D-Wave Quantum Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2024

There are 10 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the D Wave Second Quarter 2024 Earnings Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. 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.

Operator

Please go ahead.

Speaker 1

Thank you and good morning. With me today are Doctor. Alan Baritz, 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.

Speaker 1

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'll now hand over the call to Alan.

Speaker 2

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.

Speaker 2

However, optimization problems are one of the most prevalent problems found in all industries. Hence, D Wave Quantum's 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 from 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 1, streamline and optimize business processes, including applications like workforce scheduling, vehicle routing and resource allocation and 2, 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.

Speaker 2

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 our annealing quantum computing technology and its capabilities. Lastly, we're hearing from more and more customers from both the private and public sectors that they've tried quantum computing solutions, but need to work with D Wave, the quantum vendor that has real, scalable and production grade commercial solutions today. Customers have indicated that abysmal availability and reliability from other quantum vendors are huge pain points and a block for accelerated adoption. We believe that only D Wave is able to provide the commercial grade systems and services to solve real world large scale problems at the speed needed right now.

Speaker 2

I'd like to now walk through a few key business highlights starting with product and technical advancements. Last week, we announced the Quantum AI product development roadmap that extends D Wave's leap quantum cloud service to incorporate AI and machine learning. Our efforts will focus on helping customers address AIML workloads including pre training optimization, more accurate and efficient model training and opening new AI business use cases that require the integration of AI and business optimization. This effort is in direct response to growing demand from our customers as the broader industry is confronting a computing crunch. The amount of compute and the associated energy costs needed to satisfy a growing set of AI and ML use cases is rapidly escalating.

Speaker 2

Our Quantum AI solutions aim to leverage annealing Quantum Computing's ability to solve optimization problems to help customers achieve better, faster, cheaper and more energy efficient AI and ML solutions. The opportunity for D Wave could be massive and more importantly, the benefit to our customers could be transformative. As part of the Quantum AI product roadmap initiative, we recently announced a significant expansion to our commercial partnership with Zapata AI. Our extended collaboration is designed to accelerate the development and delivery of integrated quantum and generative AI solutions in D Wave's Leap cloud platform. The expanded agreement leverages Zapata's universal generative AI software for rapid development and builds on D Wave's LEAP real time quantum cloud service to support quantum, hybridquantum and even pure classical AI solutions.

Speaker 2

Together, our joint development work will focus on improved and more energy efficient model training, more performant models and the synergistic use of generative AI and quantum AI and quantum optimization. It is an important piece of our overall quantum AI strategy. On the system side of our business, we shared that we are placing a second advantage quantum computer in the U. S. This will mark the 4th production quantum computer in the LEAP Quantum Cloud Service.

Speaker 2

We're thrilled that the system will reside at Davidson Technologies new global headquarters in Huntsville, Alabama. I was actually just down in Alabama with Dale Moore and his team from Davidson at the Space and Missile Defense Symposium event, talking about the significance of this system placement, especially to the U. S. Government. The system will eventually be housed in a secure facility that could run sensitive applications using our quantum technology.

Speaker 2

This is an important development in our partnership with Davidson as we collaborate to accelerate quantum computing adoption among government agencies, especially in the areas of national security. We're also making noteworthy progress on our path toward delivering the 7,000 plus Qubit Advantage 2 product. We are nearing completion of calibrating a 4,800 plus cubit Advantage 2 Processor following the launch of the 1200 plus Qubit Advantage 2 prototype earlier this year, which is available for customer use now in our LeapFone cloud service. We are also furthering our ongoing development of new control protocols that should help customers perform expanded and richer quantum computations on our QPUs. I'll highlight a few examples.

Speaker 2

The first is fast Aneel. As discussed during our Q1 earnings call, we introduced our powerful new Fast Anil feature in April to help users perform quantum computations at unprecedented speeds, thereby reducing the impact of external disturbances such as thermal fluctuations that can hinder quantum calculations. Customer response has been incredible as they have now submitted 2,500,000 problems using this feature. The second is cyclic annealing. Research and development of cyclic and iterative annealing protocols are underway.

