Earnings Call Transcript - QBTS Q1 2023

Operator, Operator

Hello and welcome to the D-Wave Q1 2023 Earnings Call and Webcast. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Kevin Hunt, Investor Relations. Please go ahead.

Kevin Hunt, Investor Relations

Thank you, and good morning. With me today are 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 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.

Alan Baratz, CEO

Thanks, Kevin, and good morning, everyone. Well, it feels like we were just here talking about Q4 and FY ’23. But it really is a pleasure to connect again so quickly and keep you apprised of D-Wave’s business momentum. As a reminder to those investors following D-Wave and the overall quantum computing category, we are in a unique market position as the only company in the world offering quantum annealing technology. And unlike other types of quantum computing modalities, quantum annealing is in the market with commercial customers today. That gives us a first mover advantage in accelerating the commercial adoption of quantum, while others in the industry focus on research and development. Quantum annealing is a valuable technology for solving complex optimization problems and awareness of its value to the enterprise is quickly growing. In fact, earlier this month, global information technology market intelligence firm IDC recognized quantum annealing as a core quantum computing system in its annual taxonomy report on the sector. Companies are increasingly turning to the technology to find solutions to their most computationally complex optimization problems. These are problems that are fundamental to nearly every business and industry, things like employee scheduling, factory process automation, fraud detection, advertising optimization and many more. The fact is that quantum computing is here today and already emerging as a key strategy for solving the seemingly unsolvable by finding new and better ways to build businesses, navigate disruption and accelerate transformation. Customer interest in D-Wave continues to grow and our commercial customer portfolio remains robust. We've seen a steady increase in the growth of revenue producing commercial customers. Over the last four quarters, revenue derived from our commercial customers has increased by 30%, when compared to the immediately preceding four quarters. This quarter, we welcomed a number of new customers and saw expanded or renewed agreements with others, including a large non-U.S. Government agency, as well as the Interpublic Group, Unisys, POLARISqb and the Quantum Algorithms Institute. While revenue was down from the year earlier quarters, due to revenue recognition technicalities related to professional services engagements, we are pleased with our sales momentum. First quarter bookings of $2.9 million were up by 297%, compared to the first quarter of 2022. Q1 also represented our fifth consecutive quarter of sequential quarter-to-quarter bookings growth and the fourth consecutive quarter of year-over-year bookings growth. In addition, the average deal size for QCaaS and Professional Services combined bookings increased 430 percent on a year-over-year basis and by 68% on a sequential Q4 to Q1 basis. With the average deal size increasing sequentially for each of the last five quarters. This means we're seeing an uptick in both the number and the size of customer deals. And we believe that this points to accelerating adoption of our solutions and momentum in our revenue growth. In addition, we continue to execute on initiatives that support D-Wave’s commercial and production readiness. We recently completed the SOC 2 Type 1 audit, which is an important effort that helps ensure the protection of customer data. This will help streamline and speed up procurement for companies that require data compliance. Turning now to technical achievements, this quarter, we achieved a very significant scientific milestone on coherent quantum annealing, which led to us publishing the results in Nature, one of the most preeminent peer-reviewed scientific journals. Our research proved that the D-Wave advantage system's use of quantum delivers a speed up over classical for an important class of complex problems. The observed speed up matches the theory of coherent quantum annealing and shows a direct connection between coherence and the core computational power of quantum annealing. To put it in layman's terms, our research unequivocally shows two things: First, our system uses quantum mechanics to solve complex problems; and second, our system shows that quantum annealing can identify solutions to hard problems at a significantly faster rate than classical compute. This marks a milestone for the quantum industry, proving our technology's superior performance and utility for large scale optimization problems. While our competitors may not be quick to celebrate the significance of this achievement for obvious reasons, the research is a breakthrough on multiple fronts and has important implications to optimization. Moreover, these benefits will increase with our future generation systems, including Advantage 2, where we are already seeing a four times increase in coherence on an early experimental version of the system developed with our new fabrication process. I also want to remind everyone that in the first quarter, we introduced a new initiative designed to bring the power of quantum to artificial intelligence and machine learning through new feature selection offerings. As enterprise AI adoption intensifies, it's important for companies to understand the practical ways that AI and quantum can come together today to fuel innovation. By using quantum hybrid approaches, we're helping to optimize AI and machine learning models and address feature selection, a key problem in machine learning that classical computing has struggled to solve. A number of our customers have already used our feature selection tool with positive early results in areas like fraud detection and TV commercial advertising optimization. And finally, we're continuing to develop and work on Advantage 2, our next generation annealing quantum system, which is expecting to feature over 7,000 qubits, 20-way connectivity, and as I previously mentioned, higher coherence. We also remain on track with our gate model program and continue benchmarking 1 and 2 qubit Oxonium qubit circuits while working on the fabrication of larger systems. With that, I'll turn it over to John to provide a review of our first quarter 2023 results.

