D-Wave Quantum Inc. (QBTS) Q3 2022 Earnings Report, Transcript and Summary

Good morning, and welcome to the D-Wave Third Quarter Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Kevin Hunt. Please go ahead.

Thank you, and good morning. With me today are Alan Baratz, our Chief Executive Officer; and John Markovich, our Chief Financial Officer. Before we begin, I'd 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 measures under SEC rules; such as adjusted EBITDA, adjusted net income and adjusted earnings per common share. Reconciliations to GAAP measures and certain additional information are also included in today's earnings release, which is available in the Investor Relations section of our company website at www.dwavesys.com. I'll now hand over the call to Alan.

Good morning, everyone. We are pleased to share our third quarter results with you today. As the numbers reflect, our momentum with commercialization of quantum computing continues to grow. The first half of the year was somewhat slower than expected, but the headwinds that I mentioned last quarter have begun to subside, and we are seeing traction on a number of fronts. This past quarter, new companies have engaged with us, deals are now progressing through to the next stage, and both new and existing customers are signing new deals. Our [indiscernible] is a new customer with whom we are working on a manufacturing optimization applications that will drive operational cost savings associated with producing steel coils. Through our new engagement with BASF, we're building a job shop scheduling application that will optimize the throughput of jobs in the laboratory. It's clear that companies are recognizing the value of our practical quantum solutions and what they can bring to the enterprise, right now, not five years from now. Our annealing quantum computer is unique in the quantum industry. And unlike other modalities, we are able to provide significantly better solutions to hard business optimization problems today. This provides a first-mover advantage that we are capitalizing on. In fact, through the first nine months of this year, we've expanded our customer footprint to 63 total commercial customers, reflecting a 34% year-over-year increase. Our Quantum Cloud business continues to be the primary growth driver for us, Quantum Compute as a Service revenue grew by 37% year-over-year and comprised 79% of our total revenue for the quarter. Customers like Mastercard, Johnson & Johnson, Deloitte and others are working with us on quantum hybrid applications that will improve business efficiencies, reduce costs and drive growth. New and enhanced applications in development include 3d-bin-packing, which increases the number of different size and shape boxes that can be packed into shipping advantage thus reducing cost; customer offer allocation, which improves uptake for customer loyalty programs; employee scheduling, which allows businesses to meet the needs of their employees while improving business operations; and feature selection for machine learning. These are practical quantum computing applications that D-Wave is uniquely positioned to deliver for customers given the maturity and enterprise-ready nature of our annealing quantum solutions. Quantum computing is no longer seen as an experimental side project, but rather is gaining in recognition as a critical business tool for driving operational efficiency. In addition to direct quantum compute-as-a-Service growth, we recently announced that D-Wave officially launched in AWS marketplace, including our lead quantum cloud service, which went live on October 31st. Our availability in AWS Marketplace gives AWS customers access to easy-to-use quantum computing solutions, our full lead cloud service capabilities and a direct connection to D-Wave's professional services team. AWS Bracket customers will now be directed to the AWS Marketplace to access the D-Wave system. We've also introduced a new and improved pricing structure for our quantum compute-as-a-service offering. The streamlined pricing model shifts from a consumption time-based approach to a seat-based and application-based collection of offerings. We believe this updated model will better meet the needs of customers and deliver increased value. Shifting gears to our technology roadmap, our efforts this quarter reflect our ongoing commitment to relentless product development and delivery. Our gate model development work continues, and we are making good progress reaching several milestones this quarter. These included the fabrication of our first gate model qubits in our multilayer stack. We are currently engaged in benchmarking 1 and 2 qubits gates with these devices. In addition, we have also demonstrated a scalable approach to readout for our gate model architecture. On the quantum annealing front, we published important research findings in nature physics this quarter that demonstrated large-scale coherence in annealing quantum computers. This work is a very important step towards demonstrating practical quantum advantage, providing definitive proof that D-Wave systems perform coherent quantum annealing, which cannot be classically simulated. In addition, we launched a new update to our constrained quadratic model hybrid solver, enabling businesses to run quadratic optimization problems with more in constraints and introducing pre-solver techniques that simplify problem formulation. These enhancements were directly informed by customer feedback, enabling developers to unlock new use cases as well as expand the applicability of existing use cases across various industries. For example, in the energy industry, where there are conflicting requirements and priorities, the solver can optimize the electrical grid by balancing modem power supply and demand, incentivizing generated monthly emission targets. In logistics, the solver can support more advanced employee scheduling scenarios, accounting for variables such as maximum and minimum shifts per week as well as over time, thereby increasing the utility of the proposed solution. D-Wave has a proven track record of imaging be unimaginable and transforming that into products that drive real-world impact, and this quarter's product milestones reflect that commitment. We look forward to demonstrating both our technology and real customer use cases when we host qubit on January 17th to 19th in Miami. This is S-Wave's yearly customer conference and one of the industry's premier quantum computing events. Speakers from MasterCard, Schlumberger, Johnson & Johnson, Adobe, Deloitte, and many other quantum pioneers will discuss and demonstrate their work using D-Wave products and services to apply quantum to complex business problems. Customers will share a variety of quantum and quantum hybrid applications and demos spanning supply chain optimization, customer offer allocation, employee scheduling, oil field construction, port operations, TV commercial optimization, e-commerce delivery for both drivers and drones and protein design. This is both an in-person and virtual event that business leaders, developers, analysts and investors can attend by registering at QBTS.com. To summarize, we are very pleased with the progress of our business. We believe that the combination of our maturing go-to-market efforts and our ongoing product innovation is fueling the growing adoption of quantum computing in the enterprise. The era of commercialized quantum computing is here and D-Wave is leading the way. This is reflected in our expanding customer footprint, accelerated application development, new product introductions and revenue growth. With that, I'll turn it over to John to provide a review of our third quarter and nine months year-to-date results. John?