Speaker 2

We could extend the coherent regime across multiple cycles. This means that the system could potentially provide the same performance benefits that would result from much longer coherent times. Truly exciting work is happening here. The final is Bell Inequality Violation. By leveraging novel QPU control protocols, we have been able to show a violation of Bell's inequality, which is a widely recognized signature of quantum behavior in the fabric of our annealing QPUs.

Speaker 2

We are able to produce targeted Qubit excitations and analyze and readout Qubit state in arbitrary basis midway through the annealing process. This enables us to explore both digital and analog quantum computing protocols in the same processing fabric and potentially opens up important new applications opportunities such as much richer quantum distributions for generative AI architectures. Now turning to software. We launched a new non linear program hybrid quantum solver in June. This new solver enables customers to tackle real world problems of growing complexity, supporting up to 2,000,000 variables and constraints, which represents a tenfold increase in problem size capacity over other D Wave solvers for certain applications.

Speaker 2

We also introduced new demos of applications built with this new hybrid solver addressing vehicle routing and flow shop scheduling. These were introduced at our annual Qubits user conference in June. The new hybrid solver is part of our expanding set of commercial quantum optimization offerings, supporting the aggressive go to market growth strategy that we announced earlier this year. During the quarter, we also continued to expand our extensive patent portfolio, totaling over 240 issued U. S.

Speaker 2

Patents with more than 60% of our patents covering both annealing endgamemodel technologies. Seaways patent portfolio is ranked as the 3rd largest quantum computing patent portfolio in the world behind only IBM and Google. So as you can see, we've been remarkably busy with technology and product development, delivering new solutions that are 100% focused on providing customer value. It's not innovation for innovation sake, but rather development that helps our customers solve problems of even greater complexity in ways that are better, faster, less costly and more energy efficient. And speaking of customers, let's switch gears and discuss commercial momentum.

Speaker 2

Our Q2 2024 bookings mark our 9th consecutive quarter of year over year growth in quarterly bookings. In comparing the most recent 4 quarters with the immediately preceding 4 quarters, our customer count rose from 114 to 130, commercial customers went up from 70 to 77, and we counted 26 Forbes Global 2000 Companies as customers constituting 33% of total commercial customers and 26% of total revenue. We are working with customers on a wide range of quantum optimization applications, including body shop scheduling and vehicle wrapping. Let me highlight a couple of examples. First, we are working with Ford AutoSon, an automotive manufacturing company based in Turkey that is equally owned by Ford Motor Company and Koch Holding.

Speaker 2

Together, we have built a solution to generate a sequencing schedule that maximizes vehicle production for the body shop. The quantum optimization application was able to schedule 1,000 vehicles per run-in under 5 minutes compared to 30 minutes using their current process. Next up, Hermes Germany, a leading logistics service provider in Germany is working with us and our partner Quantum Basel to explore a vehicle routing quantum optimization application to route trucks from 50 depots to a network of 17,000 parcel shops throughout Germany. The project aims to understand Quantum's ability to better optimize these routes in terms of time, distance and CO2 emissions. And as you can see, this falls right in the sweet spot of the verticalization strategy we've talked about previously with our focus on manufacturing and supply chain logistics.

Speaker 2

All are very exciting projects spanning a diverse set of quantum optimization problems. Just as exciting was the Quantum Industry's interest and participation in our 10th Cubix user conference in June. More than 600 attendees representing 4 52 organizations from 50 countries participated live or virtually, an incredible turnout for the ecosystem of D Wave and annealing quantum computing supporters. This year's theme was fittingly success powered by Quantum, and we are excited to see an impressive group of organizations on stage sharing their stories of impact using D Wave technology. This included Los Alamos National Lab, Mastercard, SaaS, Davidson Technologies, Quantum Basel, ZYPOTAM AI, Unisys and more.

