Welcome to the D-Wave Q2 2023 Earnings Call. At this time, all participants will be in a listen-only mode. Later, we'll conduct a question-and-answer session. I'll now turn the call over to your host, Kevin Hunt. Mr. Hunt, you may begin.

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'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 non-GAAP gross profit – non-GAAP operating expenses and adjusted EBITDA. 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. 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 in the company's most recent periodic SS e c report. During today's call, management will provide certain information that will constitute non-gap financial measures under s E C rules, such as non-gap gross mar gross profit, non-gap operating expenses, and adjusted EBITDA reconciliations to gap 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.dwavequantum.com. I'll now hand over the call to Alan.

Thanks, Kevin, and good morning, everyone, and thank you all for taking the time to join us today. Before I begin, I do want to correct what the operator said when he said Q1 earnings call. If this was Q1, we'd be really, really late. Fortunately this is our Q2 earnings call and once again, thank you all for taking the time to join us today. So we're pleased to share our second quarter results with you, which reflect our ongoing progress in commercializing our quantum technology, as well as the continued momentum that we are seeing in the quantum industry. Overall, our quantum solutions continue to transition from R&D special projects to line of business solutions that can drive operational excellence, increased revenue, cut costs, and fuel innovation. It is clear to us that organizations are accelerating their adoption of quantum computing and in particular, D-Wave’s quantum annealing technology. They're recognizing the ability of annealing quantum computing to solve complex optimization problems today. Evidence of this can be seen in the growth in our customer bookings and increase deal sizes. In the second quarter, we closed 2.5 million in bookings, represent a 146% increase over last year's second quarter bookings with a year-over-year increase in our average deal size, up 136% across all customers, and up 163% for our commercial customers. This shows that organizations are keen to make bigger investments in our technology to build additional proofs of concepts, and ultimately to identify applications that can move into production and impact day-to-day operations. During Q2, we closed a number of new customers, including global advertising and marketing from IPG, technology heavyweight Unisys and global industrial construction company, VINCI Energies. These and many other companies are exploring a variety of optimization problems that can be addressed by today's quantum…

Thank you, Alan, and thank you to everyone taking the time to participate in this call. Revenue in the second quarter of fiscal 2023 totaled $1.7 million, an increase of $336,000 or 25% and the second quarter of 2022 revenue $1.4 million and up 8% sequentially over the immediately preceding first quarter revenue. As we outlined in our first quarter and preliminary second quarter earnings releases, the timing of revenue recognition associated with our professional services contracts may vary from period to period. However, D-Wave has generally paid in advance of the completion of its professional services engagements and the corresponding revenue recognition timeframe. I will be providing non-GAAP operating metrics, including bookings and average deal size, as well as non-GAAP financial metrics, including non-GAAP gross profit, non-GAAP gross margins, 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 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. Due to the timing associated with our professional services revenue, we believe that our bookings performance may at times be a better indicator of our business momentum than quarterly revenue. We define bookings as orders received from our customers and they’re expected to generate revenue in the future. We present the operational metric of bookings because it reflects customer’s demand for our products and services and to assist investors in analyzing our performance in future periods. As Alan previously highlighted, bookings for the second quarter of fiscal 2023 totaled $2.5 million, an increase of $1.5 million or 146% when compared to the second quarter of 2022. The second quarter bookings represents our fifth consecutive quarter of year-over-year growth…

[Operator Instructions] And our first question comes from David Williams from Benchmark Company. Please go ahead, David.

Hey, good morning, and thanks for letting me ask the question. Alan, I wanted to explore a little bit about on the AI capabilities. And how you think about maybe developing internal solutions that are more plug and play or maybe off the shelf where customers can come in and use that as a service versus maybe developing their own platform. And think about just how that would increase the time to market or your time to revenue? Is there – would you think about that or is that even a possibility? And maybe any other plans you have in that regard would be helpful to know? Thank you.

Sure. So first of all, David, thanks for taking the time to be with us this morning and for asking the question. As I mentioned previously, there is an area of artificial intelligence and machine learning that is extremely well-suited to our annealing quantum computers that’s known as feature selection. Generally anybody that does model training for AI or machine learning needs to worry about how to identify the most relevant characteristics to train the model on. And that’s what feature selection is all about. We have created a professional services offering specifically around feature selection. We realized after several customers had expressed an interest in it that there was an opportunity to develop a professional services offering that was a little bit more targeted that we could take out to market. It’s also available on AWS Marketplace as one of the offerings that AWS’ customers can buy through that medium. As far as a turnkey cloud-based feature selection service, we have not created that service up to this point in time. And the reason why we haven’t done it at least not yet, is that we hadn’t yet gotten comfortable that the model training across different types of application areas and models is common enough that we can make it a cookie cutter service. We’re still finding that the professional services team needs to work with the customer to understand exactly what it is that is of most value and importance to them as they’re training the model to be able to then tune the feature selection system to be able to extract that set of characteristics. However, that’s not to say that we might not find a way to and choose to make that available as a service at some point in the future.

