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spk05: Greetings, and welcome to the D-Wave second quarter earnings call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I'll now turn the conference over to your host, Kevin Hunt with IR. You may begin.
spk04: Thank you, and good afternoon.
spk01: With me today are Alan Barrett, 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 measures under SEC rules, such as adjusted 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.
spk06: Thanks, Kevin, and good afternoon, everyone. We're pleased to be reporting our first quarterly earnings as a public company. It has been a long and dynamic journey to this point, and we are excited to be entering the next phase of growth for D-Wave. and the beginning of the commercialization of quantum computing for the industry. As you already know, the total addressable market for quantum computing is huge. BCG estimates it to be $2 to $5 billion in the near term, growing to $450 to $850 billion in roughly the 20-year timeframe. Moreover, a study by 451 Research found that nearly 81% of respondents had a quantum use case in mind, And a staggering 31% had abandoned a project due to the level of complexity. And that's our market. Harnessing quantum computing to solve for business complexities that are either too time intensive, too expensive, or impossible to solve with classical techniques. But quantum computing is both revolutionary and evolutionary. What I mean by this is that there are both near-term and longer-term problems that quantum computing addresses. Most of the other quantum companies focus on the revolutionary problems, many of which will require years of research and product development before they can be addressed. But today, we have combinatorial optimization problems. These are the many highly complex optimization problems that businesses face every day. Problems like supply chain improvement, employee scheduling, shipping container offloading, protein foldings, simulation of risk, optimizing patient trials, choosing the right features to train machine learning models, and the list goes on and on. These represent most of the important and hard problems that businesses need to solve today. Using quantum computing to improve performance and find solutions to these problems is evolutionary quantum computing. And these are the problems that D-Wave is helping our customers to address today. This is the beginning of the commercialization of quantum computing, and it's being led by D-Wave. So while everyone else in the quantum industry is talking about government research grants as their primary source of revenue, we have a diversified commercial customer base as the source of our revenue. As many of you know, our annealing quantum computer is unique in the quantum industry, and it is a native optimization engine. It is able to compute solutions to hard business optimization problems, making D-Wave the first commercial quantum computing company. Moreover, in 2021, new research confirmed that the approach all other quantum computing companies are taking will likely never address the optimization portion of the quantum market, leaving that portion of the market to only D-Wave. That's estimated to be about a quarter of the total addressable market for quantum computing, so it is very significant. As we broaden beyond optimization and the evolutionary phase of quantum computing, our new gate model program and cross-platform approach of both annealing plus gate model quantum computing is expected to allow us to address the full quantum TAM and ultimately make it easier for our customers to benefit from the breadth of quantum offerings for all of their important use cases. Even with the promise of a very large TAM, though, there are headwinds that were not apparent last year when we set out to become a public company. I'd like to walk you through some of those challenges and the actions we are taking to address them. First, there were unexpected delays in closing our business combination, which has resulted in staffing being behind plan in key go-to-market positions. General market volatility and the shift in perception of SPACs has changed the economics of the deal, bringing less operating capital into the company than we had anticipated when we first embarked on this process. This has forced us to examine our priorities and ensure we are being more cautious in our spend, focusing now on investing in sales and go-to-market and slowing growth in other areas. The good news is that even with these headwinds, our R&D programs have continued to deliver on or ahead of schedule. Third, we have learned that because of the newness of the quantum computing market, there's a lengthy onboarding required with large companies. And as a result, these larger deals are taking longer to close than we had originally expected. To address this, we have recently become part of the AWS marketplaces. I'm not talking about the AWS bracket quantum service, but rather the AWS commercial marketplace. This will allow our customers to purchase our LEAP cloud access and D-Wave professional services through their existing relationship with AWS and avoid the need for a lengthy procurement and onboarding process with D-Wave. Finally, in addition to the impact of the financial markets on the closing of our business combination, We have also seen the economic environment create different priorities for customers, resulting in customer delays in moving between the phases of our launch program, particularly from application evaluation to proof of concept and from proof of concept to pilot deployment. In some cases, this has caused a several-month delay between phases. Combined, all of these challenges have resulted in somewhat slower revenue growth than what we initially anticipated. John will discuss the implications of this in more detail later in the call. And yet, even with the headwinds, we still see momentum in our customer base and in our delivery of quantum computing products and services. We have not lost any customers, and instead, we are seeing our customer base grow, albeit slower than originally anticipated. During 2021, we had over two dozen customers that were members of the Forbes Global 2000. Over the past six months, we're continuing to see Global 2000 customers choosing quantum computing and D-Wave specifically to solve their most complex problems. In fact, during the first half of fiscal 2022, we had a total of 56 commercial customers that represent