Thank you, Alan, and thank you to everyone taking the time to participate in this call. I will start with an overview of the Q3 results then the nine-month year-to-date results and then touch on the balance sheet and liquidity. For the fiscal third quarter ended September 30, 2022, D-Wave's consolidated revenue totaled $1.7 million, which represents an increase of $388,000 or 30% from $1.3 million in the third quarter of fiscal 2021 and an increase of $324,000 or 24% from the immediately preceding fiscal 2022 second quarter revenue of $1.4 million. With respect to the composition of revenue, our QCaaS or quantum computing as-a-service revenue ,totaled $1.346 million in the third quarter, which represents a $366,000 or 37% increase from $980,000 in the third quarter of fiscal 2021 and an increase of $170,000 or 14% when compared to the immediately preceding fiscal 2022 second quarter QCaaS revenue of $1,176 million. QCaaS revenue represented approximately 79% of total revenue in the third quarter of 2022 compared to 75% of total revenue in the year earlier period with professional services revenue comprising most of the balance. Professional services revenue totaled $347,000 in the third quarter, which represents a 13% increase from $306,000 in the third quarter of fiscal 2021 and a 122% increase from $156,000 in the immediately preceding fiscal 2022 second quarter. Gross profit for the third quarter, ended September 30, was $1.1 million, an increase of $86,000 or 9% in the third quarter of fiscal 2021 and an increase of $301,000 or 38% from the immediately preceding second quarter gross profit of $785,000. Gross margin for the third quarter was 64.1%, a decrease of 12.4% from 76.5% in the third quarter of fiscal 2021 and an increase of 6.8% from the immediately preceding fiscal 2022 second quarter gross margin of 57.3%. The year-over-year decrease in gross margin was due to a higher than normal professional services gross margins in the first nine months of fiscal 2021 due to a significant high margin non-recurring revenue contract as well as lower QSaaS gross margins due to an incrementally higher investment in customer-facing activities, while the sequential quarter-to-quarter improvement in gross margin was driven primarily by the improvements in QSaaS gross margins. I will be providing non-GAAP operating expenses and adjusted EBITDA as we believe these metrics improve investors' ability to evaluate our underlying operating performance. These measures are defined in the two tables at the bottom of today's third quarter earnings press release and for the most part, adjust for non-cash and non-recurring expenses. GAAP operating expenses for the third quarter of fiscal 2022 were $16.4 million, an increase of $5.6 million, or 52% from $10.8 million in the third quarter of fiscal 2021. The year-over-year increase was driven by increased personnel-related costs that include increased headcount compensation and stock-based compensation expense with the increase in the non-cash stock-based compensation expense, comprising about 32% of the total year-over-year increase in operating expenses, as well as public company costs, including legal, accounting, consulting and printing costs as well as D&O liability insurance premiums. From a non-GAAP perspective, the non-GAAP operating expenses for the third quarter of fiscal 2022 was $13.6 million, an increase of $3.4 million, or 33% from $10.2 million in the third quarter of fiscal 2021, with the primary difference between the GAAP and the non-GAAP operating expenses being non-cash depreciation and amortization, stock-based compensation expense and non-recurring expenses associated with our recent business combination that was completed on August 5 of this year. Net loss for the third quarter of fiscal 2022 was $13.1 million, or $0.11 per share, compared to $4.2 million, or $0.03 per share in the year earlier period, and $13.2 million, or $0.12 per share in the immediately preceding fiscal 2022 second quarter. Adjusted EBITDA for the third quarter of fiscal 2022 was negative $12.4 million compared with a negative $9.2 million in the year earlier period and $10.8 million in the immediately preceding fiscal 2022 second quarter. Now I will