Speaker 2

The energy was palpable with attendees inspired by these real world successes and expressing their excitement for what we are building in our D Wave Quantum Computing Quantum Community. I think everyone was equally inspired by my dramatic reading of a re imagined version of The Tortoise and the Hare as I donned a smoking jacket and shared the story of D. Wade serving as the measured unflappable turtle winning the quantum race. If you haven't seen it, check out my Cubitt's keynote on YouTube. So we are clearly witnessing growing awareness and interest in our solutions in the commercial sector, but that's not all.

Speaker 2

We're also seeing similar traction in the government sector. This quarter, we saw an uptick in D Wave interest from a number of major government organizations and companies that service the public sector to build applications that showcase how quantum computing can address critical public sector and national security challenges. Policymakers continue to expand government programs to encompass near term applications as well as support for quantum annealing and quantum classical technologies. Additionally, Congress is beginning to move policy which supports establishing test bed programs exploring the intersection of AI with other emerging technologies like quantum computing. Let me highlight another sign of increasing interest in our technology.

Speaker 2

We've seen double digit enrollment growth for our quantum training courses in the 1st 6 months of 2024 compared to the same period in 2023. Enrollment in the quantum programming core course increased by 53% and combined enrollments for our core plus foundations for quantum programming increased by 85%. We believe this underscores a growing global movement to train workers to keep pace with the rapidly increasing adoption of quantum computing and specifically D Wave's technology. John will walk you through the financials in just a minute, but there are 2 financial related items that I wanted to call out. 1st, D Wave has joined the Russell 3,000 Index.

Speaker 2

As you all know, Russell indices are used by investment managers and institutional investors for index funds and as benchmarks for active investment strategies. Our inclusion in this group is an honor and we will greatly increase visibility among the global investor community for the innovative quantum solutions we are bringing to market. And second, we are pleased to share that we ended the quarter with more than $50,000,000 in cash, one of the company's highest quarter end cash balances in history. It's been a solid quarter with impressive product innovations and customer adoption of these new products. Customers are clamoring to put these solutions to use in their operations.

Speaker 2

That appetite is evident in our commercial traction, government public sector interest and market position. With that, I'll hand the call over to John to provide a review of our Q2 and first half twenty twenty four results. John?

Speaker 3

Thank you, Alan, and thank you to everyone 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 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 Q2 earnings press release with the non GAAP financial metrics for the most part adjusting for non cash and non recurring expenses. Revenue for the Q2 2024 totaled $2,200,000 an increase of approximately $500,000 or 28% from the Q2 of fiscal 2023 revenue of $1,700,000 Bookings for the Q2 totaled $2,700,000 an increase of approximately $200,000 or 6 percent from the Q2 of 2023 bookings of $2,500,000 The $2,700,000 in 2nd quarter bookings represents Deway's 9th consecutive quarter of year over year growth in quarterly bookings. There are 2 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.

Speaker 3

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 4 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 of this year. 2nd, the composition of our bookings in the first half of the year has trended towards larger, longer term, higher margin, Q cast contracts that has changed the recent historical bookings to revenue relationship, providing an incrementally greater line of sight to our future year revenues and gross margins. Between the end of the Q4 of 2023 and the end of the second quarter, our revenue backlog increased by $3,100,000 or 64 percent from $5,000,000 to $8,100,000 with the composition of the backlog shifting as follows.

Speaker 3

As of the end of December, 73% of the revenue backlog was expected to be recognized in the following 12 months and 27% thereafter, whereas as of June 30, 42% of the revenue backlog was expected to be recognized in the following 12 months and 58% thereafter. Furthermore, Q cast as a percentage of the revenue backlog increased between the two periods. Our revenue backlog disclosure can be found in the remaining performance obligations footnote number 3 to the financial statements set forth in our Q2 Form 10 Q that will be filed with the SEC after market close today. With respect to customers, we continue to broaden and diversify our customer base across commercial government and research customers. In comparing the most recent 4 quarters with the immediately preceding 4 quarters, D Wave had a total of 130 customers compared with a total of 114, 77 commercial customers compared with 70 commercial customers with the commercial customers including 26 Forbe Global 2000 customers compared with 22 Forbe Global 2000 customers.