John Markovich, CFO

Thank you, Alan, and thank you to everybody taking time to participate in our call today. Revenue in the first quarter of fiscal 2023 was $1.6 million, a decrease of $129,000 or 7.5% from the first quarter of 2022. Given the nature of our professional services engagements, the timing of our professional services revenue recognition may vary, causing some revenue lumpiness on a quarter-to-quarter basis. With respect to D-Wave's revenue recognition in general, the revenue recognition associated with the QCaaS component of our revenue is quite straightforward and predictable given that QCaaS revenues typically recognize ratably over the term of the underlying contract. However, revenue recognition associated with our professional services contracts is more complex given that there are a number of variables involved, including many engagements with multiple phases, specific starts, updates for each phase and specifically defined deliverables. However, we are generally paid in advance of the completion of the professional services and the corresponding revenue recognition timeframe. With respect to the first quarter revenue mix, QCaaS or our quantum computing as a service subscription-based revenue totaled $1.2 million in the quarter, representing 74% of total quarterly revenue. This compares to the year earlier QCaaS revenue of $1.4 million that represented 81% of total quarterly revenue. I will be providing bookings, non-GAAP gross profit, gross margins, operating expenses, and adjusted EBITDA as we believe these metrics improve investor's ability to evaluate our underlying operating performance. These measures are defined in the tables at the bottom of today's first quarter earnings press release and for the most part, adjust 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 that are expected to generate revenue in the future. We present the operational metric of bookings because it reflects customers' demand for our products and services and to assist investors in analyzing our performance in future periods. As Alan previously highlighted, bookings for the first quarter were $2.9 million, an increase of $2.2 million or 297% compared to the first quarter of fiscal 2022. Furthermore, the first quarter bookings represent our fifth consecutive quarter of sequential quarter-to-quarter growth in bookings and the fourth consecutive quarter of year-over-year growth in bookings. Over the last four quarters, we had 65 revenue producing commercial customers, compared to 63 commercial customers in the immediately preceding four quarters, with commercial revenue increasing by 30% between those two periods. Over the last four quarters, we had a total of 109 revenue producing customers, compared to 106 total customers in the immediately preceding four quarters with total customers including commercial, educational, and government accounts. Regarding our GAAP gross profit for the first quarter, it totaled $421,000, a decrease of $676,000 or 62% from the first quarter of fiscal 2022 that totaled $1.1 million, with the decrease being principally due to the lower revenue and a significantly higher non-cash stock-based compensation expense in the first quarter of fiscal 2023 cost of sales. Our non-GAAP gross profit for the first quarter was $852,000, a decrease of $317,000 or 27.1% from the first quarter of fiscal 2022 non-GAAP gross profit of $1.2 million. 