D-Wave Quantum - Earnings Call - Q2 2025

Executive Summary

• Q2 revenue was $3.10M, up 42% YoY, and beat Wall Street consensus by ~$0.55M; GAAP gross margin was 63.8% and non-GAAP gross margin was 71.8%.*
• Normalized EPS came in at -$0.08 vs -$0.054 consensus (miss), while GAAP EPS was -$0.55 reflecting large non-cash warrant liability remeasurement; Adjusted EBITDA loss widened to $20.0M.*
• Cash reached a record $819.3M, supported by a $400M ATM offering, $99.3M in warrant exercises, and $37.8M under the ELOC; stockholders’ equity ended Q2 at $694.3M.
• Product and go-to-market catalysts: Advantage2 general availability, new cryogenic packaging initiative, and South Korea MOU (Yonsei/Incheon) that contemplates on-premise Advantage2 system acquisition.
• External headline risk emerged from law-firm announcements tied to a short-seller report, though not a company release; investors should monitor narrative and potential litigation headlines.

Note: Asterisks denote values retrieved from S&P Global.

What Went Well and What Went Wrong

What Went Well

• Product execution: “We brought to market our sixth-generation quantum computer… introduced developer tools… ended the quarter with a record $819 million in cash” — CEO Dr. Alan Baratz.
• Commercial traction: Q2 bookings rose 92% YoY to $1.3M; customer base exceeded 100 revenue-generating customers over the last four quarters.
• Balance sheet strength: Cash grew to $819.3M and stockholders’ equity to $694.3M, enhancing funding capacity for roadmap and acquisitions.

What Went Wrong

• Profitability deterioration: Adjusted EBITDA loss increased to $20.0M vs $13.9M in Q2 2024, driven by higher operating expenses.
• OpEx intensity: GAAP operating expenses rose 41% YoY to $28.5M on personnel, stock comp, fabrication, and professional fees, indicating heavier investment load.
• GAAP net loss optics: GAAP net loss surged to $167.3M, primarily due to $142.0M non-cash warrant liability remeasurement and losses on exercises, complicating headline P&L comparability.

Transcript

Speaker 7

Good morning, everyone, and welcome to D-Wave Quantum Inc.'s second quarter of fiscal year 2025 earnings conference call. Today's conference call is being recorded. At this time, I would like to turn the call over to the Business Lead of 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 reports. 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 gross margin, and adjusted EBITDA loss, and operating metrics such as bookings. Reconciliations to GAAP financial measures and certain additional information are also included in today's earnings release, which is available on the Investor Relations section of our company's website at www.dwavequantum.com. I will now hand the call over to Alan.

Speaker 6

Good morning, everyone, and thank you for joining us today. I'm once again really excited to share our results for the second quarter of fiscal 2025. Building on the company's remarkable first quarter results, we continue to see accelerating momentum across the business. Let me now walk you through some key highlights, starting with technical achievements. In May 2025, we announced the general availability of D-Wave's Advantage2 quantum computer, our most advanced and performing system. The Advantage2 system is a powerful and energy-efficient, annealing quantum computer capable of solving computationally complex problems beyond the reach of classical computers. A smaller prototype of this system was used to demonstrate our quantum supremacy result on a real-world material simulation problem, a first for the industry.

Featuring D-Wave's most advanced quantum processor to date, the Advantage2 system is commercial-grade and built to address real-world use cases in areas such as optimization, material simulation, and artificial intelligence. As previously shared, the Advantage2 quantum processors have demonstrated impressive performance gains over the previous Advantage system, including double coherent time for faster time to solution, a 40% increase in energy scale for higher quality solutions, and increased qubit connectivity from 15 to 20 to enable solutions for larger problems. It's a significant engineering achievement that highlights our progress in scaling quantum technologies to meet demand for growing computational processing power while maintaining energy efficiency. We're helping customers realize value from quantum computing right now, and the Advantage2 system is an important proof point. We recently announced a new strategic development initiative focused on advanced cryogenic packaging, designed to advance and scale both gate model and annealing quantum processor development.

The initiative builds on D-Wave's technology leadership in cryogenic packaging and will expand our multi-chip packaging capabilities, equipment, and processes. By bolstering D-Wave manufacturing efforts with state-of-the-art technology, the company aims to accelerate its development efforts in support of its aggressive product roadmap on the path to 100,000 qubits. As part of this initiative, D-Wave is leveraging deep expertise and processes at NASA’s Jet Propulsion Laboratory, JPL. Harnessing NASA’s Jet Propulsion Laboratory's superconducting bump-on process, we've demonstrated end-to-end superconducting interconnect between chips, work that we expect will serve as an important foundation for scaling both our annealing and our gate model systems. We are continuing important development work that brings together quantum and AI to explore the synergies and benefits of these complementary technologies. Our aim is to help organizations accelerate the use of annealing quantum computers in a growing set of AI applications.