Speaker 3

With these Forbes Global 2,000 customers constituting 33% of the total number of commercial customers over the last four quarters. With respect to commercial traction and comparing the most recent 4 quarters with the immediately preceding 4 quarters, revenue from commercial customers increased by 35 percent or $1,800,000 Commercial revenue as a percentage of total revenue remained relatively flat at 65.9% versus 66.7 percent. Revenue from Forbes Global 2000 customers increased by 50% or approximately $900,000 with Forbes Global 2000 customers constituting 26% of total consolidated revenue. Several of these Forbes Global 2,000 customers include NEC, Vinci, Fosh Holdings, Mastercard, Bridgestone Corporation, and the Interpublic Group. With respect to gross profit, GAAP gross profit for the 2nd quarter was $1,400,000 an increase of approximately $700,000 or 97 percent from the Q2 of fiscal 2023 GAAP gross profit of approximately $700,000 with the increase due primarily to growth in revenue and increased operating efficiencies.

Speaker 3

Non GAAP gross profit for the Q2 was $1,600,000 an increase of approximately $600,000 or 61% from the Q2 of fiscal 2023 non GAAP gross profit of approximately $1,000,000 again, with the increase due primarily to the growth in revenue and increased operating efficiencies. The difference between GAAP and non GAAP gross profit and gross margin is limited to non cash stock based compensation and depreciation expenses that are excluded from the non GAAP gross profit and gross margin. GAAP gross margin for the 2nd quarter was 63.6%, an improvement of 22.3% from the Q2 of fiscal 2023 GAAP gross margin of 41.3%. Non GAAP gross margin for the 2nd quarter was 73.1%, an improvement of 15% from the Q2 of fiscal 2023 non GAAP gross margin of 58.1%. With respect to operating expenses, the GAAP operating expenses for the 2nd quarter were $20,200,000 a decrease of $1,400,000 or 6% in the Q2 of fiscal 2023 GAAP operating expenses of $21,600,000 with the improvement driven primarily by decreases of $1,700,000 in third party professional services and approximately $400,000 in non cash stock based compensation expense, partially offset by an increase of approximately $800,000 in marketing expenses.

Speaker 3

Non GAAP adjusted operating expenses for the Q2 were $15,500,000 a decrease of approximately $400,000 or 3% from the Q2 of fiscal 2023 non GAAP adjusted operating expenses of $15,900,000 that reflects the company's continued focus on expense management, with the decline driven primarily by a decrease of approximately $800,000 in third party professional services, dollars 200,000 in fabrication related activities and $200,000 in insurance, partially offset by an increase of approximately $800,000 in marketing expenses. Again, the difference between GAAP operating expenses and non GAAP adjusted operating expenses is primarily non cash stock based compensation expenses and depreciation and non recurring expenses. The net loss for the 2nd quarter was $17,800,000 or $4,000,000 or $0.11 per share from the Q2 of fiscal 2023 net loss of 26 $200,000 or $0.21 per share. Adjusted EBITDA loss for the 2nd quarter was $13,900,000 an improvement of $1,000,000 or 7 percent in the Q2 of fiscal 2023, adjusted EBITDA loss of $14,900,000 with the improvement driven by higher gross profit in combination with lower operating expenses. Now, I will address the operating performance for the first half of twenty twenty four.

