Good morning, ladies and gentlemen and welcome to the D-Wave Second Quarter 2024 Earnings Call. [Operator Instructions] This call is being recorded on Thursday, August 8, 2024. I would now like to turn the conference over to Kevin Hunt from Investor Relations. Please go ahead.

Thank you and good morning. With me today are Dr. Alan Baratz, our Chief Executive Officer and John Markovich, our Chief Financial Officer. Before we begin, I would like to remind everyone that this call may contain forward-looking statements and should be considered in conjunction with cautionary statements contained in our earnings release and the company’s most recent periodic SEC report. During today’s call, management will provide certain information that will constitute non-GAAP financial and operational measures under SEC rules such as non-GAAP gross profit, non-GAAP gross margin, non-GAAP adjusted operating expenses, adjusted EBITDA loss and bookings. Reconciliations to GAAP financial measures and certain additional information are also included in today’s earnings release, which is available in the Investor Relations section of our company’s website at www.dwavequantum.com. I will now hand over the call to Alan.

Good morning everyone, and thank you for joining us today. I’m excited to share our Q2 business results with you. As we continue to see positive momentum across the business. The world is waking up to the fact that annealing quantum computing is here. Now and it’s driving measurable outcomes for our commercial, government and research customers. We believe that D-Wave is single handedly, and I’ve said this before, single handedly, creating the market for commercial quantum computing. Let me illustrate our momentum with a quote from IDC analyst, Heather West, who recently wrote, and I quote because D-Wave Quantum’s quantum annealer is specifically built for solving optimization problems. Some may argue that the quantum annealer is limited in the type of problem that it can be used to solve. However, optimization problems are one of the most prevalent problems found in all industries. Hence, D-Wave Quantum technology provides an access point for all end users that are interested in using quantum computing to gain business value, both today and into the future. Again, that’s our IDC analyst, Heather West. So there is rapidly growing recognition of the value and potential of D-Wave and its unique annealing quantum computing solutions to one streamline and optimize business processes, including applications like workforce scheduling, vehicle routing and resource allocation, and two fuel important research breakthroughs in areas like material science. And there is a growing realization that annealing quantum computing can deliver results in these areas today, not 5 or 7 years from now, but today. For example, we’re being invited to engage in an increasing number of government meetings and conferences to provide government personnel with a better understanding of the capabilities of quantum computing technologies today and in the future. We’re also seeing an increase in third-party scientific papers highlighting…

Thank you, Alan and thank you to everyone taking the time to participate in today’s call. In my review of the second quarter and first half results, I will be providing non-GAAP operating metrics, including bookings, as well as non-GAAP financial metrics, including non-GAAP gross profit, non-GAAP gross margins, non-GAAP adjusted operating expenses and adjusted EBITDA loss is we believe these metrics improve investor’s ability to evaluate our underlying operating performance. These measures are defined in the tables at the bottom of today’s second quarter earnings press release, with the non-GAAP financial metrics, for the most part, adjusting for non-cash and non-recurring expenses. Revenue for the second quarter of fiscal 2024 total $2.2 million an increase of approximately $500,000 or 28% from the second quarter of fiscal 2023, revenue, $1.7 million. Bookings for the second quarter total $2.7 million an increase of approximately $200,000 or 6% from the second quarter of 2023 bookings of $2.5 million. The $2.7 million in second quarter bookings represents the ways ninth consecutive quarter of year-over-year growth in quarterly bookings. There are two noteworthy developments that I would like to highlight with respect to our bookings and bookings trend. One, our sales organization is currently undergoing a transformation under the new leadership of Lorenzo Martinelli, who joined D-Wave as Chief Revenue Officer several months ago. Lorenzo is focused on expanding the size of the sales organization, as well as aligning the sales organization’s capabilities and expertise with our vertical market focus that encompasses manufacturing, supply chain, logistics and government, with a specific focus on four quantum market categories, optimization, AI, research and infrastructure. The entire go-to-market organization has been intimately involved with the organizational up leveling, which has had some impact on near-term sales productivity. We are planning on completing this transformation by the end…

Thank you. [Operator Instructions] Your first question is from the line of Craig Ellis from B. Riley Securities. Your line is now open.

Yes. Thank you for taking the question and guys, congratulations on the technical and commercial progress as well as joining the Russell 3000. Nice to see. Alan, I wanted to start with just a follow-up to the point you made on AI developments and better understand what the roadmap progress and the Zapata partnership agreement mean for really the timing to broadening commercial engagement, since that’s been one of the strengths of the company and what some of the milestones are that we observers should keep in mind as you go down that path.