address the operating performance for the first nine months of 2022. D-Wave’s consolidated revenue for the nine months ended September 30 was $4.8 million, which represents an increase of $925,000, or 24% from $3.9 million in the nine months ended September 30, 2021, with over 90% of the increase driven by the growth in QSaaS revenue. QSaaS revenue for the nine months ended September 30 totaled $3.9 million, which represents an $842,000, or 27% increase from $3.1 million recorded in the first nine months of fiscal 2021. QSaaS represented approximately 82% of total revenue in the first nine months of fiscal 2022, compared with 79% in the year earlier period with professional services revenue comprising most of the balance. Professional services revenue for the nine months ended September 30th totaled $812,000, which represents an increase of $86,000 or 12% from $736,000 in the first nine months of fiscal 2021. With respect to our traction with commercial customers, as Alan outlined earlier, we made considerable progress during the first nine months of the year, wherein we had a total of 63 commercial customers, a milestone for D-Wave. That represents an increase in 16 commercial customers or 34% from 47 commercial customers in the first nine months of fiscal 2021. And we define a customer's one in which we recognized revenue during the period. In addition, during the first nine months of fiscal 2022, D-Wave had a total of 105 customers in the aggregate, also a milestone for D-Wave that represents an increase of 24 customers or a 30% increase from 81 total customers in the first nine months of fiscal 2021, with the difference between the number of total customers and the number of commercial customers, being educational and government customers. Gross profit for the nine months ended September 30th, 2022, was $3 million, a small increase from $2,980,000 in the prior year period. GAAP operating expenses for the nine months ended September 30th were $40.9 million, an increase of $9.8 million or 32% from $31.1 million in the year earlier period. Non-GAAP operating expenses for the nine months ended September 30 were $35.8 million, an increase of $6.4 million or 22% from $29.4 million in the first nine months of fiscal 2021. Net loss for the nine months ended September 30th, 2022, was $37.9 million or $0.31 per share, compared with $17.7 million or 14% or $0.14 per share in the nine months ended September 30th, 2021. Adjusted EBITDA for the first nine months of fiscal 2022 was negative $32.7 million compared with a negative $26.4 million in the year-earlier period. With respect to the balance sheet, at the end of the third quarter, D-Wave's consolidated cash balance was $13.8 million. And as previously disclosed, on June 16th of this year, we entered into a $150 million three-year committed common stock purchase agreement with Lincoln Park Capital. This facility is also referred to as an equity line of credit or an HELOC and on October 26th, the S-1 registration statement associated with the HELOC was deemed effective by the SEC, thereby providing D-Wave with access to this investment vehicle. In addition, with the repayment of the fully secured $20 million venture loan in August, we now have the flexibility to replace this credit facility with another lender, and we continue to explore alternative forms of financing. As set forth in today's Q3 earnings press release, we have maintained our fiscal 2022 revenue and EBITDA guidance from what we set forth in the Q2 earnings press release. To reiterate that guidance, revenue is expected to be in the range of $7 million to $9 million, and adjusted EBITDA is expected to be less than negative $49 million As we have previously outlined, D-Wave's business model incorporates a high-degree of operating leverage and is very capital efficient, providing us with significant flexibility with respect to the magnitude, timing and pace of operating expenses and the associated cash impact. That completes our prepared remarks. We look forward to seeing some of you at upcoming conferences, including the Needham Annual Growth Conference in January, where we will be presenting virtually. With that, we will now open up the call for questions. Thank you.