an increase of 17 customers when compared to the first half of fiscal 2021, an increase of 44%. Some notable customers we have worked with include GlaxoSmithKline and Johnson & Johnson in healthcare, Volkswagen and Toyota in automotive, Davon Foods in grocery, BBVA, Bank of Canada, and PayPal in finance. Just a few weeks ago, we announced a multi-year strategic alliance with MasterCard, where we will collaborate on the development of quantum applications in areas like customer loyalty and rewards, cross-border settlement, and fraud management, among others. And in late July, we announced additional new global 2,000 customers, including Deloitte, Koch Holding, and other innovative customers, including CaixaBank and a fascinating startup exploring simulations for brain cancer therapeutics called Cosign Therapeutics. With those customers, we are addressing new use cases across manufacturing, logistics, financial services, autonomous driving, and life sciences. In addition to adding business value for a growing group of customers, we continue to be relentless about product delivery. 2022 has been just as busy on the technology and product development side. Unlike the rest of the industry that is in the process of developing their technologies and products, our 10-plus years and five generations of quantum computers means that, unlike others, we have very limited technology risk. We started the year extending the physical footprint of our Leap quantum cloud service by adding advantage quantum computers located in the United States and Europe, giving users more regional choice of physical systems accessible through our Leap cloud service. In May, we launched our CQM hybrid solver. With the updated CQM solver for the first time ever, A quantum hybrid solver allows organizations to run constrained quadratic optimization problems with continuous variables, opening up many more use cases for quantum. And in June, we announced the prototype for our next generation Advantage 2 annealing quantum computer, something we had not planned to do. But the quality of the prototype was so high that we decided to put it into customers' hands well before the full Advantage 2 system is expected to be released. When available, the Advantage 2 quantum computer will ultimately feature more than 7,000 qubits and 20-way connectivity with increased coherence and a brand new topology. The prototype is available today by our LEAP quantum cloud service. So in addition to a growing number of commercial customers with commercial use cases, this unique track record of ongoing, groundbreaking product delivery across hardware, software, and developer tools is a hallmark of D-Way's commercial business. In sum, we are navigating challenging market and business conditions, and we believe we have the right strategies and talent in place to address them. Nearly two years ago, we delivered the Advantage quantum computer and powerful quantum hybrid solvers in our LEAP quantum cloud service, enabling quantum computing to deliver business value for enterprises. At that time, we also expanded our go-to-market model to include professional services, with our quantum computing as a service offering to accelerate the development and delivery of in-production applications. While we are still early in the new go-to-market model, there are already many positive proof points. The interest level in quantum continues to grow. D-Wave is uniquely positioned to solve key business problems today, and customers are coming to us to help them guide their move to quantum applications. At the same time, we continue to innovate our product design and delivery across hardware, software, and developer tools. We expect all of this will lead to increasing adoption of our services both today and in the coming years. Before turning the call over to John, I would like to thank all of our amazing dedicated employees for their hard work in getting D-Wave to this point where we are the clear leader in driving commercial adoption of Quantum and now a public company. I would also like to thank our board members, advisors, investors, and everyone else that helped make our public listing possible. And finally, I want to reiterate that our growth journey is really just beginning, and I look forward to driving what we expect will be a rapid adoption of quantum technology in the coming years. With that, I'll now turn it over to John to provide a review of our second quarter and first half operating results and provide some additional guidance on our full year outlook. John?
spk03: Thank you, Alan, and thank you to everybody that's participating in this call. I will start by providing you with some highlights of our fiscal second quarter and first half operating results, then transition to several key balance sheet and liquidity measures and end with guidance for the balance of this fiscal year. As a point of reference, the financials set forth in our second quarter earnings release are the financials of D-Wave Systems, Inc. as of June 30th, 2022. In conjunction with the consummation of our business combination with DPCM Capital that we closed on August 5th, the new parent company is called D-Wave Quantum Inc. It is a United States incorporated company of which D-Wave Systems is now a wholly owned subsidiary. In future periods, we will be reporting our financials under D-Wave Quantum Inc., DOA's consolidated revenue for the fiscal second quarter ended June 30th, 2022, totaled $1,371,000, which represents an increase of $234,000, or 21% from $1,137,000 recorded in the second quarter of fiscal 2021. With the majority of the increase in revenue derived from customers accessing our cloud-based LEAP platform, that we refer to as QSAS, or quantum computing as a service revenue. The QSAS revenue totaled $1,176,000 in the second quarter of fiscal 22, which represents a $215,000 or 22% increase from $916,000 in the second quarter of fiscal 2021. QSAS represented approximately 86% of total revenue in the second quarter of 2022 in 85% of the total revenue in the year earlier period with professional services revenue comprising most of the balance. Gross profit for the second quarter of fiscal 2022 was $785,000, an increase of $96,000 or 14% from $689,000 in the second quarter of fiscal 2021. Gross margin for the second quarter was 57.3%, compared to 60.6% in the prior year period, with the decline in gross margin driven primarily by an increase in non-recurring personnel-related costs associated with a customer-related initiative that was substantially addressed by the end of the quarter. As Kevin outlined earlier, 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. Non-GAAP measures do not have any standardized meaning under GAAP, and therefore may not be comparable to other similar measures employed by other companies. These measures are defined in the two tables at the bottom of today's second quarter earnings press release, and for the most part, just for non-cash expenses. Operating expenses for the second quarter fiscal 2022 were $12,770,000, an increase of $2,745,000, or 27% from $10,025,000 in the second quarter fiscal 2021, with approximately 60% of the increase due to higher personnel-related expenses driven by a year-over-year increase in headcount of 21 employees. as well as increased stock-based compensation expense. 