies today and in the future. We’re also seeing an increase in third-party scientific papers highlighting our annealing quantum computing technology and its capabilities. Lastly, we’re hearing from more-and-more customers from both the private and public sectors that they’ve tried quantum computing solutions, but need to work with D-Wave, the quantum vendor that has real, scalable and production grade commercial solutions today. Customers have indicated that abysmal availability and reliability from other quantum vendors are huge pain points and a block for accelerated adoption. We believe that only D-Wave is able to provide the commercial grade systems and services to solve real world, large scale problems at the speed needed right now. I’d like to now walk through a few key business highlights, starting with product and technical advancements. Last week, we announced a Quantum AI product development roadmap that extends D-Wave lead quantum cloud service to incorporate AI and machine learning. Our efforts will focus on helping customers address AI/ML workloads, including pre-training optimization, more accurate and efficient model training and opening new AI business use cases that require the integration of AI and business optimization. This effort is in direct response to growing demand from our customers as the broader industry is confronting a computing crunch. The amount of compute and the associated energy costs needed to satisfy a growing set of AI and ML use cases is rapidly escalating. Our quantum AI solutions aim to leverage annealing quantum computing’s ability to solve optimization problems to help customers achieve better, faster, cheaper and more energy efficient AI and ML solutions. The opportunity for D-Wave could be massive, and more importantly, the benefit to our customers could be transformative. As part of the quantum AI product roadmap initiative, we recently announced a significant expansion to our commercial partnership with Zapata AI. Our extended collaboration is designed to accelerate the development and delivery of integrated quantum and generative AI solutions in D-Wave’s Leap cloud platform. The expanded agreement leverages the part as universal generative AI software for rapid development, and builds on D-Wave, sleep, real time quantum cloud service to support quantum, hybrid quantum and even pure classical AI solutions. Together, our joint development work will focus on improved and more energy efficient model training more performant models and the synergistic use of generative AI and quantum optimization. It is an important piece of our overall Quantum AI strategy. On the system side of our business, we shared that we are placing a second advantage quantum computer in the U.S. This will mark the fourth production quantum computer in the Leap quantum cloud service. We’re thrilled that the system will reside at Davidson Technology’s new global headquarters in Huntsville, Alabama. I was actually just down in Alabama with Dale Moore and his team from Davidson at the Space and Missile Defense symposium event talking about the significance of this system placement, especially to the U.S. government. The system will eventually be housed in a secure facility that could run sensitive applications using our quantum technology. This is an important development in our partnership with Davidson, as we collaborate to accelerate quantum computing adoption among government agencies, especially in the areas of national security. We’re also making noteworthy progress on our path toward delivering the 7000 plus qubit advantage two product. We are nearing completion of calibrating a 4800 plus qubit Advantage2 processor, following the launch of the 1200 plus qubit Advantage2 prototype earlier this year, which is available for customer use now in our Leap quantum cloud service. We are also furthering our ongoing development of new control protocols that should help customers perform expanded and richer quantum computations on our QPU’s. I’ll highlight a few examples. The first is Fast annneal. As discussed during our Q1 earnings call, we introduced our powerful new Fast anneal feature in April to help users perform quantum computations at unprecedented speeds, thereby reducing the impact of external disturbances, such as thermal fluctuations that can hinder quantum calculations. Customer response has been incredible, as they have now submitted 2.5 million problems using this feature. The second is cyclic annealing. Research and development of cyclic and iterative annealing protocols are underway. We could extend the coherent regime across multiple cycles. This means that the system could potentially provide the same performance benefits that would result from much longer coherence times. Truly exciting work is happening here. The final is Bell inequality violation by leveraging novel QPU control protocols. We have been able to show a violation of Bell’s inequality, which is a widely recognized signature of quantum behavior in the fabric of our annealing QPU’s. We are able to produce targeted qubit excitations and analyze and read out qubit state in arbitrary bases midway through the annealing process. This enables us to explore both digital and analog quantum computing protocols in the same processing fabric and potentially opens up important new applications, opportunities such as much richer quantum distributions for generative AI architectures. Now turning to software. We launched a new nonlinear program, hybrid-quantum solver in June. This new solver enables customers to tackle real world problems of growing complexity, supporting up to 2 million variables and constraints, which represents a tenfold increase in problem size capacity over further D-Wave solvers for certain applications, we also introduced new demos of applications built with this new hybrid solver, addressing, vehicle routing and flow shop scheduling. These were introduced at our annual qubit’s user conference in June. The new hybrid solver is part of our expanding set of commercial quantum optimization offerings supporting the aggressive go-to-market growth