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from David Williams from Benchmark. Please go ahead.

Hey, good morning. Thanks for letting me ask questions. And congrats on the continued progress, you guys. It's very nice to see.

Thank you, David.

I guess, John, first on the revenue side. You talked about the midpoint of the guidance you've maintained at least at 7% to 9%, but that midpoint kind of suggests about $3.2 million range in the fourth quarter, and that's a pretty significant step up sequentially. I'm just kind of wondering if this is more about contract visibility you'd expect to close? And I think previously you had said, revenue can be back-end loaded. I'm just kind of curious if this is more coming from maybe the commercial side or maybe government contracts that are closing. Just anything on the revenue makeup in the third quarter or the fourth quarter in model with such a significant potential growth?

Well, as we outlined earlier, David, the rate at which we're closing deals is picking up, which plays into it. But I can't give you any insight as to, obviously, the specific numbers for the quarter or the mix at this point. Other than generally speaking, we have a lot of activity both on the commercial side as well as on the government side.

Okay. Helpful. Helpful. And then I guess as you kind of work through the go-to model, to put market model and you talked about the pace of customers. What do you attribute that to? Is it just better linearity in the structure of the business, better efficiency, or do you think there's something like the macro that's helping these close more quickly?

So David, let me respond to that. And – first of all, thanks for being here, and looking forward to answering whatever questions you might have as we go forward. Essentially, what is happening is that, on the one hand, we are investing in our go-to-market activities. We did say the last time we got together, the go-to-market was one important area of investment for us going forward now that the De-SPAC transaction is closed. And on the other hand, the team that we have had in place is becoming more proficient as engaging customers, at helping them to understand the value proposition at bringing the professional services team, when needed to help demonstrate the value, and as a result, generally, being able to move through the sales process more efficiently and effectively than had previously been vindicated.

Great. Thanks so much for that. And then maybe from a little different standpoint here, if we kind of think about – I know one of your peers have had some issues as of late in terms of just their business. And just kind of curious, if there were assets that you see out in the marketplace that could be advantageous to you as you think about your gate model. And any opportunities there maybe to leverage some of the IP or other assets that maybe in the marketplace today?

So all I'd say about that is that we are always staying on top of the progress that others in the Quantum industry are making for issues or problems that we're running into. And with that knowledge and understanding, we are continually thinking through and evaluating to the extent to which there might be opportunity to leverage work going on by others. However, beyond that, there's really nothing that I could say.

Okay. Fantastic. And one last one for me, if you'll indulge here. But Alan, just kind of wondering if you could talk about the value of the coherent annealing theory in the white papers or in the paper that you guys published -- what is that important? And how do you think this impacts maybe you or the industry overall? What is the balance – that -- Thanks.

So this is -- it is a very important result for us and for the industry. So large-scale coherent annealing essentially means that our system is entangling qubits is across broad set of the topology of the system. In other words, it's not just that directly connected qubits are entangled or qubits relatively close to one another are entangled. But this is demonstrating large-scale entanglement across a significant portion of the topology of the system. And that means that those qubits can all work together in seeking the optimal solution to a problem. And that's really where we get significant speed up in driving to the optimal solution. So this is a very important demonstration and capability that our system is -- has incorporated and that we are demonstrating and proof at this point in time. Moreover, there were two elements this result. The first is what we just talked about, which is that the system is provably demonstrating large-scale coherent annealing, which is not classically stimulatable, so kind of a separation, important separation between our system and classical compute. The second thing, though, is as a part of this work, we were also able to demonstrate a scaling polynomial speed up for a class of optimization problems. So it's a combination of proving a capability in the system and then demonstrating how that capability can drive speed up in computation for a class of optimization problems.

