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spk13: Greetings. Welcome to D-Wave's fourth quarter full year fiscal 2022 earnings call. At this time, all participants are in 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 from your telephone keypad. Please note that this conference is being recorded. At this time, I'll turn the conference over to Kevin Hunt from Investor Relations. Kevin, you may now begin.
spk03: Thank you and good morning.
spk08: With me today are Dr. Alan Barrett, our Chief Executive Officer, and John Markovich, our Chief Financial Officer. Before we begin, I would like to remind everyone that this call may contain forward-looking statements and should be considered in conjunction with cautionary statements contained in our earnings release and the company's most recent periodic SEC report. During today's call, management will provide certain information that will constitute non-GAAP financial measures under SEC rules, such as non-GAAP gross both 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 sections of our company website at www.dwavequantum.com.
spk03: I'll now hand over the call to Alan.
spk12: Thank you, Kevin, and good morning, everyone. We have a lot of good news to share with you today, so let's get started. On the morning of World Quantum Day, we are pleased to share with you our fourth quarter and fiscal year 2022 results, which point to accelerating momentum in our business. We believe that we're in the midst of the quantum transformation as enterprise companies increasingly are turning to our near-term quantum technology solutions to solve their most challenging business problems today. While some define quantum computing solely as the gate model modality, there are, in fact, two main types of quantum computing, annealing and gate model. Currently, the only available quantum computing technology able to handle today's real business problems is quantum annealing, and D-Wave is the only provider of that technology in the world. Recent data from Hyperion Research showed that more than 80% of enterprise survey respondents plan to increase their quantum computing commitments in the next two to three years, and more than one-third plan to spend more than $15 million U.S. annually on quantum computing efforts. We're seeing that accelerated adoption reflected in our bookings and revenue, in our customer portfolio, and in our product usage. Let me walk you through some of the highlights. The accelerated adoption is showing up in both our quarterly and fiscal year numbers. Fourth quarter revenue increased by 41% over the third quarter, which had increased by 24% over our second quarter revenue. Average QCAS, or quantum compute as a service, deal size for 2022 increased 78% year over year compared to 2021, which is an indicator that we have customers that are moving forward toward larger scale production deployments on our quantum technologies. In fact, we have now seen several customers move into the production stage using our technology, and we expect others to follow in the coming quarters. Further, we entered 2023 with $5.8 million in a combination of firm backlog and prior year contracts expected to renew in 2023. These factors give us confidence in providing robust guidance for our fiscal 2023 with an expectation of revenue growth in the 67% to 80% range when compared to 2022. And based on what we're seeing from customers, we expect that adoption and growth momentum will provide us with the opportunity to continue to grow at this rate over the next several years. John will provide more details about our fourth quarter results and guidance in a few minutes, but first I want to cover some additional business and technology developments. Our quantum cloud business was once again a growth driver for us. Cloud access to and usage of our system and hybrid solvers reflect a significant piece of our business. More than 50 million problems have been run on our Advantage and Dealing quantum computer directly and through hybrid solvers since September of 2020. And we saw a 76% year-over-year increase in problems submitted from 2021 to 2022. Customers using our LEAP real-time quantum cloud service spend a diverse set of countries, including the United States, Canada, Japan, India, and Australia, and represent a multitude of industries, including manufacturing, technology, financial services, aerospace, energy, and healthcare. Our quantum cloud service LEAP is now available in 39 countries with the recent addition of Israel. From a customer perspective, we had 67 revenue-generating commercial customers in 2022, an 18% increase over 2021. These customers included ArcelorMittal, BASF, Unisys, Uptown Basil, Siemens Healthineers, and more. Fifteen of those companies, including MasterCard, Deloitte, Davidson Technologies, and Johnson & Johnson, were on hand at our annual Qubits user conference in January to spotlight quantum and quantum hybrid applications and demos built on D-Wave solutions. This showcased the incredible processing power and speed with which our annealing technology is solving real business problems today across a multitude of use cases, such as supply chain optimization, port optimization, employee scheduling, missile defense, and customer loyalty and rewards allocations. You can view most of the Qubits presentations and demos on our G-Wave YouTube channel. Customers are starting to demonstrate increased urgency in pushing applications to production, moving from problem definition exploration to pilots and in-production execution. We've seen several companies take applications into production, including Savantex for the Port of Los Angeles operations optimization at Pier 300, Patterson Food Group for grocery optimization and e-commerce delivery efficiency, and Recruit Communications for TV commercial optimization. Through our professional services offering, we're helping expedite the process and providing a key on-ramp into