11% of the increase due to higher professional services costs, including increased legal and accounting consulting expenses. 10% of the increase due to increased wafer fabrication costs driven by increased new product development activities, principally with respect to the Advantage 2 higher coherent stack and prototype gate model qubits. And lastly, 7% of the increase to higher sales and marketing expenses in the areas of public relations, conferences, and promotional expenses. As set forth in the table at the bottom of today's press release entitled Reconciliation of Operating Expenses to Non-Gap Operating Expenses, The non-GAAP operating expenses for the second quarter of fiscal 22 were $11,660,000, an increase of $2,167,000, or 23%, from $9,493,000 in the second quarter of fiscal 21. The primary difference between the GAAP and the non-GAAP operating expenses being non-cash depreciation and amortization and stock-based compensation. Net loss for the second quarter of fiscal 2022 was $13,198,000 or 12 cents per share compared with $4,668,000 or 4 cents per share in the year earlier period with $4,586,000 or 54% of the increase in net loss due to the year-over-year decrease in the deemed interest benefit associated with the Canadian government strategic innovation fund loan that is referred to in our SEC filings as the SIF loan. The decrease in the deemed interest benefit relates to the manner in which long-term non-interest bearing loans are accounted for under GAAP. $1,539,000 or 18% of the increase in net loss is due primarily to the interest expense associated with a venture loan that was entered into in the first quarter of this year, and the increase in imputed interest expense associated with the non-interest-bearing SIF law. As set forth in the table at the bottom of the press release entitled Reconciliation and Net Loss to Adjusted EBITDA, the Adjusted EBITDA for the second quarter of fiscal 22 was negative $10,835,000 a $2,031,000 or 23% increase from negative $8,804,000 in the second quarter of fiscal 21. With respect to the first half operating results, six months into June 30th, 2022, was $3,083,000, which represents an increase of $537,000 or 21% from $6,000 in the six months ended June 30, 2021, with, again, the majority of the increased revenue from customers that are accessing our cloud-based lead platform, otherwise referred to as our QSAS revenues. QSAS revenue totaled $2,560,000 in the first half of fiscal 22, which represents a $477,000 or 23% increase from $2,083,000 recorded in the second half of fiscal 2021. Q-SAS represented approximately 83% of the total revenue in the first half of fiscal 22 compared with 82% in the year earlier period with professional services revenue comprising most of the balance. With respect to customer accounts, during the first half of fiscal 2022, D-Wave had a total of 56 commercial customers which as Alan highlighted earlier, represents an increase of 17 on a year-over-year basis, or 44%, from the 39 customers that we had in the first half of 2021. And for clarity, we define a customer as one in which we have recognized revenue during the period. During the first half of fiscal 2022, D-Wave had a total of 97 customers, an increase of 29, or 43%, from 68 total customers in the first half of fiscal 2021, with the difference between the number of commercial customers and the number of total customers being educational and government customers. Gross profit for the six months ended June 30, 2022 was $1,914,000, an increase of $114,000 for 6% from $1.8 million for the six months ended June 30, 2021. Gross margin for the first half of fiscal 2022 was 62.1% compared to 70.1% in the prior year period, with a decline in gross margin driven primarily by a higher than normal professional services gross margin in the first half of 2021 that was related to a high margin non-recurring contract. and lower QSAS gross margins due to an incrementally higher investment in customer-facing activities. With respect to the operating expenses for the first half of 2022, they total $24,544,000, an increase of $4,443,000, or 22%, from $20,101,000 in the first half of fiscal 2021. with approximately 60% of the increase due to higher personnel-related expenses driven by a year-over-year increase in headcount of, again, 21 employees, as well as increased stock-based compensation expense, 11% of the increase due to higher professional services costs, including increased legal and accounting consulting expenses, 10% of the increase driven by increased waiver fabrication costs, as I outlined earlier, that were driven by new product development activities, principally with respect to the Advantage 2 higher coherence stack in the prototype gate model qubits, and 7% of the increase due to higher sales and marketing expenses in the areas of public relations, conferences, and promotional expenses. The adjusted operating expenses for the first half of fiscal 2022 for $22,319,000, an increase of $3,283,000 or 17% from $19,036,000 in the first half of fiscal 2021. But the primary difference between the GAAP and non-GAAP measures, again, being non-cash depreciation, amortization, and stock-based compensation expense. Net loss for the first half of fiscal 2022 was $24,815,000 or 22 cents per share compared with $13,496,000 or 12 cents per share in the year earlier period with $4,586,000 or 41% of the increase in net loss due to the deemed interest benefit associated with the SIF loan that I highlighted earlier. The decrease in the deemed interest benefit relates to the manner in which long-term interest-bearing loans are accounted for, non-interest-bearing loans are accounted for under