Thanks so much. I’ll get back in the queue.

The next question comes from Harsh Kumar from Piper Sandler. Please go ahead.

Yes. Hi, guys. Let me also add my congratulations on excellent execution and what is particularly a tough macroeconomic backdrop. Alan, I had a question for you. I was curious about the engagements that you're seeing on the commercial side. If they had a common vertical, or if there were a set of verticals that were more common within your customer loss? And also, you mentioned a series of applications in your prepared remarks. And I was wondering similar question, if there was one or two sets of applications that your process is being more utilized more than the other. So just some color on the type of customers you're engaging?

Yeah. So we have previously said that there are three industries that we think represents a low-hanging fruit for us. They include manufacturing and logistics as the first, finance is a second, and pharma as the third. However, I will tell you that over the course of the last quarter, we've actually made more progress in manufacturing and logistics versus finance and pharma, not that we don't have significant opportunities in each of those areas. And if we look at the first three months, we've actually closed deals in all of those areas. So we still believe they all represent the initial target industry for us. But in the last quarter, it's been more manufacturing and logistics. I don't view that as a trend or a change in focus for us, it's just an observation at this point. From application perspective, there really isn't a single application that we see emerging as the most important application for us in our systems. We've continued to talk about 3D bin packing. We've talked about employee scheduling. We've talked about routing applications, and those are all still applications that our customers are leveraging and that we are continuing to pursue. So no, I don't see one application or two or three applications that's a predominant applications for us. I also think that the three industries that I previously mentioned continue to be the low-hanging fruit for us.

Understood. Thanks Alan. And then as my follow-up, it seems like a little bit of a pickup or an acceleration, and in business particularly sounds like in getting customers to the finish line. As you go into the end of the year and as you look at the next year, you talked a little bit about what's causing that in general. But I was more curious if you feel that that momentum could be sustained. Obviously, in the fourth quarter, you said that, but even into next year potentially?

We have no reason to believe not. I mean, look, occasionally, I get asked, and I couldn't answer the questions that you're not asking, but here it goes. Occasionally, I'll get at, am I worried about the impending recession. Do I think that that's going to create a problem for our business as we move into next year? What I can tell you is that right now, we are not seeing any slowdown. In fact, we are continuing to see increasing interest and acceleration in the movement of opportunities through the pipeline. Moreover, I think that because of the nature of our business, which is really about helping companies to improve their operations to operate more efficiently, to potentially reduce cost. I think that as the economy weakens, if the economy weakens, the sorts of things we do will continue to be important, maybe increase in importance. Unlike, if we were selling research experimentation, which is kind of one of the were things that could get cut. But that's not where we are as a company.

Understood, Alan. Thank you. And I'll get back in queue as well. Thanks.

Okay. Thanks.

Thank you. The next question comes from Suji Desilva from Roth Capital. Please go ahead.

Hi, Alan, hi, John. Congrats on the progress as you gave here. So kind of a follow-up to David's earlier question. But the coherent annealing research, I'm wondering if that has applicability to the gate-model and if it's not maybe more generally, the gate-model, what's the pathway from 1 to 2 qubits here as we look forward? What should be the expectation here?