production, which we believe will translate into future QCAS revenue growth. Total professional services engagement increased 50% from 2021 to 2022, And total booked revenue from professional services engagements increased 281% from 2021 to 2022. And we're seeing the momentum continue in 2023 as we've already reached the total number of professional services engagements that we achieved in 2022 just in the first few months of this year. Lastly, we're seeing continued strength in our strategic alliances with partners, including AWS Marketplace, Deloitte, NEC, and Uptown Basel. The reseller ecosystem is proving to be an important incremental component to our go-to-market strategy and is expanding our pipeline. Turning to product and technology developments, we continue to innovate on or ahead of schedule, providing solutions that are helping customers solve real problems and advance the science of quantum computing. Our relentless and on-time product delivery reflects a deep commitment to ongoing innovation that accelerates quantum computing adoption, usage, and customer value. In February of this year, we announced a new initiative designed to bring the power of quantum to artificial intelligence machine learning through new feature selection offerings. By using quantum hybrid approaches, we're helping optimize AI machine learning models, Our solutions solve a key problem in machine learning that classical computing has struggled to solve, and we believe DOA's offering is uniquely suited to address this issue. A number of our customers have already used the feature selection tool, with positive early results in areas like fraud detection and TV commercial advertising optimization. We're also making continued progress with the next generation Advantage 2 annealing quantum system, which is expected to feature 7,000-plus qubits, 20-way connectivity, and higher coherence. Building on the successful integration of our new high-coherence fabrication process, which has demonstrated a four-times reduction in noise, we have now completed an initial calibration of a processor fabricated with this new process. Advantage 2 is expected to solve larger and more complex problems.
spk04: We continue our work to advance the science of quantum computing.
spk12: We published significant research findings in Nature Physics late last year that demonstrated large-scale coherence in annealing quantum computers. As noted, this work is a very important step toward demonstrating practical quantum advantage, providing definitive proof that DOA systems perform coherent quantum annealing, which cannot be classically simulated. We're doubling down on efforts in this area, working with the world's leading experts and some of the most powerful computers to demonstrate that classical computers pale in comparison to our quantum computations. In addition, we've seen recent publications demonstrated that quantum annealing significantly outperforms the quantum approximate optimization algorithm, or QAOA, for solving optimization problems when tested on state-of-the-art platforms. While D-Wave has long said that QAOA is unlikely to ever be competitive with quantum annealing, we're now seeing industry benchmarking evidence showing that quantum annealing implemented on advantage processors significantly outperforms state-of-the-art implementations of QAOA on gate model platforms. These results in two separate papers from QEDC and Los Alamos National Lab, together with previous theoretical work explaining the scalability of these approaches, suggests that QAOA will never be able to overcome the current large performance gap. D-Wave does now, and we expect in the future we'll continue to own the quantum optimization space. On the software side of our business, we opened availability of the Leap quantum cloud service in Israel, which means 39 countries around the world now have access to Leap to help drive the development of business-critical in-production hybrid applications. In addition, we're undergoing a series of initiatives designed to enhance our production and commercial readiness, including SOC 2 compliance. SOC 2 is a voluntary compliance standard for service organizations developed by the American Institute of Certified Public Accountants, which specifies how organizations should manage and protect customer data. Just last month, D-Wave successfully completed its SOC 2 Type 1 audit, which attests to the efficacy of the company's current data security practices and controls. And we are now working with independent auditors to achieve SOC 2 Type 2 compliance, which will attest to the efficacy of these controls over time. SOC 2 reports are recognized globally and affirm the company's infrastructure, software, people, data, policies, procedures, and operations have been formally reviewed. Regarding gate model, our development work is progressing. We are now benchmarking one- and two-qubit luxonium qubit circuits. We are validating a new scalable readout method for our gate model design, and we introduced a new gate model simulator in our Ocean suite of software tools, which we believe will help developers to advance their quantum designs. Through the continued development of our quantum annealing and gate model quantum systems, We're focused on building and delivering the full breadth of quantum solutions to our customers, both today and into the future, bringing our unique cross-platform vision to life. Finally, I'd like to make a few comments regarding our liquidity and financing. Today, we announced the closing of a $50 million four-year term loan. In addition, as previously disclosed in 2022, we'd entered into a common stock purchase agreement with Linkin Park Capital, with the right to issue itself to 150 million shares over a three-year period. To date, we've raised 20 million under this ELOC facility. With that, I'll turn it over to John to provide a review of our fourth quarter and fiscal year 2022 results. John?