To that end, we recently introduced a collection of developer tools to advance quantum AI and machine learning innovation. First, we launched an open-source quantum AI toolkit that provides direct integration between D-Wave Quantum Inc.'s quantum computers and PyTorch, a production-grade machine learning framework widely used to build and train deep learning models. Second, we launched a new demonstration that illustrates how developers can use D-Wave Quantum Inc.'s quantum AI toolkit to generate simple images, reflecting what we believe is a pivotal step in the development of quantum AI capabilities. These tools are making it easier for customers like NTT Data Corp, Sharp Corporation, and Triumph to build hybrid quantum-classical machine learning applications. Customers are increasingly coming to us to explore how to integrate quantum into AI workflows, and we expect this will remain a priority development area for us.

Last quarter, we discussed the purchase of an Advantage2 quantum computer by the U.S. Supercomputing Center, an important milestone in our versioning on-premises business. Demand for purchasing a system has been high, and we've been in discussions with numerous organizations around the world interested in buying a D-Wave Quantum Inc. quantum computer. Recently, we announced a strategic relationship with Yonsei University and Incheon Metropolitan City to accelerate the exploration, adoption, and usage of quantum computing in South Korea. Under the terms of the Memorandum of Understanding, the three organizations are working together to advance research and talent development for quantum computing, to provide access to D-Wave Quantum Inc.'s quantum computing systems and services, and to collaborate on the development of use cases in biotechnology, material science, and other areas.

In addition, the Memorandum of Understanding supports our efforts toward the acquisition of a D-Wave Advantage2 quantum computer on-site at the Yonsei University International Campus in Songdo, Yeonsu-gu, Incheon. Before turning to commercial updates, I wanted to take a moment to remind everyone of the differences between annealing and gate model, as there still appears to be continued misinformation that we believe is confusing the market. Annealing and gate model are different types of quantum computing approaches that solve different types of problems. According to peer-reviewed research, gate model quantum computers will not offer advantages for all problem types. Multiple research results have shown that annealing quantum computers outperform and are expected to continue to outperform gate models on optimization problems. Gate models cannot universally solve all problems better than classical. It is also important to understand that annealing is not a niche solution.

We believe that annealing quantum computing is well suited to a broad set of problems, including AI machine learning, quantum simulation, and business optimization, which is ubiquitous in today's modern enterprise. Business optimization problems encompass things like workforce scheduling, production scheduling, resource allocation, vehicle routing, and so on. Together, these represent extensive use cases with far-reaching potential. To characterize annealing quantum computing as niche is misleading and ill-informed. Both annealing and gate model quantum computers can solve a broad range of problems, and each has its limitations with problems it cannot efficiently solve. Annealing quantum computing is very good at solving optimization problems, which cannot be efficiently solved by gate models. Gate model quantum computers, once commercialized, are expected to be very good at quantum chemistry and 3D fluid dynamics, which cannot be efficiently solved by annealing.

Both systems can tackle linear algebra and factorization, meaning problems related to AI, machine learning, and cryptography. We believe that organizations will need both annealing and gate model systems in order to address their full problem set. This is why D-Wave is building both types of quantum computers for our customers. Now I'll turn to commercial updates. In terms of D-Wave Quantum Inc.'s customer portfolio, we've signed a number of new and renewing customer engagements for both commercial and research applications, including E.ON, a European multinational electric utility company, GE Vernova, a global energy company, the National Quantum Computing Centre, NQCC, the UK's National Lab for Quantum Computing, Nikon Corporation, a multinational corporation specializing in optics and precision technologies, NTT Data Corp, a multinational IT services and consulting company, NTT Docomo, Japan's leading mobile operator, Sharp Corporation, a multinational electronics company, and the University of Oxford.

We've also been working with a Fortune 500 aerospace and defense company, and in Q2, we completed a prioritization of 12 different use cases applicable to their business operations that the customer found challenging to solve using classical optimization techniques. Quantum optimization, powered by annealing quantum computing, can deliver value in terms of better and faster solutions. Based on the results of our initial exploratory work with this customer, we have now started building the proof-of-concept for the first of the use cases, with a roadmap to expand to all of them and market them to additional aerospace companies. In addition, we recently built a quantum hybrid proof of technology with North Wales Police to optimize the deployment of patrol vehicles.