Yeah. So the annealing quantum computers and gate-model quantum computers are quite different, both in their design and their operations. And I've talked about this in the past, so I won't go into detail. What I will say is that for us, since we basically use the same class of qubits for our annealing system as well as for our gate-model system mainly Flex qubit as opposed to transline and voltage qubits. And we essentially used the same fabrication process, what this means is that as we increase coherence for one, the other sees the benefits as well. So if we talk about increased coherence on our annealing quantum computer, it's likely that that's applying to our gate-model as well or increased coherent and gate-model likely that's applying to annealing as well. So it's not that there's a direct correlation between coherent times annealing and coherent times like gate-model is a very different architecture, very different designs, very different operating model. But because we use the same fundamental storage unit, the same qubit, less qubit and because we fabricate them using the same process, there is a relationship in coherence time between the two, mainly as we increased one, we're increasing the other. So we're kind of increasing that both together. As far as our gate-model progress, when we laid out our gate-model roadmap, we said from the outset that we are not believers in NISQ, Noisy Intermediate-Scale Quantum. That's what everybody else in the gate-model space is building, fabricate some qubits attach some IO lines. Don't worry about error-correction and try to get them to do something. We are not at all believers in that. In fact, we don't think there's any real evidence that NISQ systems can deliver true commercial value. We think error-correction is going to be required before any real commercial value can be delivered on a gate-model system, and that's still years away, for us as well as everybody else. However, because our approach is to design -- to architect design and to build for error correction from the outset, what we said was that we were going to take a staged approach starting with being able to fabricate the gate-model qubits in our multi-layer stack, which we've now done, being able to incorporate control on the same chip as the qubits. We do that for annealing. And so, our design requires that we do that for gate as well. By the way, this is really important, because that's really the only way that you can truly homogenize your qubits effectively as well as get efficient programming and readout. And I mentioned that we demonstrated now scalable readout for gate-model. The only way we could have done that is by having control on the same chip with the qubits. So we worked through that. The next step is to kind of build small surface code error correction and to do it in a module that is scalable, both in terms of scaling out the size of the service code for an individual qubits as well as being able to scale out the number of qubits. We are working on the design of the mass for that now. We have not taped out. We have not tried to fabricate this, but we are making progress, step by step. Despite everything that I've just said, its years away from -- we're years away from a scaled error-corrected gate-model system, as I believe everybody else in the industry is.

That's very helpful color on the subtleties there and it sounds like your approach is different. Shifting gears a little bit here. The customer revenue that you're getting, the recurring revenue. I'm wondering if there's any metrics or -- anecdotally you can provide on increasing revenue per customer, seeing maybe one app go to multiple apps. Any way to kind of track that? Thanks.

So the answer to the question is, yes. Upsell to additional applications is absolutely a part of our model. And we already have proof points that, that is a viable approach. I'm not necessarily prepared to go into any detail, but we have one customer that started with one application, moved on to a second application. The first application is actually now in production. They're in pilot of the second application. And so, there are examples of being able to move from a single application to a second or a third or a fourth. But not just that, even from the outset, working on multiple applications, we have one customer we're engaged with that wanted us to start working on four different applications simultaneously. So that's absolutely a component of the model.

Okay. Thanks, Alan. And then last question, perhaps for John. On the equity line of credit, the $100 million, how much of that is left at this point? I'm not sure if it started to tap yet. And was that used to repay the $20 million of venture loan?

No. The 20 -- it was actually $21.8 million with principal interest and fees that we've repaid to the lender on the day that we closed the leaseback, and that was actually proceeds from the $40 million pipe. With respect to the ELOC as I outlined earlier, that just became accessible. And as we'll disclose in the Q that we'll file later today, we grew a very, very small amount under it last quarter.

Great. Thanks. Helpful John. All right, thanks, guys.

Thank you. The next question comes from Richard Shannon from Craig-Hallum. Please go ahead.

Hi Alan, John, thanks for taking my questions as well. Probably a couple of follow-ups from prior questions and answers here. Alan, regarding sales cycles and the effect on recession, you said, you're not seeing anything. As we look at the customer base that you have, we're talking about mostly large companies, I would assume that most of the companies you're working with are larger in size, you're not working with smaller ones. But if you are, are you seeing any evidence of sales cycles elongating within pending recession, or maybe just kind of give some color throughout your customer base, please?