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. Regarding gross margins, our GAAP gross margin in the first quarter of fiscal ’23 was 26.6%, a decrease of 37.4% from the 64% GAAP gross margin for the first quarter of fiscal 2022, with a decrease due primarily to lower revenue and significantly higher non-cash stock-based compensation expense in the first quarter of fiscal 2023 costs of sales. Our non-GAAP gross margin was 53.8%, a decrease of 14.4% from the year earlier gross margin or non-GAAP gross margin of 68.2%. Again, the difference between the GAAP and the non-GAAP gross margin is limited to non-cash stock-based compensation and depreciation expenses that are excluded from the non-GAAP measures. With respect to our operating expenses, the GAAP operating expenses in the first quarter were $25.1 million, compared with $12 million in the year earlier period, with the increase including $5.6 million in non-cash stock-based compensation expense, along with higher public company and headcount related expenses. The non-GAAP operating expenses for the first quarter of fiscal 2023 were $17.8 million, compared with $10.9 million in the fiscal 2022 first quarter, with the difference being the non-cash stock-based compensation expense and depreciation. Net loss for the first quarter was $24.6 million or $0.20 per share, compared with a net loss of $11.7 million or $0.09 per share in the first quarter of fiscal 2022. The adjusted EBITDA for the first quarter of fiscal 2023 was a negative $16.9 million, compared with a negative $9.8 million in the fiscal 2022 first quarter, with the increase due primarily to higher public company and headcount related expenses. Now I'll move on to balance sheet and liquidity. D-Wave ended the quarter with $9 million in cash, up from $7 million at the end of the year. As previously disclosed, we entered into a common stock purchase agreement also known as the ELOC with Lincoln Park Capital in June of 2022, 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. This agreement is subject to certain limitations and satisfaction of certain conditions over a three-year period. To date, D-Wave has raised approximately $20 million under the ELOC, including $15.7 million during the first quarter of 2023. D-Wave's ability to raise additional funds under the ELOC is subject to the registration of additional shares and our stock price being above $1 per share. Also as previously disclosed, on April 13 D-Wave entered into a $50 million four-year secured term loan agreement with PSPIB Unitas Investments, an affiliate of PSP Investments. The initial advance under the term loan was $15 million, which was received on April 14, and there are second and third advances of $15 million and $20 million respectively subject to certain terms and conditions. I will now reiterate our financial guidance for fiscal 2023. Our guidance is based on current market conditions and expectations and is subject to various important cautionary factors as set forth in our first quarter earnings press release issued earlier today and in our SEC filings. Based on information available as of May 18, 2023, guidance for the full fiscal year of 2023 is revenues, which is expected to be in the range of $12 million to $13 million, representing year-over-year growth of 67% to 80%. Revenue is expected to increase sequentially in the second quarter from the first quarter. So we're essentially reaffirming the guidance that we provided with our fourth quarter earnings. With respect to the adjusted EBITDA, this also is maintained at the same level that we previously guided, which is a negative $62 million on the year. As we have previously outlined, we believe that D-Wave's business model incorporates a high degree of operating leverage. It is very capital-efficient providing us with significant flexibility with respect to the magnitude, timing, and pace of operating expenses and the associated cash impact. Lastly, I would like to add that 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 independent publicly held quantum computing company.