strategy that we announced earlier this year. During the quarter, we also continued to expand our extensive patent portfolio. Totaling over 240 issued U.S. patents with more than 60% of our patents covering both annealing and game model technologies. D-Waves patent portfolio is ranked as the third largest quantum computing patent portfolio in the world, behind only IBM (NYSE:IBM) and Google (NASDAQ:GOOGL). So as you can see, we’ve been remarkably busy with technology and product development, delivering new solutions that are 100% focused on providing customer value. It’s not innovation for innovation sake, but rather development that helps our customers solve problems of even greater complexity in ways that are better, faster, less costly and more energy efficient. And speaking of customers, let’s switch gears and discuss commercial momentum. Our second quarter 2024, bookings mark, our ninth consecutive quarter of year-over-year growth in quarterly bookings. In comparing the most recent four quarters with the immediately preceding four quarters, our customer count rose from 114 to 130 commercial customers went up from 70 to 77 and we counted 26 Forbes Global 2000 companies as customers, constituting 33% of total commercial customers and 26% of total revenue. We are working with customers on a wide range of quantum optimization applications, including body shop scheduling and vehicle router. Let me highlight a couple of examples. First, we are working with Ford Otosan, an automotive manufacturing company based in Turkey that is equally owned by Ford Motor Company (NYSE:F) and Koch holding. Together, we have built a solution to generate a sequencing schedule that maximizes vehicle production for the body shop. The quantum optimization application was able to schedule 1000 vehicles per run in under 5 minutes, compared to 30 minutes using their current process. Next up, Hermes, Germany, a leading logistics service provider in Germany, is working with us and our partner, QuantumBasil, to explore a vehicle routing quantum optimization application to route trucks from 50 depots to a network of 17,000 parcel shops throughout Germany. The project aims to understand quantum ability to better optimize these routes in terms of time, distance and CO2 emissions. And as you can see, this falls right in the sweet spot of the verticalization strategy we’ve talked about previously with our focus on manufacturing and supply chain logistics. All are very exciting projects spanning a diverse set of quantum optimization problems. Just as exciting was the quantum industry’s interest and participation in our 10th Qubits User Conference in June, more than 600 attendees, representing 452 organizations from 50 countries participated, live or virtually, an incredible turnout for the ecosystem of D-Wave and annealing quantum computing supporters. This year’s theme was fittingly success powered by quantum and we are excited to see an impressive group of organizations on stage sharing their stories of impact using D-Wave technology. This included Los Alamos National Lab, MasterCard, SAS, Davidson Technologies, QuantumBasael, Zapata AI, Unisys (NYSE:UIS) and more. The energy was palpable with attendees inspired by these real world successes and expressing their excitement for what we are building in our D-Wave quantum computing – quantum community. I think everyone was equally inspired by my dramatic reading of a reimagined version of the tortoise and the hare. As I donned a smoking jacket and shared the story of D-Wade serving as the measured, unflappable turtle winning the quantum race. If you haven’t seen it, check out my qubits keynote on YouTube. So we are clearly witnessing growing awareness and interest in our solutions in the commercial sector. But that’s not all. We’re also seeing similar traction in the government sector. This quarter, we saw an uptick in D-Wave interest from a number of major government organizations and companies that service the public sector to build applications that showcase how quantum computing can address critical public sector and national security challenges. Policymakers continue to expand government programs to encompass near-term applications as well as support for quantum annealing and quantum-classical technologies. Additionally, Congress is beginning to move policy which supports establishing testbed programs exploring the intersection of AI with other emerging technologies like quantum computing. Let me highlight another sign of increasing interest in our technology. We’ve seen double-digit enrollment growth for our quantum training courses in the first 6 months of 2024 compared to the same period in 2023. Enrollment in the quantum programming core course increased by 53% and combined enrollments for our Core Plus foundations for quantum programming increased by 85%. We believe this underscores a growing global movement to train workers to keep pace with the rapidly increasing adoption of quantum computing and specifically the waste technology. John will walk you through the financials in just a minute, but there are two financial related items that I wanted to call out. First, D-Wave has joined the Russell 3000 INDEX. As you all know, Russell indices are used by investment managers and institutional investors for index funds and as benchmarks for active investment strategies. Our inclusion in this group is an honor, and we will great and will greatly increase visibility among the global investor community for the innovative quantum solutions we are bringing to market. And second, we are pleased to share that we ended the quarter with more than $50 million in cash, one of the company’s highest quarter in cash balances in history. There’s been a solid quarter with impressive product innovations and customer adoption of these new products. Customers are clamoring to put these solutions to use in their operations. That appetite is evident in our commercial traction, government public sector interest and market position. With that, I’ll hand the call over to John to provide a review of our second quarter and first half 2024 results. John?