Yes. So, we typically talk about -- sorry, Ford's Global 2000 customers. And so, John and I both commented that we had 53 commercial customers through the first nine months, 23 of those for Global 2000 customers, so, roughly one-third of the total commercial was Ford's Global 2000. So it's not exclusively big companies. We have midsized companies in the mix as well. But as I said previously, we are not seeing a slowdown at all. We're seeing a speed up in our ability to move customers through the sales pipeline, and we are seeing an increase in interest and desire to work with us. Now, part of, I think, the increase in interest in wire [ph] is the fact that, we're doing a really good job of kind of getting the message out that quantum computing is real today and can benefit your business today. I mean, look, you've got everybody else in the industry, including big companies like IBM and Google or Honeywell, saying that, Quantum, real Quantum computing that can impact your business is years away, but you could get started with research experimentation today. So when you've got big guys out there saying, it's going to be a while before funds really impact your business, that's would start to kind of read in the customers' years. And what we need to do is, it helps them understand that's just not true, right? I mean it's true for gate model systems, which is what they're all working on, but it's not true for annealing system, which for us, are commercial today. So, part of what we need to do is to sort of help the marketplace understand that Quantum is commercial today. Quantum can benefit their business operations today, and that the time is now to engage and start working on these applications. And I think part of the reason why the pipeline is growing and part of the reason why we're able to accelerate through the stages is because we're starting to get that message out and is starting to rest.

Okay. Thanks for that feedback, Alan. I appreciate that. Let's just a quick question on the new pricing structure for the SaaS offering here. Maybe Al, I think you just briefly described why the change here and how it's going to better meet the needs of your customers as you say in the press release?

Yes. So first of all, we were constantly running into a situation where customers would buy some time and then really kind of worry about not exceeding the time they had bought. So rather than just focusing on doing the work and being successful with our technology, they were thinking about, okay, how can I efficiently use this time, right? And we felt that, that really was an odd in either their or our messages. We wanted them to be able to have the time they need to build the applications and to get comfortable with the fact that these applications can deliver business benefit. And so by transitioning to a seat and an application-based model, we've kind of eliminated that kind of feeling on usage so that they just have kind of removed that from the thought process and don't need to worry about it anymore. The second point is that, honestly, I think that with the new model, we'll be able to drive higher revenue deals than on the time-based model. And the reason for that is that with the time-based model, because our systems are so fast, there was a lot that could be done in a relatively short period of time. And so we weren't necessarily capturing as much value as we could back from the applications that were being developed. And so we believe that what this will do is it will get kind of better aligned the value that the customers are getting with the value that we're getting.

Okay. Great perspective there. And I appreciate that. I guess two quick questions for me, and I'll jump out of the queue here. Just on the topic of coherence with the annealing systems. You had some great commentary earlier. Maybe just quickly to wrap up that topic here. When do you expect this capability to find itself into your commercial available systems, I assume it's not near-term, but I just want to get a sense of when that could be?

Well, actually, the results that were published. This work was done on our 2000 qubits processor, not even our new advantage 5000 qubits processor. And sort of stay tuned for what hopefully, we'll be able to say about this kind of operation on our 5,000 qubits advantage Quantum Computer. So this is not about an experiment on a Leap System or a Prototype System. This was actually using our existing systems in a fashion a little different from how they were being used up until now. So this is a capability already in our systems.

Okay. Perfect. Last quick question for John, just to discuss the revenues, as you look in the fourth quarter, maybe if you can give us a sense of what you're thinking about in terms of OpEx, excluding your investing. So we're going to see this go up. And maybe you could just give us some thoughts on how fast you're scaling, what kind of hiring you're doing, et cetera, over the next few quarters would be great, John. Thank you.

Sure. So we are starting to ramp up our hiring. And as I outlined earlier, we are starting to incur some public company operating expenses. So you can expect OpEx to increase on a sequential basis, principally driven by the public company expenses, all within the confines of what our guidance is on the adjusted EBITDA for the entire fiscal year.

Okay. Perfect. That's all for me guys. Thank you.

Thank you. Next question comes from Kevin Garrigan from WestPark Capital. Please go ahead.