The proof of technology solution was tested against historical data and exceeded the customer's expectations, meeting target response time for more than 90% of incidents and using just 10 seconds of solve time. We're encouraged by these initial results and see them as important proof points of quantum hybrid potential for law enforcement-related use cases. We're also seeing growing interest in the LEAP Quantum Launchpad program, which is a three-month trial that provides access to D-Wave Quantum Inc.'s quantum computing systems, our LEAP Real-Time Quantum Cloud service, and our team of quantum experts for project support. Since its introduction in January of 2025, the Launchpad program has received more than 1,300 applications spanning business, government, and academic institutions. The program is serving as an important vehicle to attract and fast-track customers into proof-of-concept development and ultimately application deployments. To summarize, we are continuing to make steady progress across our business.

First, delivering on technical milestones, including the release of our sixth-generation quantum computer and advancing quantum AI development. Second, executing against our go-to-market strategy, including increased discussion for on-premises systems with a variety of interested parties. Third, working closely with customers to develop hybrid quantum applications that are addressing critical organizational problems. With the strongest cash position in our company's history, we believe that we are very well positioned to explore M&A activities that will propel our business even further and faster while delivering value to customers and shareholders alike. With that, I'll hand it over to John to provide a review of our second quarter fiscal year 2025 results. John?

Speaker 5

Thank you, Alan, and thank you to everyone taking the time to participate in today's call. In my review of the second quarter of first-patch 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, and adjusted EBITDA loss, as we believe these measures improve investors' ability to evaluate their 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 measures. For the most part, adjusting for non-cash and non-recurring expenses. Revenue for the second quarter fiscal 2025 totaled $3.1 million, an increase of about $900,000 or 42% from the second quarter of fiscal 2024 revenue of $2.2 million.

The second quarter revenue includes $1 million in revenue associated with the Advantage2 quantum computer Processing Unit upgrade for the annealing system that was installed at the UX Supercomputing Center in the first quarter of this year. Revenue from the Advantage2 upgrade is recognized using the percentage of completion method, reflecting the timing of installation services that are closely integrated with the QPU or Quantum Processing Unit hardware. We expect that this upgrade will be substantially complete by the end of this year. Bookings for the second quarter totaled $1.3 million, an increase of approximately $600,000 or 92% from the second quarter of 2024 bookings of $700,000. As we have previously mentioned, we are encouraged by an expanding sales pipeline that includes a growing number of large enterprises and well-known logos, with a marked increase in the size of the average transaction size when compared to a year ago.

Many of these companies are focused on having us build them proof-of-concepts versus just buying a small amount of QCAF or Quantum Computer as a Service that translates to incrementally more complex transaction structures. This, in combination with the challenges associated with dealing with substantially larger organizations with multi-step and sometimes very rigid procurement processes and documentation requirements, has resulted in deals taking longer to be closed than what we originally anticipated. Over the last four quarters, we had over 100 revenue-generating customers that include customers in the commercial, government, and research sectors and nearly two dozen Forbes Global 2000 companies. GAAP gross profit for the second quarter was $2 million, an increase of approximately $600,000 or 42% from the second quarter of fiscal 2024 GAAP gross profit of approximately $1.4 million, with the increase due primarily to the growth in revenue.

Non-GAAP gross profit for the second quarter was $2.2 million, an increase of approximately $600,000 or 39% from the second quarter of fiscal 2024 non-GAAP gross profit of approximately $1.6 million. 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 second quarter was 63.8%, representing a slight improvement from the second quarter of fiscal 2024 GAAP gross margin of 63.6%. Non-GAAP gross margin for the second quarter was 71.8%, a slight decrease of 1.3% from the second quarter of fiscal 2024 non-GAAP gross margin of 73.1%.

Net loss in the second quarter was $167.3 million or $0.55 per share, an increase of $149.5 million or $0.45 per share from the second quarter of fiscal 2024 net loss of $17.8 million or $0.10 per share. The increase in the net loss was primarily due to $142 million in non-cash, non-operating charges related to the remeasurement of the company's warrant liability, as well as realized losses stemming from actual warrant exercises. In extracting the impact of the non-cash, non-operating warrant remeasurement and related charges from the GAAP net loss, the adjusted net loss for the second quarter was $25.3 million or $0.08 per share, an increase of $5.3 million and a decrease of $0.04 per share from the fiscal 2024 second quarter adjusted net loss of $20 million or $0.12 per share.