Sure. Thanks Craig for the question. Actually, before I answer the question, I think I need to correct a misstatement that I made earlier, although John said it properly, that our cash balance at the end of the second quarter was a little over $40 million. I may have misstated it as $50 million, but $40 million is the correct number, so I just wanted to correct that. With respect to your question, Craig, so more and more of our customers are asking us how we can a help to improve their AI machine learning initiatives and B combine AI and machine learning with our optimization capabilities. The example of the ladder that I often like to use is, AI is good at being predictive. So you could predict demand for products over some future period and then use quantum optimization to optimize the supply chain in support of that demand. So based on these customer requests, we really started thinking through how we could help to our help our customers to better leverage AI and machine learning. And based on work that we had actually been doing ourselves and with some of our customers, what we realized is that we have opportunities in three areas. One is to help our customers build more accurate models by leveraging quantum distributions in the training of those models, rather than classical distributions. Two, develop AI machine learning models with much less energy consumption, because our quantum computers are very energy efficient compared to GPUs, which are used pretty much exclusively to train models today. And then third, as I said, bring together AI machine learning with quantum optimization, and we’ve got some early proof points in each of these areas, as we’ve talked about, some work that we’ve been doing with triumph, which is a leading scientific research institution in Canada, as well as some other companies that are starting to demonstrate the fact that we can be successful in all three of those areas. And then, of course, Zapata AI has some software that actually can be used to get a quick start on doing this quantum AI integration for model training. So essentially, what the roadmap constitutes is a enhancing the lead cloud service with more GPU capability, so that, as soon as possible, our customers can leverage our Leap cloud service, not just for quantum optimization, but also for AI model training, even if only classically to start then be integrating the quantum computations with AI machine learning to kind of enable that integrated machine learning quantum optimization capability, and then finally, actually leveraging the quantum computers in support of doing the model training to be able to deliver better models. So that’s essentially how we are focused on supporting our customers and rolling out capabilities through our Leap cloud service.

Yes, a lot there and it makes sense. Thanks for that, Alan. And then John, I just wanted to circle back to the point on bookings and make sure I get the bookings math based on the numbers that you provided. So it sounds like with the increase in bookings, but the duration difference, we’ve got a sustained low 3 million forward 12-month visibility to booking. So $3.2 million, $3.3 million of forward 12 months. But where we are today is that the visibility beyond that looks like it’s up about 2.5x versus 6 months ago, with about $5 million of visibility versus $2 million, 6 months ago. Is that math correct?

The numbers I referenced earlier, Craig was a remaining performance obligations as of the end of June of $8.1 million and I compared that to $5 million as of the end of the fourth quarter. So a $3.1 million increase, but the composition of bookings changed rather significantly as a result of the longer-term QCaaS bookings. And this is broken out – and this will be broken out in great detail in the Q that we will file later today. Does that answer your questions?

Yes. It does, but it sounds like my math is right. Given the change in timing distribution, that means that with the big increase, a lot of that has occurred beyond 12 months to give people longer term visibility on the business. Okay. Thanks guys. Appreciate your help. I will hop back in the queue. Actually, let me sneak one more in. I didn’t hear John a breakout between cash, revenue and...

Craig, I apologize. We are starting to run late. So, I think we are going to hold you to the two. Sorry. Let’s go to the next question please.

Your next question is from the line of Quinn Bolton from Needham. Your line is now open.

Hey guys. Let me also offer my congratulations on the continued progress. Alan and John, you guys mentioned sort of the change in the sales force leadership and resulting changes to the sales organization. It sounds like it’s had some near-term impact, I am wondering if you see that impact really more affecting just the bookings activity, has it actually impacted revenue? And you mentioned you sort of thought that it would – those effects would sort of dissipate by the end of the year. So, should we infer that as we get into the fourth quarter and certainly into the first couple of quarters next year, that you would expect an acceleration in bookings activity now that you have the sales force realigned?

So, obviously we are not giving guidance on bookings. But I think the fact that we are significantly ramping up staffing in the go-to-market arena, and specifically bringing in skills in the areas, John to outline the verticals as well as the application areas that your characterization is reasonable.

Perfect. And then I will throw a technical question, but you mentioned the bills inequality violation and it allows you to explore digital and analog quantum computing. Just what’s, sort of if you could, Alan, dumb it down for those of us that aren’t quantum experts, what’s the importance of that, especially sort of an analog versus digital capability. What does that bring to customers or how does that allow you to expand the application use case of annealing?