Speaker 3

Seaways revenue for the 6 months ended June 30, 2024 was $4,600,000 an increase of $1,300,000 or 41% from revenue of $3,300,000 in the 6 months ended June 30, 2023. Bookings for the first half of fiscal twenty twenty four were $7,200,000 an increase of $2,700,000 or 58 percent from bookings of $4,500,000 in the first half of fiscal twenty twenty three. GAAP gross profit for the 1st 6 months of fiscal 2024 was $3,000,000 an increase of $1,900,000 or 171 percent from GAAP gross profit of $1,100,000 for the 1st 6 months of fiscal 2023, with the increase due primarily to the growth in revenue and increased operating efficiencies. The non GAAP gross profit for 1st 6 months of fiscal 2024 was $3,500,000 an increase of $1,700,000 or 89% from the year earlier 6 months non GAAP gross profit of $1,800,000 With respect to margins, GAAP gross margin for the first half of fiscal 'twenty four was 65.6 percent, an increase of 31.4% from the 34.2% GAAP gross margin in the first half of fiscal twenty twenty three, with the increase due primarily to growth in revenue and increased operating efficiencies. The non GAAP gross margin for the first half of fiscal twenty twenty four was 75%, an increase of 18.9% from 56.1% in the 6 months ended June 30, 2023.

Speaker 3

The difference between GAAP and non GAAP gross profit and margin is limited to the non cash stock based compensation and depreciation expense that are excluded from the non GAAP gross profit and gross margin. With respect to first half operating expenses, the GAAP operating expenses totaled $39,400,000 a decrease of $7,300,000 or 16% from the GAAP operating expenses of $46,700,000 in the first half of fiscal twenty twenty three, with the year over year decrease primarily driven by $3,500,000 in non cash stock based compensation expense and $4,000,000 in third party professional services. Non GAAP adjusted operating expenses for the first half of twenty twenty four were $30,300,000 a decrease of $3,400,000 or 10% from $33,700,000 non GAAP adjusted operating expenses in the first half of fiscal twenty twenty three. Net loss for the 6 months ended June 30, 2024 was $35,100,000 or $0.21 per share, compared with a net loss of $50,600,000 or $0.40 per share in the 6 months ended June 30, 2023. Adjusted EBITDA loss for the first half of fiscal twenty twenty four was 26 $800,000 an improvement of $5,000,000 or 16% from the adjusted EBITDA loss of $31,800,000 in the first half of fiscal twenty twenty three, with the decrease due primarily to higher gross profit and reduced operating expenses, particularly with respect to 3rd party professional services.

Speaker 3

Now, I will address balance sheet and liquidity. As of June 30, 2024, D Waste consolidated cash balance totaled $40,900,000 an increase of $33,400,000 or 4 44 percent from the year earlier 2nd quarter cash balance of $7,500,000 On April 12 this year, D Wave's $175,000,000 S3 shelf registration statement was deemed effective by the SEC. On that same date, the company's equity line of credit S3 registration statement with Lincoln Park Capital Fund also went effective. As of the effective date, the company had $82,100,000 in available stock issuance capacity under the equity line of credit with the investment commitment running through October of 2025. As of June 30, D Wave had $61,800,000 in available issuance capacity under the equity line of credit.

Speaker 3

D Wave's ability to raise additional funds under the equity line of credit is subject to a number of conditions, including having a sufficient number of registered shares and D Wave stock price being above $1 per share. On May 31, 2024, the S3 registration statement was partially used for a $100,000,000 at the market program. As of June 30, 2024, D Wave had 90 point $2,500,000 in common stock issuance capacity under the Eloc and ATM on a combined basis, as well as an additional $75,000,000 in unallocated capacity under the S-three shelf registration statement. Subsequent to the end of the second quarter, D Wave began paying down the term loan with PSPIB Unitas Investments, with payments totaling approximately $15,800,000 leaving a loan balance of about $18,600,000 as of today. We are reiterating the full year 2024 financial guidance set forth in our March 28, 2024 fiscal 2023 Q4 and full year earnings press release.

Speaker 3

Our guidance is subject to various cautionary factors described below. Based on the information available on August 7, 2024, guidance for the full year 2024 is as follows. We expect the fiscal 2024 adjusted EBITDA loss to be less than the fiscal 2023 adjusted EBITDA loss of $54,300,000 To conclude, as we have previously stated, we believe that D Wave has the opportunity to be the 1st independent publicly held quantum computing company to achieve sustained profitability and to achieve this milestone with substantially less funding than required by any other independent publicly held quantum computing company. With that, we will now open the call for questions.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer Your first question is from the line of Craig Ellis from B. Riley Securities. Your line is now open.