John Markovich: Thank you, Alan and thank you to everyone taking the time to participate in today’s call. In my review of the second quarter and first half results, I will be providing non-GAAP operating metrics, including bookings, as well as non-GAAP financial metrics, including non-GAAP gross profit, non-GAAP gross margins, non-GAAP adjusted operating expenses and adjusted EBITDA loss is we believe these metrics improve investor’s ability to evaluate our underlying operating performance. These measures are defined in the tables at the bottom of today’s second quarter earnings press release, with the non-GAAP financial metrics, for the most part, adjusting for non-cash and non-recurring expenses. Revenue for the second quarter of fiscal 2024 total $2.2 million an increase of approximately $500,000 or 28% from the second quarter of fiscal 2023, revenue, $1.7 million. Bookings for the second quarter total $2.7 million an increase of approximately $200,000 or 6% from the second quarter of 2023 bookings of $2.5 million. The $2.7 million in second quarter bookings represents the ways ninth consecutive quarter of year-over-year growth in quarterly bookings. There are two noteworthy developments that I would like to highlight with respect to our bookings and bookings trend. One, our sales organization is currently undergoing a transformation under the new leadership of Lorenzo Martinelli, who joined D-Wave as Chief Revenue Officer several months ago. Lorenzo is focused on expanding the size of the sales organization, as well as aligning the sales organization’s capabilities and expertise with our vertical market focus that encompasses manufacturing, supply chain, logistics and government, with a specific focus on four quantum market categories, optimization, AI, research and infrastructure. The entire go-to-market organization has been intimately involved with the organizational up leveling, which has had some impact on near-term sales productivity. We are planning on completing this transformation by the end of this year. Second the composition of our bookings in the first half of the year has trended towards larger, longer term, higher margin QCAS contracts. That has changed the recent historical bookings to revenue relationship, providing an incrementally greater line of sight to our future year revenues and gross margins. Between the end of the fourth quarter of 2023 and the end of the second quarter, our revenue backlog increased by $3.1 million or 64% from $5 million to $8.1 million with the composition of the backlog shifting as follows. As of the end of December, 73% of the revenue backlog was expected to be recognized in the following 12 months and 27% thereafter, whereas as of June 30, 42% of the revenue backlog was expected to be recognized in the following 12 months and 58% thereafter. Furthermore, QCaaS as a percentage of the revenue backlog increased between the two periods. Our revenue backlog disclosure can be found in the remaining performance obligations, footnote number three to the financial statements set forth in our second quarter Form 10-Q that will be filed with the SEC after market closed today. With respect to customers, we continue to broaden and diversify our customer base across commercial government and research customers. In comparing the most recent four quarters with the immediately preceding four quarters, D-Wave had a total of 130 customers, compared with a total of 114, 77 commercial customers, compared with 70 commercial customers. With the commercial customers, including 26 Forbes Global 2000 customers, compared with 22 Forbes Global 2000 customers, with these Forbes Global 2000 customers, constituting 33% of the total number of commercial customers over the last four quarters. With respect to commercial traction. In comparing the most recent four quarters with the immediately preceding four quarters, revenue from commercial customers increased by 35% or $1.8 million commercial revenue as a percentage of total revenue remain relatively flat at 65.9% versus 66.7% and revenue from Forbes Global 2000 customers increased by 50% or approximately $900,000 with Forbes Global 2000 customers constituting 26% of total consolidated revenue. Several of these Forbes Global 2000 customers include NEC, VINCI, Posh Holdings, MasterCard, Bridgestone Corporation and the Interpublic Group. With respect to gross profit. GAAP gross profit for the second quarter was $1.4 million an increase of approximately $700,000 or 97% from the second quarter of fiscal 2023 GAAP gross profit of approximately $700,000 with the increase due primarily the growth in revenue and increased operating efficiencies. Non-GAAP gross profit for the second quarter was $1.6 million an increase of approximately $600,000 or 61% in the second quarter of fiscal 2023 non-GAAP gross profit of approximately $1 million. Again, with the increase due primarily the growth in revenue and increased operating efficiencies. The difference between GAAP and Non-GAAP gross profit and gross margin is limited to non-cash stock based compensation and depreciation expenses that are excluded from the non-GAAP gross profit and gross margin. GAAP gross margin for the second quarter was 