Alan Baratz, CEO

With that, I will hand the meeting back over to questions.

Operator, Operator

Thank you. We'll now be conducting a question-and-answer session. Our first question is coming from David Williams from Benchmark Company. Your line is now live.

David Williams, Analyst

Hey, good morning and thanks for letting me ask a couple of questions here. I guess first, so you haven't previously given the bookings number, really talked much about that, but it's very helpful and appreciate the clarity around the demand trends. I guess on the revenue recognition side and understanding the lumpiness of the pro services revenue, what are the drivers there? And as we kind of think about that trending through the year. Are there any things I guess that have changed in that pro services that have you changed the way that you're recognizing the revenue or changed the milestones? Is there anything that’s, kind of, different that we should be thinking about?

Alan Baratz, CEO

John, do you want to take that?

John Markovich, CFO

Sure. The core of each agreement varies somewhat regarding the milestones, but there haven't been any significant changes from what we've typically seen in how these agreements are structured. The challenge lies in the complexity of optimizing many variables, and in some situations, the timeline relies on feedback and collaboration with the client, which can sometimes cause delays.

Alan Baratz, CEO

And David, maybe I'll just add one other thing. And that is previously we had kind of had a clean separation between QCaaS agreements and professional services agreements. The QCaaS agreements are quite straightforward, as John said, when it comes to revenue recognition, it’s just ratably over the duration of the QCaaS agreement, whereas revenue recognition on the professional services agreements tends to be more lumpy, due to all the various factors associated with the agreement, the nature of the work to be done, start dates, stop dates, deliverables and so on. However, more recently, customers have been interested in combined agreements where it is both QCaaS and some professional services. Now this is really good for us, because we help customers move much faster when they're working with our professional services organization than when they're trying to do development themselves. So we're actually encouraged by this and feel like it's a good direction for the company to be moving in. But as we start putting those different elements into a single agreement, it starts impacting the way the revenue recognition across higher agreement is done. And so that's sort of another element that has started to impact exactly how we do revenue recognition.

David Williams, Analyst

Okay. Fantastic. I appreciate the color there. And then I want to ask too on the generative AI and things we talked about with the machine learning and artificial intelligence. But it seems like the hallucinations within the AI's have been really a big issue. And it seems like quantum is an area that could really especially on the mid-optimization side, it really fix a lot of those issues that we're seeing particularly in the hallucinations. Can you talk about what you're seeing in terms of demand trends from customers in developing and working towards an AI or ML solution?

Alan Baratz, CEO

Okay. So let me kind of separate that into two different questions. One is can the work that we are doing in the AI machine learning space help to mitigate hallucination? And while I can't give you definitive proof that the answer to this is yes, I can tell you that what we do in the area of feature selection is to help identify the elements of the data that are most representative of what you're trying to model, of what you're trying to learn and filter out the, if you like, superfluous data. Condensing the dataset in that way makes it much easier and faster to train the model and also gives you higher accuracy relative to what it is that you're actually trying to learn. And so you would think that by removing some of the superfluous data, you might help to mitigate hallucination or some of the hallucinations. But this is just a perspective, not a kind of specific proof or evidence, that's possible. Second, you were kind of interested in understanding how that AI work is progressing. And what I will tell you is that we worked on this problem initially with one customer in the financial services arena, and then following that, we had two more customers that were interested in the same solution. Another one in financial services and one actually in drug development. And so that caused us to define a feature selection offering, which currently is a professional services offering. So you can either buy a generic proof-of-concept where we'll help you to actually develop a proof-of-concept and application of interest to you or if you're specifically interested in feature selection you can buy a services engagement where we will help you specifically with feature selection. And we have a lot of interest in that particular professional services offering. So much, so that we are actually exploring making that a software-as-a-service on our lead cloud service. But I caution you, we're exploring the possibility of doing that. I have nothing specific to report on that.

David Williams, Analyst

Color. Okay, that’s excellent color. Thank you. And maybe lastly just John, can you talk maybe a little about the milestones or the hurdles for the second tranche in the term loan?

John Markovich, CFO

Yes, we'd be happy to, David. So there are three principal deliverables: One is, and by the way, this is all set forth in the agreement that has been filed, we've got to provide the Board with an updated multiyear financial plan. We have to review the findings of our financial advisor and we've had to complete an independent intellectual property valuation of our IP portfolio.

David Williams, Analyst

Okay, great. Do you believe that all of those things are achievable or in place to reach that hurdle?

John Markovich, CFO

Yes, we do.

Operator, Operator

Thank you. Our next question is coming from Harsh Kumar from Piper Sandler. Your line is now live.

Harsh Kumar, Analyst

Yes. Hey, guys. I had a quick question, I noticed that the deal size is up very, very nicely sequentially and then year-over-year even very impressively, I'm just curious if you could tell us what your customers are saying. Obviously, they're putting dollars down and they like what they're seeing. So generally, I was curious about the color that Alan, you might be picking up as you talk to the customers and where can this number go to as you look out?

Alan Baratz, CEO

So relative to where the number can go to as we look to the future, it's hard for me to predict how large the average deal size could become. But a comment that I made previously does provide some kind of insight into why the deal size is growing. And that is as I said, as customers are increasingly recognizing that not only can annealing quantum computing help them to solve their hard computational problems, it's best to work with us to understand how to use the system to solve those problems. And so we're starting to see deals that are not just QCaaS, not just a proof-of-concept, but rather a deal that incorporates QCaaS plus maybe even multiple proofs-of-concepts to try to move more aggressively down the path of understanding more broadly how annealing quantum computing can help them improve their businesses.