GAAP. And 2,153% or 19% of the increase in the net loss was due to the increased interest expense associated with the venture loan that was entered into during the first quarter, as well as the increase in the imputed interest expense associated with the SIF loan. Adjusted EBITDA for the first half of fiscal 2022 was negative $20,325,000, an increase of $3,101,000, or 18% for negative $17,224,000 in the first half of fiscal 2021. With respect to our key balance sheet and liquidity highlights, as of the end of June 30th, 2022, DOA's cash balance totaled $10,466,000. The current and long-term debt set forth on the June 30th balance sheet totaled $34,256,000, which differs from the actual principal balance of all repayable debt obligations. The total is $50,183,000 at the end of June, with the difference in the two amounts attributable primarily to the manner in which the government loans are accounting for wherein the on-balance sheet or GAAP principal balance is discounted due to the long-term nature of these non-interest-bearing loans. And prior to the end of the quarter, D-Wave entered into a $150 million committed three-year common stock purchase agreement with Lincoln Park Capital Fund that provides the company with the right, but not the obligation, to issue and sell shares of its common stock to Lincoln Park, subject to certain limitations, and satisfaction of certain conditions. In conjunction with the closing of the business combination with DPCM Capital on August 5th, we received $40 million in equity in the form of a pipe investment and approximately $9 million from the DPCM trust account. On that same day, we repaid the secured venture loan in the amount of $21.8 million and paid $11.5 million in expenses that were directly related to the business combination transaction. As a result, DOA's remaining debt obligations are comprised principally of two unsecured, non-interest-bearing, long-term government loans. As a result of the headwinds that Alan highlighted earlier, and based upon information available as of today, we are providing the following guidance with respect to full-year fiscal 22. Revenue is expected to be in the range of $7 to $9 million, and adjusted EBITDA is expected to be less than negative $49 million. And as we have previously outlined, DOA's business model incorporates a high degree of operating leverage and is very capital efficient, providing us with a significant flexibility with respect to the magnitude, timing, and pace of operating expenses associated and the associated cash requirements. With that, we will open up the call for Q&A.
spk05: And at this time, we will be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from the line of David Williams with the Benchmark Company. Please proceed with your question.
spk10: Hey, good afternoon, Alan and John. Great to hear you, and congrats on the close of the transaction. It's certainly well deserved, and looking forward to seeing your continued progress and success.
spk06: Well, David, thank you for that. Thank you. An interesting road, but we're thrilled to be at this point.
spk10: Yeah, and it's great to refocus on the business at hand and to continue driving forward. So we're certainly encouraged to get the transaction completed. I guess first maybe just on the macro and the backdrop, and you did a good job explaining a lot of the moving pieces there, but just kind of curious if there's anything specific or maybe any more color you could provide just kind of around the Kind of the, I guess, the challenges that you're seeing today versus maybe where you were even six months ago.
spk06: Honestly, David, nothing beyond what I said. I've tried to be thorough in articulating some of the headwinds that we're facing. It really all boils down to the fact that on the one hand, it took longer to close the transaction and we raised less cash and We've been trying to manage our expenses very carefully prior to the closing of the business combination. So while we had some modest growth in R&D to make sure that our R&D program remained on track, we decided to really limit the growth and go to market until the transaction was closed. Now that it's closed, we're going to start investing in that. But obviously limiting some of the growth in go-to-market had an impact. And then secondly, it really has to do with this notion that the sales cycles have become a little bit longer than what we anticipated when we first built the model and put the plan together about a year and a half ago. The reason for that is twofold. First of all, this is a very different economic environment than it had been back then. And you know, our customers are, you know, evaluating and reevaluating their priorities. And so, you know, it's taking a little bit longer to get some of the deals to close and to transition through the various phases or four-phase model. And then finally, you know, as we engage with very large Global 2000 companies, they have a fairly involved and lengthy onboarding process that has lengthened the sales cycle to get these deals closed. But we are really excited about the new relationship with AWS, whereby once we negotiate a deal with our customers, they can just go buy it through AWS Marketplace and thereby, in some sense, bypass the the need for that lengthy procurement and onboarding process that we think is really going to help accelerate getting deals closed.
spk10: Okay, fantastic. And maybe just on that AWS that you just mentioned, does that impact your professional services side and just kind of how that works or would you still have all of those opportunities in place?
spk06: Yeah, no, nothing changes. So to be clear, AWS Marketplace is basically an environment that allows customers to buy third-party products and services that use the AWS environment. And since our Leap Quantum Cloud Service has its front end running on AWS servers, the software, the intellectual property is all ours. We developed that cloud service, but we run it on AWS servers so we can spin them up and down as we need them. Because we have that relationship with AWS, customers can buy access to our Leap Cloud service through AWS. They can also buy access to our professional services through AWS Marketplace. So our model has not changed at all. We still have our launch four-phase professional services model. We still have our cloud-based quantum compute as a service model. It's just that if customers prefer, they can buy that through AWS Marketplace rather than directly from us.