63.6% an improvement of 22.3% from the second quarter of fiscal 2023 GAAP gross margin of 41.3%. Non-GAAP gross margin for the second quarter was 73.1% an improvement of 15% from the second quarter of fiscal 2023 non- GAAP gross margin of 58.1%. With respect to operating expenses, the GAAP operating expenses for the second quarter were $20.2 million a decrease of $1.4 million or 6% in the second quarter of fiscal 2023 GAAP operating expenses of $21.6 million, with the improvement driven primarily by decreases of $1.7 million in third party professional services and approximately $400,000 in non-cash, stock based compensation expense. Partially offset by an increase of approximately $800,000 in marketing expenses. Non- GAAP adjusted operating expenses for the second quarter was $15.5 million a decrease of approximately $400,000 or 3% from the second quarter of fiscal 2023 non- GAAP adjusted operating expenses of $15.9 million that reflects the company’s continued focus on expense management with the decline driven primarily by a decrease of approximately $800,000 in third party professional services, $200,000 in fabrication related activities, and $200,000 in insurance, partially offset by an increase of approximately $800,000 in marketing expenses. Again, the difference between GAAP operating expenses and non-GAAP adjusted operating expenses is primarily non-cash stock based compensation expenses and depreciation and non-recurring expenses. The net loss for the second quarter was $17.8 million or $0.10 a share, a decrease of $8.4 million or $0.11 per share from the second quarter of fiscal 2023, net loss of $26.2 million or $0.21 cents per share. Adjusted EBITDA loss for the second quarter was $13.9 million an improvement of $1 million or 7% from the second quarter of fiscal 2023 adjusted EBITDA loss of $14.9 million with the improvement driven by higher gross profit in combination with lower operating expenses. Now I will address the operating performance for the first half of 2024. D-Wave revenue for the 6 months ended June 30 2024 was $4.6 million an increase of $1.3 million or 41% from revenue of $3.3 million in the 6 months ended June 30 2023. Bookings for the first half of fiscal 2024 were $7.2 million an increase of $2.7 million or 58% from bookings of $4.5 million in the first half of fiscal 2023. GAAP gross profit for this first 6 months of fiscal 2024 was $3 million an increase of $1.9 million or 171% from GAAP gross profit of $1.1 million for the first 6 months of fiscal 2023 with the increase due primarily the growth in revenue and increased operating efficiencies. The non- GAAP gross profit for the first 6 months of fiscal 2024 was $3.5 million an increase of $1.7 million or 89% from the year earlier 6 months, non-GAAP gross profit of $1.8 million. With respect to margins, GAAP ross margin for the first half of fiscal ‘24 was 65.6% an increase of 31.4% from the 34.2% GAAP gross margin in the first half of fiscal 2023 with the increase due primarily the growth in revenue and increased operating efficiencies, The non-GAAP gross margin for the first half of fiscal 2024 was 75% an increase of 18.9% from 56.1% and the 6 months ended, June 30, 2023. The difference between GAAP and non-GAAP gross profit and margin is limited to non-cash, stock based compensation and depreciation expense that are excluded from the non-GAAP gross profit and gross margin. With respect to first half operating expenses. The GAAP operating expenses total $39.4 million a decrease of $7.3 million or 16% from the GAAP operating expenses of $46.7 million in the first half of fiscal 2023 with the year-over-year decrease primarily driven by $3.5 million in non-cash stock based compensation expense, and $4 million in third party professional services. Non-GAAP adjusted operating expenses from the first half of 2024 were $30.3 million a decrease of $3.4 million or 10% from $33.7 million non-GAAP adjusted operating expenses in the first half of fiscal 2023. Net loss for the 6 months ended June 30, 2024 was $35.1 million or $0.21 per share, compared with a net loss of $50.6 million or $0.40 per share in the 6 months ended June 30, 2023. Adjusted EBITDA loss for the first half of fiscal 2024 was $26.8 million an improvement of $5 million or 16% from the adjusted EBITDA loss of $31.8 million in the first half of fiscal 2023 with the decrease due primarily to higher gross profit and reduced operating expenses, particularly with respect to third party professional services. Now to really address balance sheet and liquidity. As of June 30, 2024 D-Wave consolidated cash balance totaled $40.9 million an increase of $33.4 million or 444% from the year earlier. Second quarter sash balance of $7.5 million. On April 12 of this year. D-Wave’s $175 million S3 shelf registration statement was deemed effective by the SEC. On that same date, the company’s equity line of credit S3 registration statement with Lincoln Park Capital Fund also went effective. As of the effective date, the company had $82.1 million in available DACA issuance capacity under the equity line of credit, with the investment commitment running through October of 2025. As of June 30 D-Wave has $61.8 million in available