Speaker 4

Yes. Thank you for taking the question. And guys, congratulations on the technical and commercial progress as well as joining the Russell 3,000. 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?

Speaker 2

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 $40,000,000 I may have misstated it as 50,000,000 but $40,000,000 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.

Speaker 2

The example of the latter 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 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 3 areas. 1 is to help our customers build more accurate models by leveraging quantum distributions in the training of those models rather than classical distributions 2, 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.

Speaker 2

And then 3rd, 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 B, integrating the quantum computations with AI machine learning to kind of enable that integrated machine learning quantum optimization capability.

Speaker 2

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.

Speaker 4

Yes, a lot there and it makes sense. Thanks for that, Alan. And then, John, I just wanted to cycle 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 below $3,000,000 forward 12 months visibility to bookings, so $3,200,000 $3,300,000 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 $5,000,000 of visibility versus $2,000,000 6 months ago.

Speaker 4

Is that math correct?

Speaker 3

The numbers I referenced earlier, Craig, was a remaining performance obligations as of the end of June of 8 point $1,000,000 and I compare that to $5,000,000 as of the end of the 4th quarter. So a $3,100,000 increase, but the composition of those bookings changed rather significantly as a result of the longer term Q cast bookings. And this is broken out in great detail in the Q that we'll file later today. Does that answer

Speaker 4

your question? 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.

Speaker 4

Appreciate your help. I'll hop back in the queue. Oh, actually, let me sneak one more in. I didn't hear, John, a breakout between

Speaker 2

Q and

Speaker 4

A revenue and production service?

Speaker 2

Craig, I apologize. We're starting to run late. So I think we're going to have to hold you to the 2. Sorry. Let's go to the next question, please.

Operator

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

Speaker 5

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'm wondering if you see that impact really more affecting just the bookings activity, has it actually impacted revenue?

Speaker 5

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 Q4 and certainly into the first couple of quarters of next year that you would expect an acceleration in bookings activity now that you have the sales force realigned?

Speaker 2

So obviously, we're 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.

Speaker 5

Perfect. And then I'll throw a technical question, but you mentioned the Bell's 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?

Speaker 2

Yes. So first of all, let me just take a second and say, when we say digital and analog, what I'm about to say is pretty close to accurate. It's not 100% accurate, but it's pretty close. Essentially what we're saying is combining gate model type computation with annealing type computation all within our annealing fabric. Now what's the significance of that?

Speaker 2

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 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.

Speaker 6

Perfect. Thank you.

Operator

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

Speaker 7

Great, Alan, John. Thanks for taking my questions. I'm 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.

Speaker 7

Maybe you can give context here on the sales force changes being made here that 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?

Speaker 2

Yes. So I think as I 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 within for one customer and we can bring those learnings to the next customer and get better at it in the next customer and so on, ultimately being able to move faster and help customers get 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.

Speaker 2

So by staying focused, we're making progress toward that end, but it does take some time. And then of course, as we introduce 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.

Speaker 2

We will over double the go to market staffing over the course of the remainder of this year.

Speaker 7

Okay. Thanks for that detail. Alan, a follow-up on that seems very interesting dynamics there. My follow on question is touching on the fast anneal feature, your press release mentioned you've now got 2,500,000 problems up from a half a 1000000 problems that you mentioned at the conference call a quarter ago. Obviously impressive growth there.

Speaker 7

I guess maybe just provide it'd be interesting to hear some perspective on what this exactly means from both a sales and a technology seasoning perspective here. I'm guessing there's probably not much of any real sales associated with this, but maybe you can help us understand and what you expect from all these problems being submitted and how this helps advance your technology platform? Thanks.