spk10: Okay. Very helpful. Thanks so much. And then maybe just as you kind of think about some of the levers that you have in the business, you talked about the efficient capital allocation strategy and structure there. What areas do you think you can slow? Is it about pulling back maybe some of the non-revenue-driving components? Is it the gate model? Where do you think that you're going to be able to pull back and that's not maybe going to sacrifice longer-term revenue?
spk06: Yeah, to be clear, we are not talking about reducing spend. We are simply talking about slowing the growth in spend. Now, we are going to now be investing in go-to-markets. So that is the one area where we are not going to slow the growth. Now that the transaction is complete and we have full visibility into liquidity, cash and liquidity going forward, we are going to drive that investment and go to market. However, in the other areas of the business, we're not going to reduce, we're just going to slow the rate of growth. And And, you know, that's heavily R&D related, but we're not worried about it because, frankly, our R&D deliverables are all on or ahead of schedule. And so we actually feel very good about our ability to continue to hit our milestones and deliverables, even with this modification to the operating plan.
spk10: Okay, great. And just one more, if I can, then I'll jump back in the queue. But Just kind of thinking maybe from a higher level, how has your feedback been on the Advantage 2 prototype system and anything that's maybe surprised you to date or things that you maybe hadn't considered that you're finding useful today on that system and maybe some of the feedback?
spk06: Yeah, no surprises. Look, first of all, we were really thrilled that we were able to first time out yield, calibrate, and make available to our customers a brand-new processor architecture and design. We've never been able to do that before, and this is a huge testament to the maturity of our engineering team. The fact that, you know, we could architect and design an entirely new type of qubit, a new topology, you know, fabricate that, yield chips, calibrate, and have a working system first time out is just phenomenal. And this is part of the reason why I said a minute ago, we're on or ahead of schedule. I mean, in a number of areas, we're actually ahead of schedule. Now, once we had that system up and running internally, we did extensive evaluation and benchmarking of the system ourselves. And we were very pleased with the operating characteristics of the system, the performance of the system, what's called energy scale, which is related to the precision with which you can specify problems and the quality of the results that are computed. And so that's why we were enthusiastic about putting it in LEAP and giving our customers access to it. And we've had nothing but positive feedback on it.
spk10: Great. Thanks so much for the time. Certainly appreciate the help.
spk04: Thank you.
spk05: Our next question comes from the line of Richard Shannon with Craig Hallam. Please proceed with your question.
spk08: Well, thanks, Alan and John, for taking my questions, and also my congratulations on closing the transaction. Let's hear Alan. I want to follow up on one of your responses to the past few questions here, one of them is specifically in kind of reinvesting or re-accelerating the growth in the go-to-market. Maybe you can talk to a little more specificity of what that entails. And then how long do you expect before you see some sort of return on those investments? Is that a six to 12-month cycle? Is it longer? How do we think about that?
spk06: Yeah. So the investments are pretty straightforward. We have both a direct sales organization as well as a professional services organization. We also have a marketing organization. And so those are the areas that we are going to be investing in. With respect to direct sales, we're talking about staffing up with additional salespeople We're talking about adding an inside sales capability. We're talking about enhancing our sales operations function. So it's really, you know, further building out that direct sales organization and then adding additional staffing on the professional services teams to as required to support the professional services engagement that we expect will start seeing to accelerate as we invest in the sales organization. From a marketing perspective, it's all about the programs to do demand, Jen. And so this is everything from participation in conferences. We actually participated in three conferences over the course of the last quarter that yielded a very significant number of warm leads for us. So they were quite cost effective. So, you know, further investment in conferences, further investment in webinars. You know, further investment in mining the folks that come in through our Leap cloud service to understand which of them might represent larger sales opportunities for us. So it's all of those elements. And then one last component, and that is, you know, we have a small number of resale partners. Deloitte, for example, is a resale partner of ours. NEC. for example, is a resale partner of ours. And, uh, we want to put some modest investments in place to help, uh, them to be successful in the marketplace.
spk08: Okay, great. Thanks for, uh, for, for all that detail here. Um, let's see here. Um, maybe more of a financial question, uh, well, uh, it has implications for the broader business here, but you talk about, uh, re-accelerating some investments here, mostly on OpEx. I'm just trying to put numbers to paper here and think about how this should grow sequentially over the next couple of quarters here. And I look at things on a pro forma basis, ex cash, which I think you do. But if I'm trying to model to the EBITDA loss number with the revenues at the midpoint, it seems like it should be growing, you know, one and a half, maybe $2 million a quarter each in the next couple of quarters. How close am I to figuring that out relative to your EBITDA guidance? John, do you want to handle that?
spk03: Sure. Richard, can you repeat your numbers again?
spk08: I was modeling for OPEX to grow about a million and a half per quarter each of the next two quarters to hit that EBITDA number. Is that in the range or is it faster or slower than that?