issuance capacity under the equity line of credit. D-Wave’s ability to raise additional funds under the equity line of credit is subject to a number of conditions, including having a sufficient number of registered shares and D-Wave stock price being above $1 per share. On May 31, 2024 the S3 registration statement was partially used for a $100 million at the market program as of June 30, 2020 D-Wave has $90.7 million of issuance capacity under the ATM, and had a total of $152.5 million in common stock issuance capacity under the ELOC and ATM on a combined basis, as well as an additional $75 million in unallocated capacity under the S3 shelf registration statement. Subsequent to the end of the second quarter, D-Wave began paying down the term loan with PSPIB Unitas Investments with payments totaling approximately $15.8 million leaving a loan balance of about $18.6 million as of today. We are reiterating the full year 2024 financial guidance set forth in our March, 28, 2024 fiscal 2023 four quarter and full year earnings press release, our guidance is subject to various cautionary factors described below, based on the information available on August 7 2024 guidance for the full year 2024 is as follows. We expect the fiscal 2024 adjusted EBITDA loss to be less than the fiscal 2023 adjusted EBITDA loss of $54.3 million. To conclude, as we have previously stated, we believe that D-Wave has the opportunity to be the first independent, publicly held quantum computing company to achieve sustained profitability, and to achieve this milestone with substantially less funding than required by any other independent, publicly held quantum computing company. With that, we will now open the call for questions.
Operator: Thank you. [Operator Instructions] Your first question is from the line of Craig Ellis from B. Riley Securities. Your line is now open.
Craig Ellis: Yes. Thank you for taking the question and guys, congratulations on the technical and commercial progress as well as joining the Russell 3000. Nice to see. Alan, I wanted to start with just a follow-up to the point you made on AI developments and better understand what the roadmap progress and the Zapata partnership agreement mean for really the timing to broadening commercial engagement, since that’s been one of the strengths of the company and what some of the milestones are that we observers should keep in mind as you go down that path.
Alan Baratz: Sure. Thanks Craig for the question. Actually, before I answer the question, I think I need to correct a misstatement that I made earlier, although John said it properly, that our cash balance at the end of the second quarter was a little over $40 million. I may have misstated it as $50 million, but $40 million is the correct number, so I just wanted to correct that. With respect to your question, Craig, so more and more of our customers are asking us how we can a help to improve their AI machine learning initiatives and B combine AI and machine learning with our optimization capabilities. The example of the ladder that I often like to use is, AI is good at being predictive. So you could predict demand for products over some future period and then use quantum optimization to optimize the supply chain in support of that demand. So based on these customer requests, we really started thinking through how we could help to our help our customers to better leverage AI and machine learning. And based on work that we had actually been doing ourselves and with some of our customers, what we realized is that we have opportunities in three areas. One is to help our customers build more accurate models by leveraging quantum distributions in the training of those models, rather than classical distributions. Two, develop AI machine learning models with much less energy consumption, because our quantum computers are very energy efficient compared to GPUs, which are used pretty much exclusively to train models today. And then third, as I said, bring together AI machine learning with quantum optimization, and we’ve got some early proof points in each of these areas, as we’ve talked about, some work that we’ve been doing with triumph, which is a leading scientific research institution in Canada, as well as some other companies that are starting to demonstrate the fact that we can be successful in all three of those areas. And then, of course, Zapata AI has some software that actually can be used to get a quick start on doing this quantum AI integration for model training. So essentially, what the roadmap constitutes is a enhancing the lead cloud service with more GPU capability, so that, as soon as possible, our customers can leverage our Leap cloud service, not just for quantum optimization, but also for AI model training, even if only classically to start then be integrating the quantum computations with AI machine learning to kind of enable that integrated machine learning quantum optimization capability, and then finally, actually leveraging the quantum computers in support of doing the model training to be able to deliver better models. So that’s essentially how we are focused on supporting our customers and rolling out capabilities through our Leap cloud service.