Harsh Kumar, Analyst

And I have one for John and I'll get back in line. The falloff in revenues I think you mentioned was accounting complexities associated with the recognition of revenue with professional services. I just want to like ask you again, was that all there was or did you actually see like dollars and revenues peel off in any manner that is fundamental?

John Markovich, CFO

Well, first, Harsh, I wouldn't characterize this as a complexity. So there's a very, very complex set of revenue recognition rules that you may be familiar with called ASC 606. And as we outlined previously, the composition of some of our professional services agreements have a fair number of moving pieces to them. So I think the bookings is best indicative of where we're headed here, because we have increased the bookings in professional services pretty significantly, particularly on a year-over-year basis. So from our perspective, this is principally a timing issue with respect to when we will recognize the PS or professional services portion of those bookings.

Harsh Kumar, Analyst

Understood. Thank you so much.

Operator, Operator

Thank you. Next question today is coming from Richard Shannon from Craig-Hallum. Your line is now live.

Richard Shannon, Analyst

Hi guys. Thanks for taking my questions as well. I might follow quickly on the deal size question from earlier here. I just want to get a sense of whether the timeframe or length of the contracts are still the same here. So deal size per time period is increasing or is there a lengthening of the deal size period as well?

Alan Baratz, CEO

Yes. Oh, sorry, go ahead, John.

John Markovich, CFO

Yes. Richard, we are seeing an increase, a gradual increase in the average term of our deals on a sequential basis as well.

Richard Shannon, Analyst

Thank you for that information. I have a two-part question regarding the guidance for the year related to both sales and EBIT. First, can you describe the level of growth for sales, particularly in terms of linearity? You mentioned there is sequential growth heading into the second quarter. Is this growth expected to accelerate significantly in the latter half of the year? Additionally, I noticed that gross margins are somewhat low, and I'm interested in how revenue recognition dynamics in the services area might affect these margins. How should we anticipate gross margins to perform throughout the year in relation to the EBITDA guidance you've provided?

John Markovich, CFO

Sure. Regarding the revenue growth we discussed earlier, our guidance for the year remains unchanged. We started the year with a solid backlog, and our renewal rates have surpassed 90% along with strong bookings in the first quarter. This gives us confidence in reaching our targets. Additionally, as we mentioned in the last call, there has been a significant increase in the number of inquiries for our services year-over-year. We have also enhanced the size and qualifications of our sales team. All these factors boost our confidence in achieving our targets for the year, and we anticipate a substantial quarterly increase as we progress toward year-end. The expansion of our gross margin will depend on top-line revenue and the service mix we outlined earlier. The QCaaS segment has a higher margin compared to professional services, and with the trend shifting toward more QCaaS, we expect this to positively influence our gross margins.

Richard Shannon, Analyst

Okay. Perfect, guys. Thank you very much. I'll jump on the line.

Operator, Operator

Thank you. Next question is coming from Kevin Garrigan from WestPark Capital. Your line is now live.

Kevin Garrigan, Analyst

Yes, good morning, guys. Thanks for taking my question. Hey, are you guys seeing any companies that you initially started talking to that are still waiting on their sidelines because of either a tough macro environment or quantum is on their priority list?

Alan Baratz, CEO

I would say that our sales cycles can vary. Some deals close within a few months, while others take 12 to 16 months. This has been the case since we began commercial sales just over a year ago. However, I believe the sales cycle is starting to shorten. A year ago, we might still be engaged with a customer trying to close a deal, but now many interactions are inbound. We receive significantly more inbound inquiries, as John noted, and these tend to close faster because the customers have already researched and understand our value. They reach out to us wanting to collaborate, which accelerates the process. Moreover, even when we initiate contact with customers, there appears to be increased awareness of what D-Wave's approach to quantum computing can accomplish. This heightened awareness is partly due to our effective messaging through various channels, including public relations and a technical report from IDC, which, for the first time, recognizes us as a key player in quantum computing. This overall exposure helps to enhance recognition, and as we gain more referenceable customers, it further raises awareness. Regarding the impact of the economic environment on our sales cycle, I haven't observed any significant effects. Customers are not putting discussions on hold or delaying for economic reasons. It is essential for us to continue emphasizing that commercial quantum computing is available now and can benefit businesses today, as we are currently the only company capable of delivering this. Other players in the quantum space are still saying they are not ready for commercial applications and are recommending that companies just experiment or start building a small workforce to grasp the technology. While that may work for others, we believe it's crucial to act now or risk falling behind.