spk03: You're generally in the range. So the way to look at it is our EBITDA or adjusted EBITDA for the first half of the year was roughly $21 million in So the difference between the first half and the second year to get to 49 is $28 million in the second half of the year. So, you know, that, that train translates to, you know, incremental investment on a, on a monthly basis for the balance of the year.
spk08: Okay. Does that answer your question? Yeah, I think relatively closely. Thanks for that. Alan, maybe back over to you. You've got a, a, a long and varied history as an executive in the technology space, particularly in software. And maybe it'd be nice for you to describe both from a general point of view as well as how you deal with, you know, extended sales cycles and recessions like we may be coming into here shortly for D-Wave relative to your past experiences. What are the similarities and difference and how do you react to to that to drive the best growth possible for D-Wave over the near and medium term?
spk06: Yeah, I mean, I don't think this response is going to be all that satisfying, but I'll be as honest as I can be. Every situation is different. I mean, every company that I have worked for or led has had a different set of opportunities and issues. Every economic environment, whether good or challenging, has been unique in its own right. It's not as though I've got a model or a formula or a template. At the end of the day, it's really all about being able to deliver value for our customers. What we need to be able to do and what we are doing is demonstrating to our customers how we can help them benefit in their business by using our products and services. And, you know, the more compelling we can be in making that argument, the greater our ability to be able to get those deals closed. Now, that having been said, you know, there are some kind of pretty straightforward things that we can do and are doing. to try to help ensure that we don't see, you know, lengthening sales cycles and we even start to get them to reduce. One I've already talked about is we've just got to make it easier to buy from D-Wave. You know, frankly, being a smaller company, when, you know, a behemoth wants to buy from us and, you know, kind of engages us in their long procurement process with lots of forms that need to be filled out, lots of questions that need to be answered, that takes some time. To the extent that AWS is already a trusted supplier there and they can get everything they want from us, that just cuts out that part of the process. And then the second is referenceability. the more referenceable customers that we can have, the easier it becomes to get our new customers to the point where they're ready to buy sooner rather than later. And we're focused on both making it easier to engage with and buy from D-Wave, read AWS Marketplace, as well as continuing to build that base of referenceable customers and use cases that we can use to kind of quickly demonstrate to new customers the value that we can deliver to them.
spk08: Okay, fair enough. Thanks for that answer, Alan. John, one last question. I'll throw this one over to you. Just want to get your take on how we should be modeling shares outstanding for the quarter. I'm assuming you'll give us a number that doesn't assume anything from the Lincoln Park facility, but I wonder if you can give us a baseline of how to think about that.
spk03: Well, I'd start with the share count for the end of the second quarter, which you'll see in the tables to the financials. We have share count as of the end of June. And the incremental shares from the pipe, were about 5.8 million shares, and the shares derived from the trust were about 1.3 million.
spk04: Okay, perfect.
spk08: I think that'll do it for me. Thank you, guys.
spk04: Thanks, Richard. Sure.
spk05: Our next question comes from the line of Suzy DeSilva with Roth Capital. Please proceed with your question. Sure.
spk07: Hi, Alan. Hi, John. Congratulations on closing the transaction to you and the DPCM team as well. Thank you. So maybe you can talk about examples of perhaps multiple apps for customers. MasterCard, it sounds like you have multiple areas there, so I'm curious how quickly follow-on apps can come on after you've gotten through the initial one and what it might do to the revenue per customer. Any thoughts that would be helpful?
spk06: Yeah, so first of all, It starts with the first step. We need to get to the point where the customer has bought into that first step. They've built it out or we've built it out or together we've built it out. They've tested it. They've evaluated it. They know it's going to be able to deliver value and they're ready to move it into production. And, you know, from the time the agreement is signed to get to that point with the first app, you know, that can take, you know, anywhere from four months to 12 months, depending on the complexity of the app. So, you know, that's kind of the starting point. Now, what we have seen in the cases where customers have come back and asked to do a second or a third app, is that typically right when we get to the point where we've got a proof of concept up and running that they can evaluate and determine that it's going to deliver business value, that's when they start coming back and talking to us about, hey, could you help with this or that or the other thing? And we start evaluating maybe a second app. So it really is about getting that first app under their belt so that they have some confidence that this is really a path that is going to be able to deliver value for their business, to deliver business benefit for them, and then starting to expand their thinking into a second or third app. Now, occasionally, we do have a customer that comes to us and says, hey, I've got two or three or five different things I'd like to start working with you on. MasterCard was an example of that. But I think that was because when we went in, we were able to, from the outset, talk about some of the other work that we had done in the financial industry to kind of build that credibility. And it was with companies that kind of resonated with them. We've actually seen this with another company as well. I mentioned Koch Holdings, which is a large conglomerate in Turkey. We had a very similar experience with them where we talked about some applications that we had worked on with other customers, some referenceable customers that resonated with them in areas that were important, and they came back with a number of applications that they wanted to work on. But I'd say that that's not the norm. The norm is one app, get to the point where, you know, we've been able to demonstrate that it will be able to deliver some business benefit. You know, that's a multi-month period, whether it's, you know, three months, four months, five months, six months, seven months, and then come back on a second half.