Craig Ellis: Yes, a lot there and it makes sense. Thanks for that, Alan. And then John, I just wanted to circle back to the point on bookings and make sure I get the bookings math based on the numbers that you provided. So it sounds like with the increase in bookings, but the duration difference, we’ve got a sustained low 3 million forward 12-month visibility to booking. So $3.2 million, $3.3 million of forward 12 months. But where we are today is that the visibility beyond that looks like it’s up about 2.5x versus 6 months ago, with about $5 million of visibility versus $2 million, 6 months ago. Is that math correct?
John Markovich: The numbers I referenced earlier, Craig was a remaining performance obligations as of the end of June of $8.1 million and I compared that to $5 million as of the end of the fourth quarter. So a $3.1 million increase, but the composition of bookings changed rather significantly as a result of the longer-term QCaaS bookings. And this is broken out – and this will be broken out in great detail in the Q that we will file later today. Does that answer your questions?
Craig Ellis: Yes. It does, but it sounds like my math is right. Given the change in timing distribution, that means that with the big increase, a lot of that has occurred beyond 12 months to give people longer term visibility on the business. Okay. Thanks guys. Appreciate your help. I will hop back in the queue. Actually, let me sneak one more in. I didn’t hear John a breakout between cash, revenue and...
John Markovich: Craig, I apologize. We are starting to run late. So, I think we are going to hold you to the two. Sorry. Let’s go to the next question please.
Operator: Your next question is from the line of Quinn Bolton from Needham. Your line is now open.
Quinn Bolton: Hey guys. Let me also offer my congratulations on the continued progress. Alan and John, you guys mentioned sort of the change in the sales force leadership and resulting changes to the sales organization. It sounds like it’s had some near-term impact, I am wondering if you see that impact really more affecting just the bookings activity, has it actually impacted revenue? And you mentioned you sort of thought that it would – those effects would sort of dissipate by the end of the year. So, should we infer that as we get into the fourth quarter and certainly into the first couple of quarters next year, that you would expect an acceleration in bookings activity now that you have the sales force realigned?
Alan Baratz: So, obviously we are not giving guidance on bookings. But I think the fact that we are significantly ramping up staffing in the go-to-market arena, and specifically bringing in skills in the areas, John to outline the verticals as well as the application areas that your characterization is reasonable.
Quinn Bolton: Perfect. And then I will throw a technical question, but you mentioned the bills inequality violation and it allows you to explore digital and analog quantum computing. Just what’s, sort of if you could, Alan, dumb it down for those of us that aren’t quantum experts, what’s the importance of that, especially sort of an analog versus digital capability. What does that bring to customers or how does that allow you to expand the application use case of annealing?
Alan Baratz: Yes. So, first of all, let me just take a second and say, when we say digital and analog, what I am about to say is pretty close to accurate. It’s not 100% accurate, but it’s pretty close. Essentially, what we are saying is combining deep model type computation with annealing type computation all within our annealing fabric. Now, what’s the significance of that, as I mentioned, the significance of that is that it will allow us to generate quantum distributions that are in some sense richer than what we can generate with annealing exclusively, and that will have significant benefits in areas like machine learning, model training and I think I have talked about this briefly in the past, but doing some exploration in the area of hashing functions, these kinds of rich quantum distributions can be very helpful there as well. So, think about energy efficient hashing functions.
Quinn Bolton: Perfect. Thank you.
Operator: Your next question is from the line of Richard Shannon from Craig-Hallum. Your line is now open.
Richard Shannon: Well, great. Alan, John, thanks for taking my questions. I am going to follow-up on some comments from John, but the question really is more for Alan here. John, you detailed some changes to the go-to-market sales force in the context of the bookings and kind of changes there. I guess my question really for Alan here is going back to the analyst event back in January, you talked about a goal of increasing time to revenues and time to solution for customers here. Maybe you can give us context here in the sales force changes being made here, they are affecting bookings. How has that also helped or maybe just give us an update on how you think your progress is going in terms of accelerating the time to solution from your sales force?
