D-Wave Quantum Inc. (NYSE:QBTS) Q2 2023 Earnings Call Transcript

D-Wave Quantum Inc. (NYSE:QBTS) Q2 2023 Earnings Call Transcript August 10, 2023

D-Wave Quantum Inc. misses on earnings expectations. Reported EPS is $-0.14 EPS, expectations were $-0.13.

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

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

I’ll now hand over the call to Alan. Before we begin, I would like to remind everyone that this call may contain forward-looking statements and should be considered in conjunction with cautionary statements contained in our earnings release in the company’s most recent periodic SS e c report. During today’s call, management will provide certain information that will constitute non-gap financial measures under s E C rules, such as non-gap gross mar gross profit, non-gap operating expenses, and adjusted EBITDA reconciliations to gap measures and certain additional information are also included in today’s earnings release, which is available in the investor relations section of our company website at www.dwavequantum.com. I’ll now hand over the call to Alan.

Alan Baratz: Thanks, Kevin, and good morning, everyone, and thank you all for taking the time to join us today. Before I begin, I do want to correct what the operator said when he said Q1 earnings call. If this was Q1, we’d be really, really late. Fortunately this is our Q2 earnings call and once again, thank you all for taking the time to join us today. So we’re pleased to share our second quarter results with you, which reflect our ongoing progress in commercializing our quantum technology, as well as the continued momentum that we are seeing in the quantum industry. Overall, our quantum solutions continue to transition from R&D special projects to line of business solutions that can drive operational excellence, increased revenue, cut costs, and fuel innovation.

It is clear to us that organizations are accelerating their adoption of quantum computing and in particular, D-Wave’s quantum annealing technology. They’re recognizing the ability of annealing quantum computing to solve complex optimization problems today. Evidence of this can be seen in the growth in our customer bookings and increase deal sizes. In the second quarter, we closed 2.5 million in bookings, represent a 146% increase over last year’s second quarter bookings with a year-over-year increase in our average deal size, up 136% across all customers, and up 163% for our commercial customers. This shows that organizations are keen to make bigger investments in our technology to build additional proofs of concepts, and ultimately to identify applications that can move into production and impact day-to-day operations.

During Q2, we closed a number of new customers, including global advertising and marketing from IPG, technology heavyweight Unisys and global industrial construction company, VINCI Energies. These and many other companies are exploring a variety of optimization problems that can be addressed by today’s quantum technology with use cases including logistics, building HVAC design, satellite launch optimization, and many more. In addition to commercial momentum, we’re also seeing governments around the world taking a more inclusive approach to their quantum strategies by supporting both near-term quantum technologies, such as annealing quantum computing and quantum hybrid, in addition to longer term approaches like gate-model. Here in the U.S., there have been a multitude of bills recently introduced by Congress that are focused more explicitly on inclusion of all quantum technologies, including annealing quantum computing to accelerate adoption.

Other countries like Canada, the United Kingdom, Japan, Australia, and others are also shifting their focus toward near-term applications and offering support for a broader range of quantum solutions, including annealing, hybrid technologies and gate-model. This reflects a transformative mindset shift as it wasn’t long ago, the governments were focused solely on gate-model solutions, and we’re not looking at utilizing existing quantum systems for near-term applications. We’re also seeing increased interest in the use of our quantum technology for applications in national security and defense. Just this week, I joined General John Holly, CEO of Davidson Technologies at the Space and Missile Defense Symposium to present a live demonstration of our joint interceptor assignment application.

Davidson is a leading technology services company that provides innovative engineering, technical and management solutions for the Department of Defense, aerospace, and commercial customers. We’re excited by the progress of our work together to bring quantum to bear for national interests. Turning now to D-Wave’s technology, we are continuing to drive technical advancements to help further increase the performance of our quantum solutions. Our team continues to make progress in the development of our next-generation Advantage2 quantum computing system. We have now successfully fabricated a 1,200-qubit prototype processor in our new high coherence fabrication stack. Advantage2 is expected to ultimately feature over 7,000 qubits, 20 way connectivity, and significantly higher coherence.

From a software perspective, we continue to make enhancements to Leap, our real-time quantum cloud service. Most recently, we introduced algorithmic updates to our hybrid solvers to drive increased performance for key customers. In addition, we are implementing organization administration changes in Leap to streamline how we manage projects and to allow customers and partners to better manage their own projects. We recently celebrated our first year anniversary of being listed on the New York Stock Exchange. It’s a remarkable achievement to take a company public, especially when we did at a time of significant macroeconomic and stock market headwinds. I’m grateful to our employees, customers, partners, and investors for their ongoing support and trust in the business we’re building at D-Wave.

We remain at the early stages of quantum’s commercialization and global impact, but as a category leader with two decades of experience in harnessing the power of this technology to solve highly complex problems, we believe we’re out in front in driving this transformation. And finally, we are very pleased to report that subsequent to the second quarter, we substantially improved the company’s cash position, which currently exceeds $50 million. With that, I’ll hand it over to John to provide a review of our second quarter 2023 results. John?