spk04: Okay. That's a very helpful call, Alan. Thank you.
spk07: And then maybe my last question, the verticals you've done well in logistics, finance, and pharma, Any of the new verticals you might call out as being sort of an exciting sort of next opportunity given now that you're funding out, you know, building out staffing for additional verticals and more direct kind of targeted marketing approaches?
spk06: Yeah. Look, we're still focused on the three that we've been talking about, manufacturing and logistics, pharma, and finance. They continue to be the verticals that have really the – you know, important, hard optimization problems that represent the low-hanging fruit for where we can deliver real value. So, you know, and frankly, there's huge opportunity in those verticals. So, you know, we're continuing to stay focused there for now. I think once we penetrate those a little more deeply, we'll start thinking about, you know, expanding into other verticals, but not yet.
spk04: Okay. Thanks, Alan. Again, congratulations and best of luck. Thank you very much.
spk05: And just as a quick reminder, if you'd like to join the question and answer queue, you may press star one on your telephone keypad. Our next question comes from the line of David Williams with the Benchmark Company. Please proceed with your question.
spk10: Hey, guys. Thanks for letting me ask another one here. I just... I really wanted to ask about the employees and just maybe the morale of the business overall, how they're feeling, and positive, negative. If there's anything, I guess, just since the closing that you've maybe noticed with your employees and just kind of the feel around the business.
spk06: So, first of all, let me say that we do truly have an amazing team. You know, it is not easy. to build a quantum computer. It is not easy to develop software that's never before been developed or even conceived. And this team has just done an amazing job for the company. And I couldn't be more proud of them. And now that we are investing as well in the go-to-market activities, We've also got a strong team that's really starting to focus on helping us to build that business and drive that revenue. And I think they're all really excited about where we are right now. Look, some of these folks have been with the company for more than 15 years. I mean, they've made what is getting close to a lifelong investment in the company. And to be able to see the company achieve This particular milestone, I think, has been really exciting and, frankly, energizing for them. So I feel really good about the team and about the morale in the company and where we are in our ability to operate as a well-oiled machine.
spk04: Great to hear. Thanks again. Certainly appreciate it.
spk05: Our next question comes from the line of Kevin Garrigan with West Park Capital. Please proceed with your question.
spk09: Hey, good afternoon, guys. I hope all is well. Let me echo my congrats on the completed transaction. Hey, I was wondering if you guys can give us any update on your progress on your roadmap to kind of generate a gate model system, you know, when we may start seeing some more announcements or is that still kind of too far out?
spk06: So, you know, We'll make announcements when we're in a position to make the announcements. I can't really kind of give you a specific timeline for that, but here's what I can tell you. We're making good progress on the program. It is a multi-phase program. The first phase is really all about designing, fabricating, and thoroughly evaluating the qubits. to get them to the point where they have the coherence time required in our fabrication stack. And then the second phase is all about building that logical qubit that includes error correction, but being built in a scalable fashion, scalable both in terms of scaling out the surface code or the error correction per qubit, as well as scaling out in terms of number of interconnected qubits. And then, of course, moving from there on to building that, you know, first small system and then growing the size of the system going forward. Right now, we are at the point where we have evaluated first pass gate model qubits. They have performed as we expected them to perform, but not yet at the level at which we need them to perform in the sense that we've got a several-phase fabrication stack improvement roadmap. So those initial gate model qubits, it was a new qubit design, but we actually built them using our current fabrication stack, the same stack that we use for building the advantage system. And we had done analysis on what the likely coherence time would be on those qubits, and they came out roughly where we expected it to be. We are just about to get back now the second pass, which is the first modification to that fabric fabrication stack to increase coherence time. You know, as soon as we get those back, we will pull them down. We'll evaluate them to see if that's hitting what our analysis indicated that we should be able to hit. And then we've got a third pass at that. So this is all in the path to getting those cubits to where they need to be. You know, the reason why not to just do it all at once, is that the changes that we are making are in different areas of the FAB stack, and we want to make sure that each change is delivering the operating characteristics that we expect and need for it to deliver before we move on to the next phase modification. So we're still in that first overall phase of getting to the point where we've got our gate model qubits, fabricated in the stack we want and with the coherence levels we need. And then we will move on to the second phase, which is the first logical or error-corrected qubit. The only additional thing I will say is that we are never totally serial in the way we operate. And so, in fact, we have already begun the design of the MAST for the first logical qubit design. And so we'll actually be in a position to start fabricating chips that have that design on them relatively soon. Now, in order for those logical qubits to work in the way we need them to work, we also have to hit the coherence time on the individual qubits. you know, while we're developing the masks and we could start the fabrication, we, you know, we may not until we get a little further down the path on the individual qubit fabrication and coherence time.