Adjusted EBITDA loss for the second quarter was $20 million, an increase of $6.1 million or 44% from the second quarter of fiscal 2024 adjusted EBITDA loss of $13.9 million, with the increase due primarily to higher operating expenses as reflective of our investments to support our future growth opportunity, partly offset by higher gross profit. I'll now address the performance for the first half of the year. D-Wave Quantum Inc.'s revenue for the six months ended June 30th was $18.1 million, an increase of $13.5 million or 289% from revenue of $4.6 million in the six months ended June 30th, 2024. Bookings for the first half of fiscal 2025 were $2.9 million, a decrease of approximately $400,000 or 13% from bookings of $3.3 million in the first half of fiscal 2024.

GAAP gross profit for the first six months of fiscal 2025 was $15.9 million, an increase of $12.9 million or 420% from GAAP gross profit of $3 million for the first six months of fiscal 2024, with the increase due primarily to the high-margin system sale during the six months ended in June. Non-GAAP gross profit for the first six months of fiscal 2025 was $16.3 million, an increase of $12.8 million or 367% from the year earlier six months' non-GAAP gross profit of $3.5 million. GAAP gross margins for the first half of 2025 were 87.6%, an increase of 22% from the 65.6% GAAP gross margin in the first half of fiscal 2024, with the increase due, again, primarily to the high-margin system sale during the first six months ended in June.

Non-GAAP gross margins for the first half of fiscal 2025 were 89.9%, an increase of 14.9% from 75% in the six months ended June 30, 2024. Net loss for the six months ended June 30, 2025, was $172.8 million or $0.59 per share, compared with a net loss of $35.1 million or $0.21 per share for the six months ended June 30, 2024. In adjusting the impact of the non-cash, non-operating warrant remeasurement and related charges from the GAAP net loss, the adjusted net loss for the six months ended June 30 was $34.6 million or $0.12 per share, essentially flat when compared with the adjusted net loss of $34.6 million or $0.21 per share for the six months ended June 30, 2024.

Adjusted EBITDA loss for the first half of fiscal 2025 was $26.1 million, a decrease of approximately $700,000 or 3% from the adjusted EBITDA loss of $26.8 million in the first half of 2024, with the improvement due primarily to higher gross profit, partially offset by increased operating expenses. Moving on to the balance sheet and liquidity, as of June 30, D-Wave Quantum Inc.'s consolidated cash position totaled a record $819.3 million, representing over a 1,900% increase from the fiscal 2024 second quarter consolidated cash balance of $40.9 million and a nearly 170% increase from the immediately prior fiscal 2025 first quarter consolidated cash balance of $304.3 million.

During the second quarter of fiscal 2025, we raised over $500 million in equity, including $400 million in gross proceeds from our forced at-the-market equity program, $99.3 million in net proceeds from the exercise of warrants, and $37.8 million in net proceeds from our equity line of credit with Lincoln Park Capital Fund that fulfilled the $150 million commitment that was originally secured in June of 2022. Subsequent to the end of the quarter, we received an additional $15 million from the exercise of warrants. Lastly, during the quarter, we fully recovered the $1 million investment plus accrued interest that we made in Zapata AI in February of 2024 through a convertible note that we wrote off later that year when Zapata became insolvent.

As a result of the magnitude of capital that we have recently raised, in addition to pursuing strategic acquisitions, we are accelerating a number of our key investment initiatives. In the area of research and development, we are investing in the superconducting bond process, as highlighted in our last Wednesday's press release and as Alan mentioned earlier. This process will support our multi-chip processor program on our path towards a 100,000-qubit annealing system. This process will also support scalable cryogenic control of fluxonium-based gate model technology. We will also be upgrading our superconducting printed circuit board advanced packaging manufacturing operation and increasing the number and frequency of our wafer fabrication runs to support building Advantage2 prototypes, as well as continuous improvements to qubit coherence times for both our annealing and gate model architectures. In addition, we will be investing in a number of quantum AI research and development programs.

In the area of sales and marketing, we will be expanding the size and geographical footprint of our professional services organization to support growing demand for quantum optimization customer engagements across both commercial and government sectors, including U.S. defense. Lastly, in the area of G&A, we will be making further investments in our cybersecurity personnel and infrastructure. For the balance of this year, we expect these incremental investments will result in a quarterly non-GAAP OpEx that is approximately 15% higher than our second quarter actual non-GAAP OpEx. To conclude, as we have previously stated, we believe that D-Wave Quantum Inc. has the opportunity to be the first independent publicly held quantum computing company to achieve sustained profitability and achieve this milestone with substantially less funding than required by any other independent publicly held quantum computing company.