Alan Baratz: Yes. So, I think – as I have said at the analyst conference, the approach of focusing on some key verticals and some key use cases, we believed and believe accelerates time to production by allowing us to get the benefits of reuse. In other words, we learn from developing a use case with them for one customer and we can bring those learnings to the next customer and get better at it and the next customer and so on. Ultimately being able to move faster and help customers get it into production more quickly. And that is still our view and our goal. But it does take some time. I mean this whole notion of learning from reuse means that we need to learn and we need to reuse. So, by staying focused, we are making progress towards that end. But it does take some time and then of course, as we introduced the new verticalization strategy, it meant we needed to, in some sense tool up the go-to-market organization with the skills in those vertical areas and use cases to be able to be effective in selling and supporting customers in those areas. And that’s all work that we started to put in place. As we were coming through the analyst conference in January, one of the early and most important steps was to hire our new Chief Revenue Officer, Lorenzo Martinelli, who has a strong background in this area and has kind of worked to, if you like, determine how to best retool the go-to-market organization and that’s now all starting to get implemented, including significant focus on staffing. We will over double the go-to-market staffing over the course of the remainder of this year.
Richard Shannon: Okay. Thanks for that detail, Alan. The follow-up on that seems very interesting dynamics there. My follow-on question is touching on the fast and yield feature. Your press release mentioned you have got 2.5 million problems up from 0.5 million problems that you mentioned at the conference call a quarter ago, obviously impressive growth there. I guess maybe just for five, would be interesting to hear some perspective on what this exactly means from both a sales and a technology, seasoning perspective here. I am guessing there is probably not much of any real sales associated with this, but maybe you can help us understand and what you expect from all of these problems being submitted and how this helps advance your technology platform. Thanks.
Alan Baratz: Yes. So, maybe two comments. First, the fact anneal capability combined with the 1,200 qubit Advantage2 system that’s now available in our cloud service was the platform that we used to achieve the quantum supremacy result. We tried to do that work on the Advantage system. The 5,000 qubit Advantage system, but it really required the 1,200 qubit Advantage2 processor with fast anneal, because of the longer coherence times. And the longer coherence times combined with the fact anneal, means that essentially we can get to solutions faster because we know that the rate to optimality is much faster when we are doing coherent quantum annealing. When the annealing process is running while the system is coherent and there is a combination of the longer coherent times in the Advantage2 processor with the fast anneal, right. So, that it’s – so, that anneal is not living outside of the coherence times and we are starting to see impact of the external environment, we can get to solutions much faster. So, on the one hand, it gave us a quantum supremacy result, which has been invaluable in getting the government, the U.S. government and other governments around the world excited about finally starting to get engaged with the way so opening up more opportunities for us there. It’s also been a supporting message for the commercial market as they get more and more comfort with our technology being able to do things that can’t be done classically. And then secondarily, and maybe even more directly, it just means that we are able to deliver better solutions faster to their commercial optimization problems.
Richard Shannon: Great. Thanks for all that detail. I am going to unpack that one a little bit later. But that’s all the questions for me guys. Thanks.
Alan Baratz: Thanks.
Operator: Due to time, we will only allow one question, then ask you to rejoin the queue for the follow-up question. Your next question is from the line of David Williams from Benchmark. Your line is now open.
David Williams: Great. Thanks so much for taking my question here. I guess maybe for John, revenue was below expectation, I believe below where you guided and you have talked a little bit about this. But I am just wondering if maybe you can help us understand how you typically expect maybe bookings to convert to revenue and then how much of your business is generally a turns business or business captured during the that quarter? Thank you.
John Markovich: Dave, I think you stated revenue guidance which for clarity, we have not provided any revenue guidance. We provide an EBITDA guidance on the year. As I mentioned earlier the composition of our bookings has changed rather significantly in the first half of the year, which has changed the historical relationship between bookings and when that revenue is recognized. As of the end of December, when we looked at our revenue backlog at that point, 73% of the revenue would be recognized in the subsequent 12 months. As of the end of June, that number had dropped to 42%, meaning that the balance of 58% is stretched out over the next couple of years. So, the average contract term has lengthened rather significantly, and the bulk of that backlog is QCaaS revenue. So, the higher margin QCaaS contracts. So, that that relationship is going to be a function of whatever the composition of the bookings is at any given point in time. Does that answer your question?