spk07: Thank you, Alan, and thank you to everybody that is participating in this call. I will start with an overview of the fourth quarter results, then the full 2022 results and then touch on the balance sheet and liquidity. As Alan noted earlier, in the second half of 2022, the growth in revenue began to accelerate on a sequential quarter-to-quarter basis with Q3 revenue of $1.7 million, increasing by 24% over Q2 revenue of $1.4 million. and Q4 revenue of 2.4 million, increasing by 41% over the immediately prior third quarter. The 2.4 million in fiscal 2022 fourth quarter revenue was essentially flat when compared to the year earlier, 2021 fourth quarter revenue of 2.4 million that included $350,000 of non-recurring revenue. Adjusting for the fiscal 2021 fourth quarter non-recurring revenue, the year-over-year growth was 15.3%. During the second half of 2022, the commercial content of our revenue began to expand with the commercial revenue as a percentage of total quarterly revenue increasing from 46.5% in the second quarter to 62.2% in the third quarter and further increasing to 72.4% in the fourth quarter. With respect to the composition of revenue, QCAS or quantum computing as a service revenue total $1.7 million in the fourth quarter, which represents 71.4% of the total fourth quarter revenue and a $351,000 or 26% increase from $1.4 million in QCAS revenue in the fourth quarter of fiscal 2021. So we'll be providing non-GAAP gross profit, gross margin, operating expense, and adjusted EBITDA numbers 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 fourth quarter and year 2022 earnings press release, and for the most part, adjust for non-cash and non-recurring expenses. With respect to the non-GAAP gross profit, the fiscal 2022 fourth quarter non-GAAP gross profit of $1.6 million increased by $543,000 or 50% from the immediately preceding fiscal 2022 third quarter non-GAAP gross profit of $1.1 million, which increased by $266,000 or 32% from the immediately preceding fiscal second quarter non-GAAP gross profit of $820,000. The fiscal 2022 fourth quarter non-GAAP gross profit of $1.6 million increased by $80,000, or 5.2% non-GAAP gross profit of $1.5 million in the year earlier fiscal 2021 fourth quarter. With respect to the GAAP gross profit, GAAP gross profit for the fiscal fourth quarter was $1.3 million, a decrease of $289,000 or 28% from the immediately preceding fiscal 2022 third quarter gap gross profit of $1 million that increased by $256,000 or 33% from the immediately preceding fiscal second quarter gross profit of $785,000. The 2022 fourth quarter gap gross profit of $1.3 million decreased by $219,000 or 14% from the fiscal 2021 fourth quarter GAAP gross profit of $1.5 million. The difference between GAAP and non-GAAP gross profit is limited to the non-cash stock-based compensation expenses that is excluded from the non-GAAP gross profit. With respect to margins, during the second half of 2022, we experienced sequential quarter-to-quarter expansion in non-GAAP gross margins, with margins increasing from 59.8% in the second quarter to 64.1% in the third quarter to 68.1% in the fourth quarter, primarily driven by the sequential growth in the higher margin QCAS revenue. With respect to GAAP gross margins, for the fourth quarter, the GAAP gross margin was 55.5%. A decrease of 5.9% from the immediately preceding third quarter gross margin of 61.4%, then increased by 4.1% from the second quarter gross margin of 57.3%. The fiscal 2022 fourth quarter gap gross margin of 55.5% compares with 63.8% gap gross margin in the year earlier fiscal 2021. fourth quarter that did not include any expenses from stock-based compensation. With respect to operating expenses, the non-GAAP operating expenses for the fourth quarter totaled $15.9 million compared with $10.9 million in the fiscal 2021 fourth quarter. GAAP operating expenses for the fourth quarter were $22.4 million compared with with 12.4 million in the year earlier period. Net loss for the fourth quarter was $12.5 million or 10 cents per share compared with $13.8 million or 11 cents per share in the fiscal 21 fourth quarter. With respect to adjusted EBITDA, the fourth quarter adjusted EBITDA was a negative 14.5 million that compares with the year earlier of adjusted EBITDA of negative 9.3 million in the fourth quarter of 21. Now I will address the operating performance for the entire fiscal 2022. Revenue for fiscal 2022 was $7.2 million, an increase of $894,000 or 14.2% from 6.3 million in fiscal 2021 and within the range of our 2022 revenue guidance. The percentage of fiscal 22 revenue derived from commercial customers was 60.3%, an increase of 5.3% from 55% in fiscal 21. The 2022 QCAS revenue totaled $5.6 million, which