Given that we are now fortunate enough to have 10 security analysts covering D-Wave Quantum Inc., we will, in the essence of time, ask each analyst to commence the Q&A session with one question, and then we will go back through the queue for additional follow-on questions. With that, we will now open up the call for questions.

Speaker 7

Thank you, ladies and gentlemen. We will now begin the question and answer session. Should you have a question, please press the star followed by the number one on your touchtone phone. You will hear a prompt that your hand has been raised. If you wish to decline from the polling process, please press the star followed by the number two. If you are using a speaker phone, please lift the handset before pressing any key. Please note that each person is limited to one session and are welcome to join the queue again. One moment please for our first question. Our first question comes from Craig Hallum of B. Riley Securities. Please go ahead.

Yeah, thanks for taking the question and congratulations on the results in the quarter and technical progress, guys. I wanted to start by following up on the point the company has made about M&A and understand the types of M&A that the company believes would make sense, either items that are more technical in nature, maybe helping to accelerate the gate model side of the business, or things that might be more go-to-market oriented, and what size of M&A makes sense for the company. Finally, related to that, what are we looking at in terms of timing as we pursue that grade angle? Thank you.

Speaker 6

Hi, Craig. Thanks for the question. We have not disclosed our strategy and plans for M&A, other than to say that, you know, with $800 million in the bank, it has now become a strategic priority for the company. That having been said, over the course of the last several months, we have been spending a fair amount of time developing a strategy and a plan, and it falls into a number of key areas, including some of those that you mentioned. Think about it as really accelerating our R&D and product development activities in a number of key areas, which could be everything from gate model to quantum AI.

there anything on timing there, Alan, whether we're looking at something that could be 2025 versus 2026?

It's hard for me to predict, but what I would say is that our goal would be to start being able to announce acquisitions this year. However, it takes two to tango, and we'll just have to see how that plays out.

Good luck with the deal. I'll get back in the queue.

Thank you.

Speaker 7

Our next question comes from David Williams of Benchmark. Please go ahead.

Good morning, everyone, and congrats on the continued progress here. If you could speak to the cryogenic news and the importance of that towards your roadmap and what you think it will bring ultimately as you get that ramped into the roadmap. Thank you.

Speaker 6

Yep, David, thank you. This is really important, Jeff. We've talked in the past about how we have significant intellectual property and a real need in cryogenic control. By that, I mean the ability to control qubits and control our systems on chip rather than needing to do all the control from room temperature. Now, as we are looking to leverage that into the gate model program, as well as expanding our annealing processes to much larger numbers of qubits, as we said, 100,000 qubits, we really need to be moving to a multi-chip solution. When we start interconnecting chips together in the refrigerator, we need to make sure that the interconnect is also superconducting and that we can preserve the quantum properties, like entanglement across those interconnects. This is key to both scaling our annealing systems as well as developing our gate model systems.

Frankly, we've made progress in this area much faster than we actually expected it to. NASA’s Jet Propulsion Laboratory had some capabilities that we thought looked interesting. We thought it would take a while to get to the point where we could actually kind of evolve that into what we needed, but it actually moved a lot faster than we thought. Now we're really starting to build a production capability around that technology to more rapidly drive the multi-chip annealing processes as well as the gate model system.

Speaker 7

Thank you. Our next question comes from Troy Jensen of Piper Sandler. Please go ahead.

Hey, gentlemen. I also want to, also my congrats to all the technical milestones here. Maybe in a few, Alan, I'd just love to hear more about Advantage2 and I guess a few things kind of all coupled together would be, you know, is South Korea deployment, is that going to be Advantage2 or a number of systems you expect to install by the end of next year and maybe some of the technical improvements in the platform?

Speaker 6

Okay, Troy. First of all, Advantage2 is a really important system for us in the sense that it was the first system on which we were able to demonstrate true quantum supremacy, specifically the ability to solve a useful real-world problem on a quantum computer that cannot be solved classically, full stop. It is what everybody in the quantum industry aspires to, and we were the first to achieve it, and we achieved it on the Advantage2 system. I will tell you, we tried to get this result on our earlier Advantage system, and we were not able to. It took the increased capability of Advantage2 to be able to perform that computation, and specifically, it required the additional interconnect to more efficiently map the problem into the quantum processor. It also took the longer coherence time and the increased energy scale to get the solutions faster and more accurately.

This is a significant advance over Advantage, and we're really excited about it. You know, it's also, I think, driving that increased customer interest that John talked about relative to much larger companies with much larger opportunities that are now engaged with us in a kind of sales cycle process. As far as the number of systems, this falls into two categories. One is our quantum cloud service, and we have four production systems in our quantum cloud service today. We don't really need more than that in the cloud service for, you know, relatively near-term revenue growth. We likely will add a couple more systems down the road, but four is sufficient for now. Obviously, all four of those will be upgraded to Advantage2. Currently, one of them has been upgraded. Ultimately, all of them will be upgraded. Then there's the on-premise systems.