Hey. Good morning guys. And let me echo my, congrats on the continued progress. Going off of CDs question regarding your Gate Model development, you said you had reached several milestones during the quarter and then commented that the next step is to build small surface code are correction. Is that kind of the main goal regarding Gate Model development in 2023, or what are some other goals or milestones you're looking at for that timeframe? A - Yeah. So first of all, we obviously -- well, obviously, that -- that's a fair statement. We need to continually focus on increasing coherence times. And the reason is that in order for the surface code to work in generating long-lived qubits. The individual qubit coherent needs to hit a certain level. Nobody in the industry has qubits with sufficient coherence today, for error correction to actually work, in delivering long-lived qubits. So there are two elements to error-correction. One, is the qubits themselves need to be a high enough quality. And then two, is the error correction that you kind of wrap around qubit, needs to work properly. So we are just putting on both tests simultaneously, continuing to drive increased coherence times on the individual qubits, while designing and fabricating and demonstrating the scalable approach to error correction. But both of these have to come together to be able to generate long live qubit. And so it's not just about the service code, it's also about continuing work on individual qubit quality and coherence time. There are other things that we are working on as well. I mentioned that readout, but we also need to address programming and fast programming time. And there are a host of other things. But as we look to 2023, it's a continued focus on increasing coherence time as well as really starting to prove out the service code approach to error correction.

Okay, got it. Thanks for that Alan. And then you guys have been public for a little over three months now, which I know isn't the longest time, but just kind of wondering in terms of the quantum computing market as a whole or D-Wave as a company, how things have played out versus how you imagine them since the beginning of 2022. And what has changed, if anything? And what are some of the things that you've learned over the last three months since going public?

So, first of all, I'm just thrilled that the destock process is behind us, and we can focus on running the company as opposed to getting the transaction closed. And so it's not so much what we've learned over the last three months. It's simply that now that management attention is kind of fully squarely focused on building the business and driving the technology. I feel like we are operating more efficiently and effectively versus the last -- the six to nine months prior, where in addition to trying to keep the business growing, we were also trying to get a transaction closed. So management was spread pretty thin. And on top of that, we're trying to do it in an environment that was not conducive to what we were trying to do. So there was just a whole host of challenges in the six to nine months prior to closing the transaction. It took a lot of management time and attention that is now behind us and so it's great to be able to just focus on the business.

Got it. That makes sense. I appreciate the color. And yes, that's all for me. Thanks, guys.

Thank you. Next question is a follow-up question from the line of Harsh Kumar from Piper Sandler. Please go ahead.

Yes, Alan, the -- with Christmas coming up, I feel like I got to ask the Christmas like question. I know you love all your applications and all your customers very equally. But surely, there must be a Christmas list of applications that you want to see your annealing technology deployed in. I was curious if you could talk about where your heart is in terms of what kind of problems you would like to solve?

That's a really interesting question. I'll be honest, Harsh. I really don't think about the business in that way. I know that our technology and our products are very broadly applicable and can drive significant benefits for many different companies in different industries, grappling with different classes of problems. So it's not like I've got my favorite child. Obviously, I'm always excited when I hear about a customer that used that in the pharma space to develop a new therapeutic or -- the kind of aid in some way of, sort of, more efficiently and effectively getting their products to market because that's one area that really benefits a lot of people, not just our customer, but particularly a broad array of the population. So I mean, I always feel good to hear about those applications. But, I mean, look, I think we've talked about in the past some work that a partner called [indiscernible] has done with the Port of L.A., where they've come up with a solution that basically provides a 60% improvement in efficiency in gas free loading and offloading a 12% improvement in truck turnaround time for pickups and give us all the challenges that we all are facing with supply chain and logistics, it's great to know that we're helping to address that problem. So again, it's not like I've got a favorite industry or favorite company or favorite application area. I'd just love to hear about when our systems are making things better broadly.

Got it. Understood. Thanks for the color, Alan. Thank you so much. Congratulations, guys.

Thank you.

Thank you, Harsh.

Thank you. This concludes our question-and-answer session. I would now like to turn the conference back to Alan Baratz for closing remarks. Thank you. And over to you, Alan.

Thank you, and thank you all for taking the time to join us today for our earnings announcement. As I said previously, we are making really good progress. We feel great about where we are from both a commercial business perspective as well as a product perspective. Everybody in the company is 100% focused on continuing to build a great company. And this is not about management. This is about everyone in the company. We have an amazing team that works tirelessly. Solve some of the hardest problems in the world and does it with kind of fortitude and grace. And I know that we could always count them. So thank you all for taking the time to be here, and we look forward to talking to you in a few months.

Thank you very much. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Thank you.