comprised 78% of the total annual revenue. It represents an increase of $1.2 million, or 26%, from the fiscal 21 QCAS revenue of $4.4 million, with professional services revenue comprising most of the balance of the revenue. With respect to customer metrics, and as Alan outlined earlier, we continue to gain traction with our commercial customers. We had a total of 67 revenue-producing commercial customers, which is a milestone for D-Wave. This represents an increase of 10 commercial customers, or 18%, from the 57 commercial customers that we had in fiscal 21. And we defined a customer as one in which we recognized revenue during the period. In addition, during 2022, D-Wave had a total of 112 customers, also a milestone for the company. That represents an increase of 17 customers, or 18%, from a total of 95 total customers in fiscal 21, with the difference between the number of total customers and the number of commercial customers being educational and government customers. As we also noted previously, we started to see a pretty significant increase in the size or the average size of our QCAS bookings, which increased by 78% on a year-over-year basis. With respect to the non-GAAP risk-profit, The non-GAAP gross profit for fiscal 22 is $4.6 million, representing a slight increase over the $4.5 million recorded in fiscal 21. Our GAAP gross profit for fiscal 22 was $4.3 million, a slight decrease from the $4.5 million in fiscal 21. The non-GAAP gross margin for fiscal 22 was 64.5%. that compares with 72% in fiscal 2021, and the GAAP gross margin on the year was 59.3% that compares with 72.1% in fiscal 21. With respect to operating expenses, our non-GAAP operating expenses for the full year were $52.4 million that compares with $40.3 million in fiscal 21. The gap operating expenses for fiscal 22 were $63.7 million compared with $43.5 million in fiscal 21, with the primary difference between the gap and non-gap operating expenses being non-cash stock-based compensation expense and non-cash depreciation expenses that are excluded from the non-gap operating expenses. The net loss for 2022 was a negative 51.5 million or a negative 43 cents per share compared with a negative 31.5 million or 25 cents per share in fiscal 21. The adjusted EBITDA for fiscal 22 was negative $48 million compared to a negative 35.7 million in fiscal 21 and within the range of our 2022 adjusted EBITDA guidance. Now I will touch on balance sheet and liquidity metrics. We ended the year with $7.1 million in cash and subsequently raised $15.7 million under the Lincoln Park equity line of credit during the months of January and February. As previously disclosed, D-Wave entered into a common stock purchase agreement, which we refer to as a ELOC or equity line of credit with Lincoln Park Capital in June of last year. wherein the company has the right but not the obligation to issue and sell up to $150 million of shares of its common stock to Linkin Park, subject to certain limitations and satisfaction of certain conditions, with this being a three-year commitment. Since the agreement was entered into, D-Wave has raised approximately $20 million under the ELOC. On February 13th of this year, DOA file a related form S4N registration statement to register additional common shares under the ELOC. On April 13th, yesterday, we entered into a $50 million four-year term loan agreement with PSPIB Unitas Investments, which is an affiliate of PSP Investments. The initial advance under the term loan is $15 million, with second and third advances of $15 million and $20 million, respectively, subject to certain terms and conditions. Now I'll move on to our 2023 outlook and guidance. Our guidance is based upon current market conditions and expectations and is subject to various important cautionary factors described below in our press release and in our SEC filings. Based on information available as of April 13th, guidance for the full year 2023 is as follows. Revenue is expected to be in the range of $12 to $13 million, representing year-over-year growth of 67% to 80%, a growth rate range that the company expects to maintain over the next several years. Our fiscal 23 revenue guidance is supported by $4.6 million in contracted backlog as of December 31st, 2021, and $1.2 million in the renewal of contracts entered into prior to December 31st. Our adjusted EBITDA is expected to be less than a negative $62 million. As we have previously outlined, D-Way's business model incorporates a high degree of operating leverage It 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.
spk04: With that, I'll turn the conversation back over to Alan. Okay.
spk12: I think that we're ready to go into some Q&A, so I'll let the operator help us with that.