Thank you very much for the color there. Certainly very helpful. And John, I wanted to ask on your – in your preliminary results, it looks like you reduced your losses on the EBITDA, adjusted EBITDA for the year. I’m just wondering what is the primary driver there? What’s the difference? Is it OpEx or just maybe any color around the improved EBITDA guidance?

Principally lowering of the OpEx, David. So we – historically, we had a lot of non-recurring costs associated with preparing for and executing the public offering process as well as prior financing initiatives. So we see those costs starting to drop off over time. So that’s the principal driver, and that impacts not only finance and accounting, but also our legal expenses.

Okay, great. And then just one last one if I can. You talked a little bit about the increase in the government funding around the globe. Just kind of curious what you’re seeing in terms of opportunities there. What you’ve applied for and how you think that will help D-Wave in the near term and maybe even longer term? Thank you.

Yes, so David, as you know, we’ve talked regularly about the fact that D-Wave is the only commercial quantum computing company, and that everybody else is pretty much taking government research funding to help build their systems. However, there is a lot of that government funding that’s been handed out to the other quantum computing companies, and that’s not something that D-Wave has participated in up to this point in time. In part because our systems are commercial today, so we don’t need government research grants to help us build them. But in part because governments around the world until very recently had been focused on only gate-model and only our long-term R&D in the development of those systems. But what we’ve been focused on is helping governments around the world, understand that quantum is real today and can be a benefit to their operations today. And so for example, we’ve had success getting language into the U.S. House version of the National Defense Authorization Act that talks to being inclusive of all quantum technologies that includes a kneeling as well as language around focusing on near-term applications of quantum computing, not just long-term research. And we are starting to have success in getting governments around the world. I mentioned some of those countries a minute ago to adopt the same point of view. Now it takes time for these things to kind of transition from making sure the governments understand, then getting them into the various acts and the appropriations, and then being able to tap into the funding. But we’re making good progress on that. And so, we expect that over the course of the next year or two, we’ll start to see that money flowing and D-Wave will be best able to benefit from that aspect of government funding because we really are the only ones that can help with near-term solutions. And by the way, I also mentioned that I was at the space in Missile Defense Symposium just this week in Huntsville with Davidson where we’re demonstrating some work that we’ve done with them. And there was an enormous amount of interest in that because until then, it really just wasn’t understood by that community that quantum can help solve important problems that they’re facing today.

Thanks so much guys. Certainly, I appreciate the help.

And our next question comes from Suji Desilva from ROTH Capital. Please go ahead, Suji.

Good morning, Alan. Good morning, John. Congratulations on the progress here. So the average deal size increasing, I’m wondering if this level from last year is kind of the new level or whether those deal sizes can increase in meaning in similar magnitudes over the next 12 months, 24 months. I just know digging into that bit, there’s a number of applications per customer trending higher from kind of trying a few to more. And are – is the percent of deals involving professional services increasing? I’m just trying to figure out some of those indicators would lead to the belief that deal size will continue to grow?

Yes, so Suji, there are a couple of things that drive the increase in deal sizes. One is in fact customers buying into quantum, more broadly upfront as represented by deals that include a combination of not just one, but multiple POCs and quantum compute as a service in support of those POCs and ultimately moving them into production. And so, the bigger deals are in part as a result of customers buying upfront more of our capability as represented by not just a single POC, but multiple POCs across different applications plus quantum compute as a service. And then the second element of that is as applications move from POCs into production that represents a significant increase as well because the running of those applications in production, really generates higher revenue quantum compute as a service deals than the shorter upfront POC engagement deals.

Thanks, Alan. And then – thanks, Alan. And then, the Advantage 2 coming online the next I think a few quarters, several quarters. Can you talk about the addressable opportunity, if there’s any increase there of any new end markets that might be tapped with the higher qubit count machine versus the three you’ve been focusing on in the past?