spk04: Got it. That's fantastic. Thank you for that, Alan. I really appreciate that color.
spk09: And then just really quickly, I know you guys talked about some delays, In terms of your kind of transaction sizes, are you even seeing larger transaction sizes or can you kind of give us a sense of what the trends are there and how they compare to maybe three or six months ago? And then just kind of at a high level, are these transaction sizes kind of in line with what you've been thinking?
spk06: Yeah. So, first of all, there are two different trends. types of transactions. There's our launch program, which is the professional services-led program, the four-phase model, where the first three phases of application evaluation, proof of concept, and pilot deployment are all professional services-led before the application moves into production, which is the fourth phase. That's quantum compute as a service. So that's one path that our customers can and do go down. The other path is what we sometimes affectionately refer to as do-it-yourself, where our customers just buy access to the quantum systems and hybrid solvers and do the R&D and development work themselves. And so we have customers that come into us under both models. The four-phase model is kind of a fixed model in terms of the size and cost. associated with it um it's the do-it-yourself that varies uh we've got some customers that come in and they're they fought by a fairly large amount of uh access over uh you know a longer period of time in some cases multi-year and then we have others that come in and buy a smaller amount of access over a shorter period of time maybe you know a quarter or six months so you know we've got all three of those going on, small do-it-yourselfers, large do-it-yourselfers, and the professional services-led launch program. We're roughly kind of continuing to see the same distribution amongst the do-it-yourselfers between small and large that we've seen in the past, but We're also seeing more customers start to go down the professional services-led path because we're trying to push them that way. That's the more, you know, we think that's the faster path to get to production.
spk04: Got it. That's very helpful. That was all I had. Thanks, guys, and congrats again. Thank you.
spk05: And our last question comes from the line of Ben Solek with Ziegler Capital Management. Please proceed with your question.
spk00: Hey, guys. Thanks for squeezing me in. And congrats going public, and congrats on the second quarter. Just a quick question regarding the gate model you'll build. Do you guys have any plans on how you'll tackle the error rates with more cubes you guys are going to be adding? And could you provide some color on how you'll catch up with the current competition with the gate companies?
spk06: Yeah, sure. You mean with the other gate companies? Because we're now a gate company as well.
spk00: Correct.
spk06: Yeah. Yeah, the only company that does both annealing and gate. But, yeah, so first of all, I can turn it around and say, you know, the real question is how are they going to catch up with us? And you might say, well, wait a minute, Alan, why would you say that? They started five years ago and you just started. Well, that's true and it's also not true in the sense that, you know, we've been developing superconducting quantum technologies for over 10 years now. And we've tackled some of the hardest problems that need to be tackled in building a scaled error-corrected gate model system. For example, we're the only company that has multilayer fabrication to get high density on the chip. That's why we have 5,000 qubits when everybody else is, you know, like 50 to 100 qubits. We're also the only company that has control on the same chip as the qubits. You know, nobody else has been able to do that because the crosstalks are horrendous and they haven't figured out how to manage them, but we have. You know, the bottom line here is that we've got a number of technologies that we have developed and gotten to the point where we've even made them commercial that the other companies are going to have to figure out how to do. So in those areas, we're actually ahead. So, you know, at this point, I think that the program that we've defined, I think it'll allow us to get to a scaled error-corrected gate model system, you know, no later than anybody else in the space. Because, yeah, there are some areas where we're not as far ahead. You know, the one is, you know, fabricating qubits that have high coherence. Our qubits have high coherence for the annealing space, but we're not yet where we need to be on the gate model qubits. The other folks are definitely further ahead in that area, but when it comes to everything you need to be able to do error correction and control that error correction, we've got, I think, technology that they haven't even started working on yet that we're going to be able to apply in that area. You know, it may take us a little bit longer to get to the point where our qubits are ready to go, but I think once we're there, we're going to actually be able to move faster. Now, as far as the, you know, dealing with the number of qubits needed to run service code and do error correction, I mean, look, the fact that we are currently at 5,000 qubits on a chip and we're continuing to grow that means that, you know, you know, we'll have the ability on a single chip to have multiple logical qubits, even superconducting, even if service code requires 1,000 to 1. You know, nobody else has that right now. I mean, Google, IBM, Rigetti, they're not even close to having thousands of qubits on a chip to have multiple logical qubits on a chip. So, you know, I think it's actually going to be a bit easier for us
spk04: to be able to build out that service code, have those logical qubits, and interconnect them. Fantastic. Thank you. Yep.
spk05: And we have reached the end of the question and answer session, and I'll now turn the call back over to Alan Barrett for closing remarks.
spk06: Great. Thank you. So all I want to do is thank everybody once again for joining us on the call today. It has been a really interesting and dynamic year for us as we move forward through to the point where we close the business combination and became listed last Monday on the New York Stock Exchange. And we're thrilled to be at this point and looking forward to engaging with you all on a regular basis as we go forward. So have a great evening, everyone. And operator, please proceed to close the call.
spk05: Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
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