Obviously, E.ON is one of those, and we are already in the process of doing that upgrade, as John pointed out. As we sell more on-premises systems, those will be Advantage2 processors. You know, we've said that we've got a really good pipeline for sales of systems. We've got a second one that we're closing in on, which is South Korea. We've got another one that's now starting to kind of emerge as a relatively near-term opportunity and then a pipeline of others. In the past, I have said, in the near term, think more like one a year than multiple a year. I still say that, although I'm starting to feel like maybe it could be a little bit more. The number is still, you know, kind of relatively small in the near term.

That having been said, if you add up everything that I said, we're talking maybe six or seven Advantage2 systems.

Perfect. Thanks for the detailed answer, and good luck on the board, guys.

Thank you.

Speaker 7

Our next question comes from Richard Shannon of Craig Hallum. Please go ahead.

This is Tyler Anderson. I'm for Richard Shannon. Thanks for taking my question, guys. Could you elaborate on the developer tools that you released? Noting that the problem that you demoed is a classical ML problem, can users leverage higher pixel images for this? For the sake of time and question, you mentioned control right after your bump bonding. Do you have or already plan to have integrated control onto your chiplet such that there isn't an external control mechanism?

Speaker 6

Tyler, I will answer your first question to be fair to everybody else because we did say only one question, and then you can go ahead and get back into the queue. With respect to what we announced as far as the quantum AI toolkit, which I believe is what you're referring to, essentially, what we have done is we have introduced the ability to use PyTorch, which is an open-source Python-based machine learning platform that's frankly in fairly wide use for training large language models. We've introduced into that the ability to use a technology that we actually developed within D-Wave, which is called a discrete variational autoencoder.

I'm not going to get into the technical detail of what I mean by that, other than to say what this does is it allows you to take a data set and map it into a latent space, which is really what machine learning is all about. Essentially, map it into a machine learning model that can then be used to recreate the data and other things that look like that data set. What's unique about this is that we're mapping it into a discrete latent space, not a continuous latent space. Machine learning today typically operates on continuous data, but we're now mapping it into a discrete latent space. It's getting excellent results with a discrete latent space. What's so important about that is that our quantum processors natively work with discrete data, not with continuous data.

What this does is it actually opens up the opportunity for the annealing quantum computer to be the vehicle for creating that discrete latent space or doing the learning, which we ultimately think could deliver better models faster and with lower energy consumption. That having been said, I also want to point out that this is just the next step on our journey in the area of quantum AI. There are a number of other things we are working on today in the lab that take this significantly further than what we've announced so far that we're very excited about as well.

Thank you. I appreciate the answer. I'll get back in the queue.

Thanks.

Speaker 7

Our next question comes from Suji Desilva of Roth Capital. Please go ahead.

Hi, Alan. Hi, John. I appreciate all the colors thus far on quantum AI. Can you talk, Alan, about the next milestones or activities to watch in indicating D-Wave's progress here?

Speaker 6

In the area of quantum AI?

Correct.

I think the short answer to the question is no, because we haven't yet announced anything beyond what we announced a few days ago. Just to say a little bit, follow up a bit more on what I said a minute ago, there are a number of modern approaches to AI and machine learning model training and inference. Variational autoencoders is one approach, but there are other important things like transformer models and diffusion models. We're working with those as well. We expect that over time, we would be able to deliver a platform that could leverage our quantum systems in support of all of those approaches.

Thanks, Al.

Speaker 7

Our next question comes from Harsh Kumar of Piper Sandler. Please go ahead.

Yeah, hey, guys. Congratulations on a lot of progress Advantage2 and other things that you're doing. Alan, I wanted to ask you about the toolkit information you provided in your press release. Is it possible that you could have libraries, kind of like how NVIDIA does, offer to its customers sort of half-finished models that the customers can then take and sort of finish up and customize? Is that sort of the idea, or is that even possible with the toolkit with demos reference that you mentioned in your press release and commentary?

Speaker 6

It is absolutely possible. In fact, the demo is one simple example of that. However, currently, we are working with customers leveraging their data in the application areas that are important to them. For example, Japan's backbone, Triumph, the two that I mentioned a bit earlier, rather than trying to build these out ourselves. The extent to which, A, we take any of that and pull it back into our platform will depend a little bit on the customers and the extent to which we've negotiated the ability to be able to do that. Whether we choose to start pursuing any applications or application templates ourselves is not something that we've certainly not announced. We've not talked about it.