spk13: Thank you. If you'd like to ask a question today, please press star 1 from your telephone keypad and a confirmation tone to indicate your line is in the question queue. You may press star 2 if you'd like to move your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. So that we may address questions from as many participants as possible, we ask you to please ask no more than two questions. Thank you. Now our first question will be coming from the line of Harsh Kumar with Piper Sandler. Please proceed with your questions.
spk00: Yeah. Hey, guys. First of all, congratulations. Some pretty solid and interesting kind of growth metrics. Alan, I had one question for you. I think maybe John mentioned that the growth rate for the out years, or maybe I misheard this, but the growth rate for the out years will be similar to the growth rate that you're forecasting for 2023. With the sort of increases in awareness, the increases in customers, the increases in everything that is happening that's positive at your company, Why would we not expect the growth rate to accelerate as perhaps all these good things turn into maybe commercialization?
spk12: Well, Harsh, at this point, we're still early in the true commercialization of quantum. As both John and I have said over the course of the last 30 minutes or so, We're seeing acceleration in terms of bookings and revenue and deal size. And so we have a fairly high degree of confidence in what we can project for this year, 2023. But, you know, it's still earlier rather than later in the maturity of this industry. and our business model. And so, you know, we want to be realistic about what we can expect for the future. And if we, you know, get a pleasant surprise down the road, you know, that would be great.
spk00: Okay, fair enough. That's great. And then, John, maybe I had a question on the breakeven timeline. With all the metrics of OPEX and things that you're doing and the acceleration, et cetera, that you're seeing in your business, where do you think what kind of number of years to breakeven should be anticipated at this point?
spk07: Harsh, at this point, we haven't provided any guidance in terms of the timing on achieving positive free cash flow.
spk02: Okay, fair enough. Thanks, guys.
spk04: Our next question is from the line of David William with Benchmark Company.
spk13: Please just use your questions.
spk11: Hey, good morning. Thanks for letting me ask the question, and let me echo my congrats on the solid year in progress. I guess maybe, Alan, first to you, if you kind of think about all the progress that you've made and you are making, and the acceleration of your customers. Can you put some color maybe around just kind of what you're seeing or hearing from those customers? Um, we've heard a lot at your, your conference this year, but just curious what you're seeing and maybe if you could frame the, uh, the acceleration that you're seeing, the urgency that you talked about, perhaps maybe. Thank you.
spk04: Sure. Yeah. So, um, until maybe a year to a year and a half ago,
spk12: You know, our systems were not really at the point where they could support real business applications at a production scale. And so most of what was going on was that customers were buying small amounts of access basically for experimentation or tinkering. Kind of where GateModel is right now, you know? small amounts of experimentation and tinkering. However, as we started to enter 2022, last year, and our systems had matured to the point where they really could support business applications at production scale, we started focusing on building our professional services organization and leveraging that as an on-ramp. to quantum compute as a service. Specifically, rather than just having customers tinker with our systems, really working with us through our professional services organization to get them on a journey that would lead to production deployment of their applications, which would then drive recurring QCAS revenue for us. And we're making really good progress with that. I mean, a year into it, we are seeing a significant acceleration in professional services. We talked about that a little bit earlier. We're seeing an increase in deal sizes. We talked about that a little earlier. And we're seeing applications now actually starting to move into production. You know, we've talked about the Port of LA application. We've talked about e-commerce grocery delivery application with a Canadian grocery chain. We've talked about a TV advertising placement application. These are all applications that have now moved through the process into production. And we've got a really nice pipeline of applications that we're working on through our PS engagement on the path to getting those into production. And as we move applications into production, our customers are seeing a very positive ROI. For example, the Port of L.A. application that is allowing each crane at the port to handle up to 60% more cargo containers versus the scheduling that was done with classical solutions. Or an employee scheduling application where we're able to take the scheduling from month to minute. And it's really all of this. that is driving that move into production.
spk11: Okay, very, very helpful. Thank you for that. And then maybe just how does the revenue trajectory change as your customers kind of move through that pipeline? I mean, what should we expect as they go into deployment phase? Is there an inflection in that revenue from that customer, or does it slowly grow over time? Just help us understand how that revenue dynamic works.