Yes. So, first of all, let me just take a second and say, when we say digital and analog, what I am about to say is pretty close to accurate. It’s not 100% accurate, but it’s pretty close. Essentially, what we are saying is combining deep model type computation with annealing type computation all within our annealing fabric. Now, what’s the significance of that, as I mentioned, the significance of that is that it will allow us to generate quantum distributions that are in some sense richer than what we can generate with annealing exclusively, and that will have significant benefits in areas like machine learning, model training and I think I have talked about this briefly in the past, but doing some exploration in the area of hashing functions, these kinds of rich quantum distributions can be very helpful there as well. So, think about energy efficient hashing functions.

Perfect. Thank you.

Your next question is from the line of Richard Shannon from Craig-Hallum. Your line is now open.

Well, great. Alan, John, thanks for taking my questions. I am going to follow-up on some comments from John, but the question really is more for Alan here. John, you detailed some changes to the go-to-market sales force in the context of the bookings and kind of changes there. I guess my question really for Alan here is going back to the analyst event back in January, you talked about a goal of increasing time to revenues and time to solution for customers here. Maybe you can give us context here in the sales force changes being made here, they are affecting bookings. How has that also helped or maybe just give us an update on how you think your progress is going in terms of accelerating the time to solution from your sales force?

Yes. So, I think – as I have said at the analyst conference, the approach of focusing on some key verticals and some key use cases, we believed and believe accelerates time to production by allowing us to get the benefits of reuse. In other words, we learn from developing a use case with them for one customer and we can bring those learnings to the next customer and get better at it and the next customer and so on. Ultimately being able to move faster and help customers get it into production more quickly. And that is still our view and our goal. But it does take some time. I mean this whole notion of learning from reuse means that we need to learn and we need to reuse. So, by staying focused, we are making progress towards that end. But it does take some time and then of course, as we introduced the new verticalization strategy, it meant we needed to, in some sense tool up the go-to-market organization with the skills in those vertical areas and use cases to be able to be effective in selling and supporting customers in those areas. And that’s all work that we started to put in place. As we were coming through the analyst conference in January, one of the early and most important steps was to hire our new Chief Revenue Officer, Lorenzo Martinelli, who has a strong background in this area and has kind of worked to, if you like, determine how to best retool the go-to-market organization and that’s now all starting to get implemented, including significant focus on staffing. We will over double the go-to-market staffing over the course of the remainder of this year.

Okay. Thanks for that detail, Alan. The follow-up on that seems very interesting dynamics there. My follow-on question is touching on the fast and yield feature. Your press release mentioned you have got 2.5 million problems up from 0.5 million problems that you mentioned at the conference call a quarter ago, obviously impressive growth there. I guess maybe just for five, would be interesting to hear some perspective on what this exactly means from both a sales and a technology, seasoning perspective here. I am guessing there is probably not much of any real sales associated with this, but maybe you can help us understand and what you expect from all of these problems being submitted and how this helps advance your technology platform. Thanks.

Yes. So, maybe two comments. First, the fact anneal capability combined with the 1,200 qubit Advantage2 system that’s now available in our cloud service was the platform that we used to achieve the quantum supremacy result. We tried to do that work on the Advantage system. The 5,000 qubit Advantage system, but it really required the 1,200 qubit Advantage2 processor with fast anneal, because of the longer coherence times. And the longer coherence times combined with the fact anneal, means that essentially we can get to solutions faster because we know that the rate to optimality is much faster when we are doing coherent quantum annealing. When the annealing process is running while the system is coherent and there is a combination of the longer coherent times in the Advantage2 processor with the fast anneal, right. So, that it’s – so, that anneal is not living outside of the coherence times and we are starting to see impact of the external environment, we can get to solutions much faster. So, on the one hand, it gave us a quantum supremacy result, which has been invaluable in getting the government, the U.S. government and other governments around the world excited about finally starting to get engaged with the way so opening up more opportunities for us there. It’s also been a supporting message for the commercial market as they get more and more comfort with our technology being able to do things that can’t be done classically. And then secondarily, and maybe even more directly, it just means that we are able to deliver better solutions faster to their commercial optimization problems.

Great. Thanks for all that detail. I am going to unpack that one a little bit later. But that’s all the questions for me guys. Thanks.

Thanks.

Due to time, we will only allow one question, then ask you to rejoin the queue for the follow-up question. Your next question is from the line of David Williams from Benchmark. Your line is now open.

Great. Thanks so much for taking my question here. I guess maybe for John, revenue was below expectation, I believe below where you guided and you have talked a little bit about this. But I am just wondering if maybe you can help us understand how you typically expect maybe bookings to convert to revenue and then how much of your business is generally a turns business or business captured during the that quarter? Thank you.