I think that would require us to bring domain expertise in key problem areas into the company. It is something we're thinking about, but honestly, at this point, I wouldn't say we're going to do it. I would just say we're thinking about it.

Understood. Thank you, Alan.

Speaker 7

Our next question comes from Suji Desilva of Roth Capital. Please go ahead.

Hi, thanks for taking the question. Quantum annealing really has significant potential with both corporate and nation states or agencies. I'm curious how the tenor in the U.S. government has shifted specifically with respect to quantum annealing in the past couple of quarters, and just any thoughts on DARPA's quantum benchmarking initiatives and if there's an opportunity for annealing within that framework.

Speaker 6

Oh my, you really know how to push my buttons. Okay, let's start with QBI. The DARPA's QBI program is totally focused on gate model, and I think that is a huge mistake on the part of DARPA and the U.S. government. I think that by focusing on gate model, they are totally missing the fact that annealing is the most capable approach to quantum for many of the important problems that the government needs to address, whether it's in the area of defense for things like missile defense or troop resupply, or in the area of transportation, for example, things like port logistics, or we've done work in the area of wildfire fighting. The truth of the matter is annealing represents, I think, not only the best, but the only quantum approach that can address many of the government's hard computational problems.

This is back to the fact that many of these are optimization problems which require annealing quantum. Gate model cannot address them. By excluding annealing from the QBI program, I think DARPA has made a huge mistake. I would encourage them to maybe not add annealing to the QBI program, but maybe create a second quantum program for non-gate model approaches to ensure that the U.S. government is kind of focused on all the approaches to quantum computing, not just one approach to quantum computing. Now, with respect to progress more broadly in the U.S. government, I'd say the answer is yes, but slow. We are making inroads into different application areas because we can do that since we have a system that is capable of delivering value today, not 5 or 10 years from now, but it's slow going.

Appreciate the comments. Thanks, Alan.

Speaker 7

Thank you. Our next question is coming from Ruben Roy of Stifel. Please go ahead.

Speaker 6

Yes, thank you. Alan, I don't mean to push your buttons here, but I'm going to ask this question anyway. I guess it's in the context of the M&A commentary that you made and also some of the comments that John made with respect to having conversations with larger customers and getting feedback from them. With all of that in mind, I guess the simple question is, has your philosophy on the timing of when D-Wave might think about bringing the gate model to market changed? Has that accelerated for any reason or no? If no, are customer conversations driving you to think that the timeframe that you guys were thinking about previously is probably the right timeframe? Thank you. Yeah, that's definitely pushing my buttons as well. I mean, that's just a great, but no, they're all good questions and they're all good conversations to have.

I'm not annoyed about the gate model. I'm annoyed about DARPA. Relative to our gate model program, look, we still believe that, A, you will never, never see a commercially viable gate model quantum computer before we have error correction. We still need to scale to solve useful real-world problems. As a result, we're still many years out because, no matter what you hear from the industry, there are still very hard problems that need to be solved around error correction. It's not just a matter of engineering. There are still very hard problems that need to be solved in scaling. It's not just a matter of engineering. We do think that it's still a number of years before we will see a scaled error-corrected gate model system that is commercially viable. For us, though, the focus is on removing the risk.

In other words, providing a clearer line of sight to being able to deliver that by driving the R&D efforts needed, and/or possibly bringing in-house really great things that are going on out there in the industry. It's less, I think, about accelerating the timeframe and more about being much more concrete on exactly what the roadmap is that will get us there.

I appreciate the detail. Thanks, Alan.

Speaker 7

Our next question is coming from Suji Desilva of Roth Capital. Please go ahead.

Yeah, hey, Alan, John. Thanks for taking my question. I'm going to switch gears a little bit. You mentioned you signed renewing customer engagements. Can you give us a sense of what your retention rate is? The customers that do renew, have they typically already had another application in mind that they want to use your quantum annealers for? Does the team show them how else they can benefit from quantum and that gets to renewed engagement?

Speaker 6

Yeah, John, you want to talk about the retention rate, and then I can provide color on kind of how we grow with our customers?

Sure. On average, our retention rate, going back over approximately like a four-quarter period, is in excess of 90%.