Yes. So I think that the work we did that resulted in the Nature paper two months or so ago really points out where we’re going to see a lot of value in Advantage 2 over the current Advantage system. So in that work as I think I mentioned the last time we got together, we basically proved that our systems do coherent quantum and kneeling. And we proved that while they’re doing coherent quantum and kneeling, they’re delivering a significant speed up over classical on hard optimization problems. However, once we leave the coherent regime, then that speed up starts to wane. And so as we increase coherence, which is a big component of Advantage 2, what we are able to do is to get to optimal solutions faster and on larger problems. So the fact that Advantage 2 has not only more qubits and more connectivity, both of which allow us to embed larger problems and significantly higher coherence, which means we’re able to get to the solutions faster than in Advantage is what represents opportunity for addressing more applications than we are able to address today. Now, how to map what I just said into specific applications. The easiest way to think about that is that the number, the way we solve commercial problems for our customers is through our hybrid solvers, because all of their applications today are larger than can be directly embedded in our quantum computer. And so the classical part of the hybrid solver takes in the problem, it finds the hard sub [ph] problems and sends those off to the quantum computer to be solved. Okay. Now, yes, there’s a relationship between the size of the problem that comes in and the size of the problem that goes to the hybrid solvers.…

Okay, helpful, thanks. And thanks for the detailed answer.

And our next question comes from Richard Shannon from Craig-Hallum. Please go ahead, Richard.

Hi, Alan and John. Thanks for taking my questions as well. Maybe we'll touch on bookings here. Alan, you talked about increased activity going on here. And it's great to see the deal size is going up on a year-on-year basis, but if we look at the bookings here it was down a little bit sequentially to 92.5 here, which I guess isn't a big deal. I'd certainly love to see that grow here. So you talk about a lot of activity. Is there a sense of sales cycles lengthening that drives this or some other lumpiness and would you expect bookings to start improving on a quarter-on-quarter basis and third quarter in the second half?

Yes, so first of all, I think it's more about lumpiness in the following sense because of the fact that we're still early on in building the business, just a kind of one or two deal change in win versus loss really makes an impact. So we are going to continue to see lumpiness for a while until the bookings end up being large enough that those small perturbations in win-loss of just a couple of deals aren't really causing a significant impact on the total bookings number. And then secondarily, actually we had been seeing cycle times coming down on getting deals closed. A year ago, we were looking at north of a year, sales cycle whereas more recently we've been looking at in a range of five to seven months. And so, again, small perturbations in that can make a difference right now given where we are. And so, okay, in the last quarter, maybe we were looking at the higher end of that rather than the lower end of that, where we were in the previous quarter. But I think the main point is that small perturbations make a difference right now, our expectation is that, as we get a little bit further down the path and the bookings become larger, that those small perturbations won't make much of a difference.

Okay. So it sounds like you're suggesting that bookings should start to improve in the second half then, is that what you're saying?

Look, what I'm saying is that bookings are going to continue to be lumpy until they become large enough that small perturbations won't matter. And our focus is on continuing to grow the site –and continue to grow bookings and revenue.

Okay. Fair enough. Let's follow up on topic of your Advantage2 here. And you had an interesting comment in your press release in the last question from Suji was hitting on part of this, but in your press release you talked about a new 1,200-qubit processor supporting that Advantage – future Advantage2 system here. How big of an improvement is this 1,200-qubit processor from prior generations? And how does this help you scale up into larger systems over time?

Yes, so the 1,200-qubit processor is just a step on the path to the Advantage2 delivery. So the way we develop the quantum computers is we start by fabricating smaller versions to prove out the design and the fab stack and our ability to calibrate the new architecture and then we start scaling it. And so in the case of Advantage2, our product plan and roadmap involved several processors of increasing size, starting with roughly a 300-qubit processor, which I think we pointed out was available in the new higher coherent stack. I don't know, three or four months ago, a 1,200-qubit version which we've now yielded and is being calibrated. The next one in the stack is a 5,000-qubit version, and then on the 7,000-qubit version. So it's not that these are all individual products, these are all development processors that are on the path to the ultimate production quantum computer. We could choose to make any one of these available in our quantum cloud service to give our customers the ability to see early versions of the product and experiment with them or actually run applications on them. We have not yet decided whether or not we'll make the 1,200-qubit version available within Leap, we may. We almost assuredly will make the 5,000-qubit version available and then ultimately the 7,000-qubit version. The reason why we'll most assuredly make the 5,000-qubit version available is because 5,000-qubits with 20 way connectivity and significantly higher coherence will be Advantage system with the same 5,000 qubits, but less connectivity and lower coherence.

Okay. Great viewpoint there. Thanks for the detail. That's all for me. Thank you.

And our next question come from Robert Aguanno from Piper Sandler. Please go ahead, Robert.

Hi guys. Robert Aguanno on for Harsh Kumar. Thanks for all the colors so far, and thanks for taking the question. Just longer term thinking, can you guys talk more about the competitive landscape here, and as more companies try and get into the annealing space. I was curious about kind of the moat you guys have established and maybe how has that changed since you guys have been public?