John Markovich: Thank you, Alan, and thank you to everyone taking the time to participate in this call. Revenue in the second quarter of fiscal 2023 totaled $1.7 million, an increase of $336,000 or 25% and the second quarter of 2022 revenue $1.4 million and up 8% sequentially over the immediately preceding first quarter revenue. As we outlined in our first quarter and preliminary second quarter earnings releases, the timing of revenue recognition associated with our professional services contracts may vary from period to period. However, D-Wave has generally paid in advance of the completion of its professional services engagements and the corresponding revenue recognition timeframe. I will be providing non-GAAP operating metrics, including bookings and average deal size, as well as non-GAAP financial metrics, including non-GAAP gross profit, non-GAAP gross margins, non-GAAP operating expenses, and adjusted EBITDA as we believe these metrics improve investors’ ability to evaluate our underlying operating performance.

These measures are defined in the tables at the bottom of today’s second quarter earnings press release with the non-GAAP financial metrics for the most part, adjusting for non-cash and non-recurring expenses. Due to the timing associated with our professional services revenue, we believe that our bookings performance may at times be a better indicator of our business momentum than quarterly revenue. We define bookings as orders received from our customers and they’re expected to generate revenue in the future. We present the operational metric of bookings because it reflects customer’s demand for our products and services and to assist investors in analyzing our performance in future periods. As Alan previously highlighted, bookings for the second quarter of fiscal 2023 totaled $2.5 million, an increase of $1.5 million or 146% when compared to the second quarter of 2022.

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The second quarter bookings represents our fifth consecutive quarter of year-over-year growth in bookings. During the second quarter, D-Wave’s average deal size defined as the average dollar amount per booking increased by 136% when compared to the year earlier second quarter with the average deal size for our commercial accounts increasing by 136% on a year-over-year basis. Over the last four quarters, we had 68 revenue producing commercial customers compared with 72 commercial customers in the immediately preceding four quarters with total commercial revenue increasing by 44% between these two periods. And the average deal size for our commercial customers, increasing by 308% between the two periods. Over the last four quarters, we had a total of 115 revenue producing customers compared with 116 total customers in the immediately preceding four quarters with total customers including commercial, educational and government accounts.

Our GAAP gross profit for the second quarter was $705,000, a decrease of $46,000 or 6% from the second quarter of 2022. GAAP gross profit was $751,000 with the decrease due primarily to higher non-cash stock-based compensation expense in the second quarter of this year. Our non-GAAP gross profit for the second quarter was $1 million, an increase of $201,000 or 25% from the second quarter of 2022 non-GAAP gross profit of $791,000. The difference between GAAP and non-GAAP gross profit is limited to non-cash stock-based compensation and depreciation expenses that are excluded from the non-GAAP gross profit. With respect to gross margins, our GAAP gross margin for the second quarter was 41.3%, a decrease of 13.5% from the 54.8% GAAP gross margin in the second quarter of 2022 with a decrease due primarily to higher non-cash stock-based compensation expense and cost of sales in the second quarter of this year.

With respect to non-GAAP gross margin, our non-GAAP gross margin for the second quarter was 58.1%, a slight increase from the second quarter of 2022 non-GAAP gross margin of 57.7%. Again, the difference between the GAAP and non-GAAP gross margin is limited to non-cash stock-based compensation and depreciation expenses that are excluded from the non-GAAP gross margin. With respect to operating expenses, our GAAP operating expenses for the second quarter were $21.6 million compared with $13.2 million in the second quarter of 2022 with the year-over-year increase, including $3.7 million in non-cash stock-based compensation expense along with higher public company and headcount related expenses. With respect to the non-GAAP operating expenses, a total $15.9 million for the second quarter compared with $12 million in the year earlier 2022 second quarter, again, with the difference between GAAP and non-GAAP operating expenses being principally non-cash stock-based compensation expense, non-recurring one-time expenses and depreciation.

The net loss for the second quarter is $25.9 million or $0.20 per share compared with a net loss of $13.3 million or $0.11 per share in the second quarter of 2022. Our adjusted EBITDA for the second quarter was a negative $14.9 million compared with $11.3 million or a negative $11.3 million in the 2022 second quarter and $16.9 million in the immediately preceding first quarter. With the year-over-year increase due primarily to higher public company and headcount related expenses. Now I will transition to our operating performance for the first half of 2023. D-Wave’s revenue for the first six months ended June 30 was $3.3 million, an increase of $207,000 or 7% from revenue of $3.1 million in the six months ended June 30, 2022. Bookings for the six months ended June 30 were $5.4 million, an increase of $3.7 million or 209% from the six months ended June 30, 2022.