We do have a very high retention rate. You know, we've talked a little bit about this in the past. You need to keep in mind that we have two different types of quantum computers as service customers. There are customers that we call do-it-yourself, where they come in and buy some assets, a developer seat, and start kind of exploring, doing research, trying to develop applications on their own. These customers tend to just continue to renew, quarter after quarter or year after year, but, you know, haven't been kind of growing or converting from experimentation to actual production applications. One of the things we are focused on is how to help them move faster into production, but not all of them are even kind of at the stage where it makes sense to do that. Some of them are research organizations, which would never convert to production applications.

Some of them are smaller organizations that really are just experimenting. Rather, it's kind of really understanding who those do-it-yourself customers are and focusing on trying to engage them with help to move forward. In some sense, the LEAP Quantum Launchpad program was put in place in part specifically to do that, to move those customers off of just do-it-yourself into the Launchpad program, where it comes with some support from our professional services team. The other class of customers is the customers that have engaged us through a professional services engagement. Those are the class of customers that, as John said, it's much larger customers that are engaging us now with much larger projects. For example, that aerospace company, I mean, a Fortune 500 company, we engaged across 12 different applications from the outset.

We did the evaluation and are now working on the first of those applications with a plan to move through all of them and then take it to other aerospace companies. Our approach now really is to work with these larger companies to really kind of find a fraction customer in each industry or vertical area, work with them the way we did with this customer, and then as we're helping them progress through the applications, take that out to other customers in the same industry, and so on.

Got it. Okay, that makes sense. I appreciate the color, and I'll hop back in the queue.

Speaker 7

Thank you. Our next question is coming from Craig Ellis of B. Riley Securities. Please go ahead.

Yeah, thanks for taking the follow-up question. I wanted to follow up on my first question, but take it in a different direction. Clearly, there's a lot of business model flexibility you now have with a much higher cash balance. One of the things you can do is organically invest a greater amount in R&D and marketing. What I'd like your help on is understanding how you're evaluating current intensity versus higher levels, and what we should expect as you evaluate where you can go with internal investment to accelerate your path to further commerciality, especially with this growing quotient of Fortune 500, Global 2,000 customers in your pipeline. Thank you.

Speaker 6

Thanks, Craig. First of all, we have in the past said that we are investing in go-to-market. We've made a significant, for us, investment in the sales portion of go-to-market sales and technical account management, as we overdoubled the size of that team in the first half of this year. Now, as John said, we're focused on building out the professional services team in support of that. We're also taking it a step at a time. We've made an investment and the pipeline looks good. We're making progress. It's taking a little bit longer to get these deals closed than we had expected because of the size of the customer and the complexity of the processes involved. We're making good forward progress. We want to see that we're getting a return on that go-to-market investment. Once that's been validated, we'll continue to grow there.

On the R&D side, we also are starting to make some additional investments in R&D. We talked about the advanced cryogenic packaging work. We've talked a little bit about quantum AI. These are areas where we are starting to make some incremental investments. Beyond cryogenic packaging and its impact on both annealing and gate model, there'll be incremental investments on the gate model side as well as we continue to kind of work through all the technical elements and R&D elements of that program. John kind of gave you a metric to think about with respect to an increase in spend throughout the remainder of this year.

Got it. Thank you very much, Alan.

Speaker 7

Thank you. We also have a follow-up question from Richard Shannon of Craig Hallum. Please go ahead.

Hi, thank you for taking my follow-up. I had noticed that Triumph had mentioned using Advantage2 in their upcoming research. Are you in talks with them for a scale of a QPU? Is this someone who you have recently been talking to or you have mentioned that you had been talking to about sale?

Speaker 6

Triumph is actually working with our system today, and they have seen really good results leveraging our system to do basically generative AI around, you know, a particle acceleration problem that they're dealing with. We talked about them in the past. We talked about the work that they're doing. I mentioned them a little earlier. They are a customer. They are working with our system. They are working with our system in the area of generative AI. They have seen some really good results with that, and we're continuing to grow that relationship with them. As far as the system sale, I haven't really talked about who is in the pipeline and who we're engaged with, you know, other than, you know, we have now begun talking about Yonsei University in South Korea.

Okay, thanks. Appreciate the color. Congrats.

Thank you. Okay, should we go ahead?

Speaker 7

Yes, thank you. As a reminder, if you wish to ask a question, please press star one. There are no further questions at this time. I would now like to turn the call back over to Alan Baratz for his closing remarks. Please go ahead.

Speaker 6

Thanks, Yakurizo. As I think you all know, at D-Wave Quantum Inc., our mission is to help customers realize the value of quantum computing right now. Our second quarter results show continued progress in service of that mission across R&D, go-to-market, customer application development, and more. Everything we build is designed to provide lasting value for our customers and shareholders, and the future looks very bright. Thank you all for taking the time to join us today.

Speaker 7

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