Speaker 2

Yes. So maybe two comments. First, the Fastenal capability combined with the 1200 Cubit Advantage 2 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 cubit advantage system, but it really required the 1200 Cubit Advantage 2 Processor with Fast Anneal because of the longer coherence times. And the longer coherence times combined with the fast 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.

Speaker 2

And so the combination of the longer coherence times in the ADDvantage 2 Processor with the fast anneal, right, so that the anneal is not living outside of the coherence times and we're 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 D Wave. So opening up more opportunities for us there.

Speaker 2

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.

Speaker 7

Great. Thanks for all that detail. I'm going to unpack that one a little bit later, but that's all the questions for me, Thanks.

Speaker 2

Thanks.

Operator

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.

Speaker 6

Great. Thanks so much

Speaker 2

for taking my question here.

Speaker 6

I guess maybe it's for John. Revenue was below expectation, I believe below where you guided and you talked a little bit about this. But I'm just wondering if maybe you can help us understand how you typically expect maybe bookings to convert to revenue? Then how much of your business is generally a turns business or business that's captured during that quarter?

Speaker 3

David, I think you stated revenue guidance, which for clarity, we have not provided any revenue guidance. We provided 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 look 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.

Speaker 3

So the average contract term has lengthened rather significantly, and the bulk of that backlog is Q cast revenue, so the higher margin Q cast contracts. So 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?

Speaker 6

It does. Thank you.

Operator

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

Speaker 8

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

Speaker 8

Thanks.

Speaker 2

Yes. So actually the land and expand is working quite well. We've got currently 6 or 7 PS engagements in flight with commercial customers. I talked about Ford Auto San. I talked about Hermes.

Speaker 2

In the past, we've talked about Vinci. We've talked about Mastercard. And we are progressing all of those. And so we're feeling quite good actually about that component of the model. Once we get engaged and we start working with the customer through the professional services organization, the PS team is phenomenal.

Speaker 2

They're 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 more oriented toward growing the customer base as opposed to land and expand. And with respect to AIML, again, this just simply makes our capabilities richer and the applications more valuable in the verticals that we've already said we want to go after manufacturing, logistics, especially logistics and government.

Speaker 1

Okay. Thanks, Al.

Operator

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

Speaker 9

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?

Speaker 2

So Harsh, it really does continue to focus on the verticals that we've 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 are having success in signing up 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.

Speaker 2

With the notable addition of government and there really has been a rapidly increasing interest from government in our technology and that is opening up opportunities there for us as well.

Speaker 9

Got you. Thank you for the color. There

Operator

are no questions. Okay, 2

Speaker 2

minutes left. So if we want to cycle back around, if Suji maybe or David, I guess, would be next if you wanted to ask the second question.

Speaker 6

Hey, guys, can you hear me? Yes.

Speaker 9

Yes.

Speaker 6

Great. Thanks for taking the follow-up here. Just kind of curious, Alan, if you could speak to you've got some really nice innovation here, 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 resonate most you think as you're acquiring customers? Thank you.

Speaker 2

Yes. So when we're talking about the use cases in the vertical areas, what they really care about is how well can we solve the 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. And 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.

Speaker 2

If we're talking about government and research, they want to play with the technologies. I mean, 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've got some really exciting enhanced capabilities that is generating government and research excitement for us as well.

Operator

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

Speaker 4

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

Speaker 3

Sure. So for the quarter, our Q cast revenue represented about 81% of the total revenue, whereas professional services represented 16%.

Speaker 4

Thank you.

Speaker 2

Okay. We're pretty much at time now. So let me just close out by saying that our Q2 results show continued progress and momentum on all fronts revenue, liquidity and technical advancements. There's growing awareness of Annealing Quantum Computing and its ability to deliver business benefits today and this is further strengthened by our product development activities in hardware, software and quantum artificial intelligence. Our momentum as one of the few companies in the world leading the quantum transformation is evident, and we thank you all for your time today.

Operator

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

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Earnings Conference Call
D-Wave Quantum Q2 2024
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