Dave, I think you stated revenue guidance which for clarity, we have not provided any revenue guidance. We provide an EBITDA guidance on the year. As I mentioned earlier the composition of our bookings has changed rather significantly in the first half of the year, which has changed the historical relationship between bookings and when that revenue is recognized. As of the end of December, when we looked at our revenue backlog at that point, 73% of the revenue would be recognized in the subsequent 12 months. As of the end of June, that number had dropped to 42%, meaning that the balance of 58% is stretched out over the next couple of years. So, the average contract term has lengthened rather significantly, and the bulk of that backlog is QCaaS revenue. So, the higher margin QCaaS contracts. So, that that relationship is going to be a function of whatever the composition of the bookings is at any given point in time. Does that answer your question?

It does. Thank you.

Your next question is from the line of Suji Desilva from ROTH Capital. Your line is now open.

Hi Alan. Hi John. Congrats on the progress here. I am curious on the new sales structure, if this will help improve or accelerate land and expand efforts at the customers, maybe a customer, a revenue per customer metric in the future might show there. And particularly Alan, the verticals of optimization, AI research infrastructure, I am curious how those in particular are going to play out in terms of helping here. Thanks.

Yes. So, actually the land and expand is working quite well. We have got currently six or seven PS engagements in flight with commercial customers. I talked about Ford Otosan, I talked about Hermes. In the past we have talked about VINCI. We have talked about Mastercard and we are progressing all of those. And so we are feeling quite good actually about that component in the model. Once we get engaged and we start working with the customer through the professional services organization, the PS team is phenomenal. They are always delivering good results and then, as a result the customers start looking to okay, how do I move this into production or what’s the next application. So, all the changes that Lorenzo is making are, in some sense more oriented towards growing the customer base as opposed to the land and expand. And with respect to AI/ML, again this just simply makes our capabilities richer and the applications more valuable in the verticals that we have already said, we want to go after, manufacturing logistics, especially logistics and government.

Okay. Thanks Alan.

Your next question is from the line of Harsh Kumar from Piper Sandler. Your line is now open.

Actually, the last answer might chime in into the question that I am asking. But Alan, I noticed that your bookings were up very nicely and I was curious what kind of companies, end markets or customers are signing up incrementally with you. In other words, what industries are showing most interest in signing up with your company?

So, it really does continue to focus on the verticals that we have talked about. We knew at the beginning of this year that those represented the low hanging fruit, the areas where we thought we could deliver the most value fastest. And we all are having success in signing up those customers in those industries over other industries. It’s just that we need to be even more effective, move even faster, and be signing up more customers in a given period of time, but it is those areas. With a notable addition of government and there really has been rapidly increasing interest from government in our technology and that is opening up opportunities there for us as well.

Got it. Thank you for the color.

Is there any questions left? So, if we want to circle back around, if Suji maybe or David, I guess would be next, if you wanted to ask a second question, or Suji or Harsh?

Hey guys. Can you hear me?

Yes.

Yes.

Great. Thanks for taking the follow-up here. Just kind of curious, Alan, if you could speak to, you have got some really nice innovation here, very, very solid on the technology front, but just kind of wondering how your customers view that. And if you could speak to maybe the key areas that they resonate most you think as you are acquiring customers? Thank you.

Yes. So, when we are talking about the use cases in the vertical areas, what they really care about is, how well can we solve this problem. And it’s really us being able to leverage our new technologies to be able to solve their problems faster and with greater precision. But at the end of the day, what they care about is solving their problems. What we care about is having the technology that allows us to do that really well. If we are talking about government and research, they want to play with the technologies, alright. That’s really what’s going on with all our competitors, right. It’s basically governments playing with the technologies, because can’t really do anything useful with them. But now, we have got some really exciting enhanced capabilities that is generating a site government and research excitement for us as well.

Thank you.

Your next follow-up question is from the line of Craig Ellis. Your line is now open.

Yes. Thanks for taking the question. John, can you help us with the breakout of QCaaS versus professional services in the quarter, even if qualitatively? Thank you.

Sure. So, for the quarter, our QCaaS revenue represented about 81% of the total revenue was – professional services represented 16%.

Thank you.

Okay. We are pretty much at time now, so let me just close out by saying that our second quarter results show continued progress and momentum on all fronts revenue, liquidity and technical advancements. There is rapidly growing awareness of annealing, quantum computing and its ability to deliver business benefits today. And this is further strengthened by our product development activities and hardware, software and quantum artificial intelligence. Our momentum is one of the few companies in the world leading the quantum transformation is evident and we thank you all for your time today.

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.