spk12: Yeah, so David, it's a change in the type of revenue. So when we're working with them to help them, you know, identify and build out the applications, it's really more professional services revenue. But those are, you know, relatively short. By relatively short, I mean, you know, small to larger numbers of months. on the path to production. But once it goes into production, it becomes long-running recurring revenue for the business. Because once the application is in production, you know, it's multi-year revenue, you know, as those applications continue to run, continue to access our systems and solvers through our quantum cloud service, and continue to generate recurring revenue for us. And it's really that quantum compute as a service recurring revenue that's the important revenue for us because that's the revenue that allows us to build backlog and have more predictable growth going forward.
spk04: Thanks again, Gus. Appreciate it. Thank you. Our next questions come from the line of Richard Shannon with Craig Hallam. Please proceed with your questions. Mr. Shannon, please proceed with your questions. Mr. Shannon, your line is live for questions today. All right, thank you.
spk13: Our next question will be from the line of Quinn Bolton with Needham & Company. Please proceed with your questions.
spk09: Hey, guys. Thanks for taking my question. I apologize for the background noise. I'm at a train station. But, Alan, I wanted to ask, you mentioned seeing an acceleration in the business and wondering if you could talk about the, you know, commercial launch of Advantage 2, also SOC 2, Type 2 compliance. Would you expect those milestones to cause a further acceleration in the commercial adoption of quantum annealing? Thanks.
spk12: Yeah. I mean, the short answer is yes. But let me provide a little bit of context. So let's start with SOC 2 type 2 compliance. You know, as we move larger businesses into production with their applications, they are requiring us to kind of get onboarded. through a fairly intense process whereby we have to kind of provide supporting evidence of our ability to ensure high availability, security, particularly security of their data, privacy, privacy of their data, and so on. And every time we go through this, It's a fairly involved process that takes time. However, SOC 2 Type 2 compliance generally kind of short-circuits that entire process because SOC 2 Type 2 compliance is kind of a replacement for that intense onboarding process. When we can say to a customer, we're already SOC 2 Type 2 compliant, that generally reduces their questionnaire and the number of questions they need to ask us in order to onboard us to a much smaller set. So it really helps to reduce the time to get an application moved into production. With respect to Advantage 2, With each generation of system, as we increase qubits, increase connectivity, improve coherence time, we are able to solve larger and more complex problems, but also able to solve existing problems faster, thereby providing an even better ROI to our customers. And as a result, we do expect that the Advantage 2 system will help to further accelerate growth as we're able to expand the class of applications that we can solve and demonstrate an even stronger ROI.
spk09: Alan, would you expect Advantage 2 and Type 2 compliance to be milestones you hit this year, or do you not want to commit yet to timing on those milestones?
spk12: I actually think we've already said that our goal is SOC 2 type 2 compliance before the end of this year. We have previously published our roadmap for the Advantage 2 quantum computer. I will tell you that we are progressing extremely well. You may recall that last year, in 2022, we had fabricated a small-scale 500-qubit version of the Advantage 2 processor in the same fabrication process that we used to build the Advantage system. And we were able to yield that processor first try. We calibrated it, and we actually put it in our LeapCloud service as an experimental prototype so that our customers could start working with the new Advantage 2 architecture. So this basically validated the Advantage 2 architecture, but fabricated in the, you know, Advantage fabrication stack. What I mentioned today is that we now have a small-scale version of the Advantage 2 process that we fabricated in the new low-noise fabrication stack. We've calibrated that as well. We have not yet opened that up for public use, but, you know, once again, we are moving very rapidly toward the delivery of the Advantage 2 processor. So at this point, we validated the architecture. We validated the new reverse fabrication process on a smaller scale processor. And now it's just about building out the full 7,000 cubic system. So we're making very good progress.
spk09: Excellent. And then for John, you mentioned that the $50 million term loan is comes in three tranches. I don't know if you're prepared to sort of discuss the milestones needed to receive the second and third tranche. If not, can you say, would you expect those tranches to be available in 2023, or is that going to take place over a longer period? I think it's a four-year term loan, but any sense of timing of the second and third tranche would be helpful. Thank you.
spk07: Sure, Quinn. So the subsequent tranches are targeted to be completed within the context of this year. And when we file our 10-K, we'll have additional disclosures with respect to the conditions around each of those tranches.
spk04: Great. Thank you very much. Our next question is from the line of Richard Shannon with Craig Helm.
spk13: Please proceed with your question.
spk06: All right, guys, can you hear me this time?
spk13: Yeah, we can.
spk04: Yes.