During the first half of 2023, D-Wave’s average deal size increased by 252% when compared to the first half of 2022. During the same period, our average deal size per booking from our commercial customers increased by 232% on a year-over-year basis. With respect to the GAAP gross profit for the six months ended June 30, it totaled $1.1 million, a decrease of $722,000 or 39% from $1.8 million in the six months end of June 30, 2022, with the decrease due primarily to higher non-cash stock-based compensation expense in the first half of 2023 cost of sales. Non-GAAP gross profit for the six months ended June 30 was $1.8 million, a decrease of $83,000 or 4% from the year earlier six months non-GAAP gross profit of $1.9 million. Again, the difference between the GAAP and non-GAAP gross profit is limited to non-cash based compensation and depreciation expenses that are excluded from the non-GAAP gross profit.

With respect to margins, the GAAP gross margin for the six months ended June 30 was 34.2%, a decrease of 25.7% from the 59.9% GAAP gross margin in the first six months of 2022 with a decrease due primarily to higher non-cash stock-based compensation expense in the cost of sales in the first half of 2023. The non-GAAP gross margin for the first six months ended June 30 was 56.1%, a decrease of 6.4% from 62.5% in the six months ended June 30, 2022. Again, the difference between the GAAP and the non-GAAP gross margins are limited to the non-cash based compensation expense and depreciation expenses. With respect to operating expenses for the first half, our GAAP operating expenses totaled $46.7 million compared with $25.2 million in the first half of 2022 with the year-over-year increase, including $9.3 million in non-cash stock-based compensation expense and higher public company and headcount related expenses.

Our non-GAAP adjusted operating expenses for the first half of 2023 were $33.7 million, compared with $23 million in the first half of 2022. Again, with the difference between the GAAP and the non-GAAP operating expenses being primarily the non-cash stock-based compensation expense and depreciation. Net loss for the six months ended June 30 was $50.5 million or $0.40 per share, compared with a net loss of $25.3 million or $0.20 per share in the six months ended June 30, 2022. The adjusted EBITDA for the first half of 2023 was negative $31.8 million, compared with a negative $21.1 million in the first half of 2022 with the increased due primarily to higher public company and headcount related expenses. Moving on to the balance sheet and liquidity.

As of June 30, 2023, D-Wave’s consolidated cash balance totaled $7.5 million. As of today, our consolidated cash balance exceeds $50 million. That represents the largest cash balance in D-Wave’s history. On April 13th of this year, D-Wave entered into a $50 million four-year term loan agreement with PSPIB Unitas Investments and affiliate PSP investments. The loan agreement is comprised of three individual tranches of $15 million, $15 million and $20 million respectively. And to date, we have drawn on the first two tranches totaling $30 million. However, there can be no assurance that the company will be able to meet the conditions necessary to draw on the third tranche. As previously disclosed on June 16th of last year, D-Wave entered into a common stock purchase agreement that is also referred to as an equity line of credit or ELOC with Lincoln Park Capital, 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 Lincoln Park, subject to certain limitations and satisfaction of certain conditions over a three-year timeframe.

As of the end of the first quarter of this year, D-Wave raised approximately $20 million through the ELOC, leaving $130 million in availability with over two years remaining under the ELOC commitment. On July 24, D-Wave recommenced its use of the ELOC and has raised a total of $35.1 million through August 8. D-Wave’s ability to raise funds under the ELOC is subject to a number of conditions, including having a sufficient number of registered shares and the stock price being above $1 per share. With respect to our 2023 outlook, we are reiterating the full year 2023 financial guidance set forth in our July 20 preliminary second quarter revenue and bookings press release. Our guidance is subject to various cautionary factors described below, and based upon the information available on August 9, 2023, guidance for the full year 2023 is as follows.

We expect fiscal 2023 revenue to be in the range of $11 million to $13 million, and we expect fiscal 2023 adjusted EBITDA to be less than a negative $58 million. As we have previously stated, we believe that D-Wave has the opportunity to be the first independent publicly held quantum computing company to achieve sustained profitability and to achieve this milestone with substantially less funding than required by any other independently publicly held quantum computing company. With that, we’ll now open the call for questions.

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Q&A Session

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

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

Alan Baratz: Sure. So first of all, David, thanks for taking the time to be with us this morning and for asking the question. As I mentioned previously, there is an area of artificial intelligence and machine learning that is extremely well-suited to our annealing quantum computers that’s known as feature selection. Generally anybody that does model training for AI or machine learning needs to worry about how to identify the most relevant characteristics to train the model on. And that’s what feature selection is all about. We have created a professional services offering specifically around feature selection. We realized after several customers had expressed an interest in it that there was an opportunity to develop a professional services offering that was a little bit more targeted that we could take out to market.

It’s also available on AWS Marketplace as one of the offerings that AWS’ customers can buy through that medium. As far as a turnkey cloud-based feature selection service, we have not created that service up to this point in time. And the reason why we haven’t done it at least not yet, is that we hadn’t yet gotten comfortable that the model training across different types of application areas and models is common enough that we can make it a cookie cutter service. We’re still finding that the professional services team needs to work with the customer to understand exactly what it is that is of most value and importance to them as they’re training the model to be able to then tune the feature selection system to be able to extract that set of characteristics.

However, that’s not to say that we might not find a way to and choose to make that available as a service at some point in the future.

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

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

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