So first of all, there's no other commercial annealing quantum computer in the market today. The only other experimental prototype system that we are aware of and that recently became available is a system that I think has like I don't know four or five qubits. I don't remember the exact number. That was a experimental research system that was developed by NEC and one of the universities in Japan experimenting with a different technology for the qubits than the flux qubits that we use. And so, it's interesting to see that there's some work now beginning in annealing beyond what D-Wave has done. However, it's very, very fledgling at this point in time. And my view on this has always been that it took us 15 years to get to the point where we had our 5,000-qubit commercial annealing quantum computer. We're not standing still. There are many, many hard problems that we had to solve along the way. Much of that is trade secret, and so anybody else that wants to enter the space is going to have a long complex road ahead of them. I think I might've mentioned in the past, the U.S. government actually had a program to build an annealing quantum computer four or five years ago. They were not successful with that. We're the only ones that have been able to pull it off up until now. And we've got 220, 225 U.S. granted patents, 400 patents worldwide in this space. So we've got a massive patent mode. So I think it's going to be a long time, if ever before anybody is able to compete with us in annealing quantum computing.

Fair enough. Thanks for the color there. More on the guide for the back half here. The guidance implies a pretty steep ramp. So I was wondering kind of what are the puts and takes there and how should we be thinking about maybe the split between Q3 and Q4? Is there a significant ramp that we should expect in either quarter? Any color there would be great.

John, do you want to take that one?

Sure. We haven't provided any guidance Robert with respect to per quarter performance. But based upon the guidance on the year obviously you can back into what our expectations are with respect to revenue in the second half.

Thanks guys.

And our next question come from Kevin Garrigan from WestPark Capital. Please go ahead, Kevin.

Yes. Hi guys. Thanks for taking my questions. So at a high level, can you kind of give us a sense of where most customers are in terms of your engagement model and kind of more specifically in the professional services side, are our majority of customers maybe in the proof of concept stage or kind of still in the application evaluation stage?

Yes, so we've always said that the professional services business is the on-ramp to production applications and the quantum compute-as-a-service business. And over the course of the first half of this year, actually starting Q4 of last year, we really started to see customers focus on actually driving to get those proofs of concept engagements in place and built out as opposed to just evaluating applications. And so the bulk of the work going on right now in the professional services organization is actually building out the proofs-of-concept. Now, the next step after building out the proofs-of-concept then is trial deployments, which really involves getting the technology working in their environment on the real data as opposed to sample data and then finally moving the application into full production. So, most of the customers are still in the proof-of-concept stage. We do have several that are now in the trial stage, and we have two that are very, very close to production deployment where I expect that both of them will be in production before the end of this year.

Okay, great. No, I appreciate the color Alan. And then just kind of looking at the full year outlook, how much of that is, is in backlog already?

John, you want to take that?

So, we actually don’t break out our backlog, Kevin, but I think that our bookings performance over the last four quarters is indicative of what we can look for the second half with respect to the revenue.

Okay. Got it. Got it. And then just one last quick one. Alan, you had mentioned you’re coming up on, on kind of the one year anniversary of being public. How things kind of played out in the quantum computing market versus how you imagine them one year ago? What has changed, if anything? And what are some of the things that you’ve learned over the last year?

So, first of all, I am really encouraged and excited by the progress that we are making commercially with respect to the fact that if I look back a year ago, our customers were mostly buying small amounts of time on our quantum system to kind of play around with it. We affectionately called them the DIY or do-it-yourself customers. But they were not really focused on trying to solve a real business problem. They were just doing experimentation and trying to kind of understand the capabilities of the system. And over the course of the last year, we have really progressed that to customers that have real business problems that they are interested in leveraging quantum computing to solve and working with us to help build out the solutions to those problems that do leverage our quantum computers through the proofs-of-concept. And that’s really what’s caused the deal sizes to grow so dramatically. And in the process, the sales cycle has shortened. As I said, a year ago we are looking at over a year and now we’re in the – call it on average six month range. And so we’ve progressed a lot with respect to building out the commercial side of the business over the course of the last year. I’m also really pleased with how we’ve done at getting out the message that quantum computing is real today, and that you can see real business benefits from it today. Remember, everybody else in the quantum space is building gate model systems, and they are still many years away from being able to solve real world problems at commercial scale. And so, they’re out there and some of them have big megaphones, like an IBM or Google or a Honeywell. They’re out there saying, just dip your toe in the water, do some experimentation, start trying to build some skills, but it’s going to be a few years before you can do anything useful with quantum. And so we had to kind of overcome that rhetoric and really get through to businesses and now to governments that quantum is real today and that you can benefit from quantum today. And we’ve just made enormous progress with that. The evidence is really in the growth in bookings, it’s in the growth in deal sizes, it’s in what we’re starting to see in legislation. And so I just feel really good with the progress that we’ve made.