spk06: Excellent. Good morning, Alan. Good morning, John. How are you? Good morning. I apologize for my technology issues. Hopefully they weren't created by me, but hopefully we won't have them again here. Anyway, thanks for taking my questions again. I missed a couple of the other ones trying to redial in here. So let me start with an easy one here on your outlook for the year from a sales perspective. I wonder if you could just kind of give us your sense of, are there any meaningful shifts between QCAS revenues and professional services? And then also, I like the disclosure here about the percentage of revenues coming from commercial customers. Maybe you can discuss how you're seeing that trend throughout this year as well.
spk12: Yeah, so let me start, and then John can weigh in if he wants to add anything else to it. So first of all, You know, as I said in the past, you know, our goal is to use professional services as an on-ramp to the quantum compute as a service because, you know, once those applications that we help customers build out through professional services move into production and become QCAS recurring revenue, you know, they become multi-year engagements, and that allows us to really build that base of recurring revenue for more predictable revenue growth. However, in the earlier quarters and years, we do expect that the percentage of professional services versus QCAS revenue will vary. We started this model, as I said, at the beginning of last year. We are seeing an acceleration in in those professional services engagements, as I've already talked about and John has talked about. And that's a good thing for us because that's really what allows, what gets those customers engaged and on the on-ramp to QCAS. But as that happens, we may go through some periods where we see maybe a higher percentage of professional services versus QCAS as we're kind of building customers up onto that on-ramp and prior to having transitioned to full production. But over time, we fully expect that the revenue will be much more QCAS than professional services. It's just earlier on, it may be, you know, the percentages may vary a bit from quarter to quarter until we get that larger base of applications into production, that larger base of recurring revenue, at which point professional services we expect will always be the smaller percentage. You know, with respect to the movement from, you know, or the increase in commercial, this is a really important metric for us because what's not commercial is, you know, kind of research and education. And that really tends to be that tinkering that I talked about a little earlier, as opposed to the drive to applications that are really going to be of value to our customer and benefit their business operations. And so we really want the customer base to be commercial, building applications that are going to be important to their business operations. So, you know, we watch closely the movement or the growth in commercial.
spk06: Perfect. And great for that. Thanks for that detail here. Alan, I want to follow up on your comment you just referred to in your last answer here on the pickup in professional services. Obviously, see, there's a leading indicator, which makes perfect sense. It seems like a fairly substantial pickup here. Can you kind of describe what's going on here? Is this kind of a wide breadth of new customers, or is there a one or two or small number of sizable professional services engagements? And do you see this as a trend, or is this more of an unusual blip? Can you help us understand that a little better, please?
spk12: So it's growth in both the number and the size, and we see it as a trend, not as a blip. And, you know, I mean, it's fairly straightforward to kind of explain what's going on here. Again, we started down this path just a little over a year ago, right, beginning of last year. And at that point in time, A, we actually had to go out and convince companies that, you know, quantum was ready for prime time. that you really could build and run your important business applications on our quantum systems and get a solid ROI. And so, you know, it's been an educational process in the market. And by the way, you know, I don't want to be negative on gate model because, you know, as you know, we're developing a gate model system as well. It's just that it's many, many years away from commercial. The fact that, you know, we're the only ones that are providing and kneeling quantum computing today and, as a result, are commercial today means that most of the rhetoric out there in the marketplace is that quantum computing is not yet ready for prime time. So when we go and talk to a customer, you know, in many cases, the first thing they're saying to us is, well, come on. I mean, it's going to be five years before you can really support my applications because that's what most of the industry is saying because everybody else is on a technology base for which that's actually true. It's just that we're unique. We're commercial today. And so part of what we have to do is we have to break through that kind of misperception with respect to the fact that quantum is real today and you can, in fact, benefit from quantum today. So, you know, there's an educational process. And, you know, as a result, the cycle time to get deals closed can be longer in some cases than we might like. So that cycle runs from a few months if the customer is already knowledgeable and looking for a quantum solution to as much as 12 months if we have to start from scratch in educating them. So that's one element. By the way, I just wanted to go out an anecdote here because I did mention that sometimes our deals close very fast, and sometimes they can take longer to close. We just closed the deal in two months, and I think you'll find this quite interesting. A customer came to us and said, we went to ChatGPT and asked, you know, what technology can help us solve this problem? And ChatGPT said D-Wave. They came to us, and we closed the deal in two months. So, you know, we owe a debt of gratitude to GPT. But, again, this is a case where the customer kind of did their work, understood, was looking for the solution, and we could close the deal pretty quickly versus when we really, you know, kind of have to educate them, and that can take a little bit longer.