David Williams: It does. Thank you.
Operator: Your next question is from the line of Suji Desilva from ROTH Capital. Your line is now open.
Suji Desilva: Hi Alan. Hi John. Congrats on the progress here. I am curious on the new sales structure, if this will help improve or accelerate land and expand efforts at the customers, maybe a customer, a revenue per customer metric in the future might show there. And particularly Alan, the verticals of optimization, AI research infrastructure, I am curious how those in particular are going to play out in terms of helping here. Thanks.
Alan Baratz: Yes. So, actually the land and expand is working quite well. We have got currently six or seven PS engagements in flight with commercial customers. I talked about Ford Otosan, I talked about Hermes. In the past we have talked about VINCI. We have talked about Mastercard (NYSE:MA) and we are progressing all of those. And so we are feeling quite good actually about that component in the model. Once we get engaged and we start working with the customer through the professional services organization, the PS team is phenomenal. They are always delivering good results and then, as a result the customers start looking to okay, how do I move this into production or what’s the next application. So, all the changes that Lorenzo is making are, in some sense more oriented towards growing the customer base as opposed to the land and expand. And with respect to AI/ML, again this just simply makes our capabilities richer and the applications more valuable in the verticals that we have already said, we want to go after, manufacturing logistics, especially logistics and government.
Suji Desilva: Okay. Thanks Alan.
Operator: Your next question is from the line of Harsh Kumar from Piper Sandler. Your line is now open.
Harsh Kumar: Actually, the last answer might chime in into the question that I am asking. But Alan, I noticed that your bookings were up very nicely and I was curious what kind of companies, end markets or customers are signing up incrementally with you. In other words, what industries are showing most interest in signing up with your company?
Alan Baratz: So, it really does continue to focus on the verticals that we have talked about. We knew at the beginning of this year that those represented the low hanging fruit, the areas where we thought we could deliver the most value fastest. And we all are having success in signing up those customers in those industries over other industries. It’s just that we need to be even more effective, move even faster, and be signing up more customers in a given period of time, but it is those areas. With a notable addition of government and there really has been rapidly increasing interest from government in our technology and that is opening up opportunities there for us as well.
Harsh Kumar: Got it. Thank you for the color.
Alan Baratz: Is there any questions left? So, if we want to circle back around, if Suji maybe or David, I guess would be next, if you wanted to ask a second question, or Suji or Harsh?
Unidentified Analyst: Hey guys. Can you hear me?
Alan Baratz: Yes.
John Markovich: Yes.
Unidentified Analyst: Great. Thanks for taking the follow-up here. Just kind of curious, Alan, if you could speak to, you have got some really nice innovation here, very, very solid on the technology front, but just kind of wondering how your customers view that. And if you could speak to maybe the key areas that they resonate most you think as you are acquiring customers? Thank you.
Alan Baratz: Yes. So, when we are talking about the use cases in the vertical areas, what they really care about is, how well can we solve this problem. And it’s really us being able to leverage our new technologies to be able to solve their problems faster and with greater precision. But at the end of the day, what they care about is solving their problems. What we care about is having the technology that allows us to do that really well. If we are talking about government and research, they want to play with the technologies, alright. That’s really what’s going on with all our competitors, right. It’s basically governments playing with the technologies, because can’t really do anything useful with them. But now, we have got some really exciting enhanced capabilities that is generating a site government and research excitement for us as well.
Unidentified Analyst: Thank you.
Operator: Your next follow-up question is from the line of Craig Ellis. Your line is now open.
Craig Ellis: Yes. Thanks for taking the question. John, can you help us with the breakout of QCaaS versus professional services in the quarter, even if qualitatively? Thank you.
John Markovich: Sure. So, for the quarter, our QCaaS revenue represented about 81% of the total revenue was – professional services represented 16%.
Craig Ellis: Thank you.
Alan Baratz: Okay. We are pretty much at time now, so let me just close out by saying that our second quarter results show continued progress and momentum on all fronts revenue, liquidity and technical advancements. There is rapidly growing awareness of annealing, quantum computing and its ability to deliver business benefits today. And this is further strengthened by our product development activities and hardware, software and quantum artificial intelligence. Our momentum is one of the few companies in the world leading the quantum transformation is evident and we thank you all for your time today.
Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.
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