That makes a ton of sense. Okay, perfect. I appreciate the detail. Thank you.

And the next question comes from Quinn Bolton from Needham & Company. Please go ahead, Quinn.

Hi, Alan and John, thanks for – excuse me, taking my questions. I guess, Alan or John, just sort of looking at that second half guidance implies about a doubling in revenue, maybe a little more than doubling of revenue from the first half to the second half from less than $4 million to about $8 million. Are you seeing a pretty good increase across both professional services and the Leap QCaaS side of the business? Or is that kind of half over half growth really still more driven just by timing of some of the professional services rev rec?

John, you want to do that?

Sure. It’s a combination Quinn, so we’ll have some carry over from deals that we commenced in the first half and the second half, but also based upon what our bookings momentum has been this is both on the professional services side as well as the QCaaS side with respect to the type of revenue.

Great. Good to see the QCaaS revenue increase. And I assume as that QCaaS revenue grows, that’s really driven by some of these customers moving out of the professional services and into the production. And that’s where the QCaaS revenue really jumps up, right?

Yes.

Well, in – yes, but in addition to that, there is a – there’s typically a QCaaS component to our professional services engagements as well.

Okay. Second question, Alan, you mentioned sort of the roadmap to Advantage2. You’ve got the 1,200-qubit. It sounds like the next step along the way is a 5,000-qubit processor. What do you expect the timing to be? Is that kind of a couple of quarters before you see the 5,000-qubit could potentially be longer because it sounds like you’ll put the 5,000-qubit Advantage2 system in Leap given the better performance versus today’s Advantage1.

Yes. And look, we may put the 1,200-qubit version in, we’ll see. I mean, we did a year ago put a 500-qubit version of Advantage2, but in the old fabrication stack that did not have the higher coherence, so it had more connectivity, it was only 500-qubit it didn’t have the higher coherence fabrication stack. We did make available for an early look at the architecture. We did not put the 300-qubit version that had higher coherence. We may put the 1,200-qubit, we will for sure, put the 5,000-qubit. As far as the timeframe is concerned, so the reason why we build these systems in increasing size is because it’s all about tuning the fabrication stack. As the processors become larger, obviously the layout becomes denser and the fabrication has to be tuned, so that we don’t see shorts or other sorts of problems in the fabrication. And so it’s really all about the cycles of learning and the fabrication to get that process fully dialed in. And so, it takes some time as the processor becomes denser. I don’t want to kind of be too specific on timeframe, but it’s quarters, not years to kind get this dialed in.

Got it. Last question for me, maybe a little bit out there. But there’s been a lot in the press over the past few weeks about this LK-99 material, which may or now may not be superconducting at or near room temperature. If that material does actually prove to be a breakthrough in room temp superconductors, would there be any benefit to your manufacturing technology? I mean, could that ultimately benefit your superconducting qubit manufacturing process?

Sure. I mean, if we’re able to build superconducting quantum computers that run at room temperature the size shrinks, the placement of the systems becomes much more flexible. So we can put them in environments that we couldn’t put them in today. So there certainly are benefits to room temperature superconducting. And we keep an eye on all these technologies. Typically though, the timeframe to go from a demonstration of room temperature superconducting to production capable materials can be quite long. But we’re constantly keeping an eye on this. The only other thing I would say is that, there’d also be a benefit in terms of the cost of the systems because the largest single component – the largest cost component of our quantum computer is the refrigerator, believe it or not. So we’d also be able to produce these systems at lower costs, although, they’re pretty cost effective today. I think we’ve talked in the past that it takes us – it costs us about $1.5 million or so to build a quantum computer today. And each one can support $25 million to $30 million in revenue. So there would be some benefits to room temperature. And we’re constantly keeping an eye on it, but not totally transformative.

Got it. Okay. Thank you, Alan.

[Operator Instructions] And at this time, there are no further questions. I would like to turn the call back over to Alan for closing remarks.

Okay. So once again, thank you all. As you’ve heard in today’s call, our business results reflect the growing adoption of our annealing quantum computing solutions by companies seeking methods for solving their most complex computational problems. Our growth in bookings and the expansion of our average deal sizes demonstrate increasing demand for our near-term quantum technologies and showcase D-Wave’s continued commercial momentum. Thanks again for taking the time to join us. And we’ll look forward to speaking with you all in about three months.

This concludes today’s conference call. Thank you for attending.