spk06: Okay, fair enough. Great perspective there. Maybe I'll just ask one last quick question, jump on the line here. Obviously, you've given us guidance for the full year here, but you've already kind of finished the first quarter here. How do we think about the cadence or linearity of this quarter? I would assume kind of like last year, maybe see it down and then kind of accelerating through the years. Is that a fair guess as to how the trends look throughout the year by quarter, John?
spk07: It is, Richard. Yes.
spk06: Okay. All right. Fair enough. That's all for me. I'll jump out of line. Thank you.
spk13: Thank you. Our next question is from the line of Suji DeSilva with Ross MPM. Please proceed with your question.
spk01: Hi, Alan. Hi, John. Glad to hear you guys have ChatGPT on your side. All the help you can get. Yeah, that's good. Congrats, guys, on the progress. QCAS deal size here growing significantly. Can you just talk about the driver's? of the sizing of a deal, how you guys kind of approach that. Is it estimated minutes used, or are the years, the term years of the deal, extending just to understand what's driving some of that growth?
spk12: So, CJ, let me start, and then maybe John wants to weigh in. So one of the things that's helping to grow the size is that we did change our pricing model on January 1st. I think we've talked about this in the past. We've certainly talked about it publicly previously, but prior to the beginning of this year, we were selling on a consumption-based model, essentially charging by the hour. However, we changed on January 1 to a seat-based model where we have two components. We have either a developer seat, or an application slot. So if you're building an application, you get a developer seat. And you essentially get as much time as you need to build your application. We do put a cap on it just to kind of ensure we don't have runaway usage. But when it comes to developing an application, you can view it as all you need to develop your application. And then we have an application slot, which is similarly all you need to run your application. And, you know, as we're now selling developer seats and application slots, you know, the deal sizes are becoming larger, which is what we had intended when we put that model in place.
spk04: Okay. Okay.
spk01: Thanks. And then maybe you highlighted AI ML feature selection as one of the areas of growth. Can you just talk about how that tool feels? You said that tool feels different perhaps to the customer versus the other tools, or is it very similar in use to the other ones? I'm just curious because it sounds like a very ripe area for growth for you guys.
spk12: Yeah. So think about it this way. That is the first that we are making available an application solution as opposed to a platform service. So prior to feature selection, essentially what we were doing was helping customers build applications through professional services and then providing them access to our hybrid solvers and quantum systems in support of running those applications on an ongoing basis. But it was really their applications, and they were accessing our systems and paying us to run those applications. Feature selection is the first time we're actually bringing an application to market. And so you're right, it is quite a bit different, and we do think there's real opportunity there. And, you know, we're... kind of monitor this closely and use it to evaluate whether in the future we think that it might make sense for us to do more of that sort of or bring to market more of those types of services. Okay.
spk01: Makes sense.
spk04: Thanks, guys. The next question comes in the line of Kevin Garrigan with West Park Capital.
spk10: Pleased to see you with your questions. Yeah, good morning, everyone. Let me echo my congrats on the results. I mean, most of my questions have been answered, so just one quick one for me. You're $4.6 million in contracted backlog already. Can you kind of give us a sense of which of your three main verticals are the majority of this, or is it pretty kind of evenly spread across the three?
spk04: It's pretty diversified. Okay, got it. Thanks, guys.
spk12: Don't you all just love the fact that when I answer a question, I talk for like seven or eight minutes, and when John answers a question, he talks for like three seconds?
spk07: I thank everyone for that.
spk13: Thank you, everyone. And if you'd like to ask a question today, you can press star one from your telephone keypad. We'll pause a moment to assemble a queue.
spk04: Thank you. Thank you.
spk13: At this time, I'm showing no additional questions. I will turn the floor to Alan Barrett for any further remarks before we close.
spk12: Okay, thank you, and thanks to all of you for taking the time to be here with us today. So to summarize, we remain really pleased with the progress of our business in both the customer adoption and technology development fronts. Honestly, Z-Wave is the leader in driving commercial adoption of quantum computing and we're excited by the pace with which the businesses are embracing our solutions to solve their critical computational problems. So thanks again for all your time, and we'll look forward to catching up with you in the next earnings call.
spk13: Thank you. This will conclude today's conference. You may disconnect your lines at this time. We thank you for your participation, and have a wonderful day.
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