Kevin Garrigan, Analyst

Okay. Yeah. No, that makes a ton of sense. Thank you for that. And then just as a quick reminder of your retention rate for your customers?

John Markovich, CFO

Our renewals on our QCaaS business Kevin have historically been consistently in excess of 90%.

Operator, Operator

Thank you. Next question is coming from Suji Desilva from Roth Capital Partners. Your line is now live.

Suji Desilva, Analyst

Hi, John. Congrats on the progress here. Just real quick on the cash just to clarify with the $15 million that came in after the end of the quarter, so I would take the $9 million and $15 million, $24 million, that’s a rough way of thinking about your current cash runway, is that correct?

John Markovich, CFO

That's correct, Suji. So we closed the first tranche of the $50 million loan commitment, it was funded on the 14th of April.

Suji Desilva, Analyst

Great. Just want to make sure there's no other elements. And then lead generation, I was curious when you had your January, you had a lot of partners presenting there. What percent of your lead generation now is coming direct versus from your channel partners trying to get a sense of how that's working out the channel program?

Alan Baratz, CEO

Yes. I think that we've got some really great channel partners. We've talked about NEC in the Asia Pacific region and now looking to grow with us in Europe. We've got Deloitte as a partner that actually presented at qubit. We've got some regional partners like Sigma-i in Japan or Multiverse in Europe. All that having been said, I would say that still the majority of our business is direct. I'd say that John, I don't know the exact number. The exact percentage maybe you have it, but the vast majority of our business is still direct as we are now kind of working with those partners to kind of help them understand how to be successful in the market and add new channel partners. So it's still early with respect to building out the channel.

Suji Desilva, Analyst

Got it. That's a good opportunity there. And then last question real quick, Alan, you mentioned something about competitors and how you'll be kind of the lowest funded, kind of, business to grow. Can you just walk us through the two or three reasons why you're more efficient from a funding capital perspective versus competitors?

Alan Baratz, CEO

Yes, it was John who made that comment. Let me share some thoughts, and John might want to add to that. It's important to note that our quantum computers are already commercial. We’re not facing years of research and development before we can operate commercially and grow that business. We are commercial now, and the investment made in D-Wave over the past 15 years has enabled us to reach a point where our systems can support business applications in production today, delivering positive returns for our customers. As we plan for the future, we will require less investment in product research and development as we focus on increasing our revenue. This sets us apart from others who will continue to face significant R&D investments for years. I've mentioned before that there is no evidence that a gate model system, which everyone else in the industry is pursuing, can provide commercial value without error correction. The reality is there’s no evidence to support that, despite what others in that field might assert. Error correction is a complex and challenging technology, and we are still years away from achieving it, which will require substantial R&D resources. This perspective highlights our unique ability to drive business growth and profitability.

John Markovich, CFO

No, I think you've captured it, Alan.

Suji Desilva, Analyst

Great. Sorry for the wrong attribution there. Thanks, guys.

Operator, Operator

Thank you. Next question is coming from Quinn Bolton from Needham & Company. Your line is now live.

Quinn Bolton, Analyst

Thank you for taking my question. I wanted to follow up on the relationship between deal size and the number of customers. Deal size has seen a strong increase over the last several quarters, but the number of customers only grew modestly to 65 in the latest 12 months compared to 63 in the previous year. Can you comment on the trends regarding the number of customers generating revenue? Are you limiting the number of customers to ensure adequate support? Do you think there’s a lack of interest in Quantum? I would appreciate any thoughts you have on the number of customers. Thank you.

Alan Baratz, CEO

Yes. Let me address that, and then John might want to add his thoughts. First and foremost, we are very focused on assisting customers in reaching production stages. Our priority is to collaborate with customers to assess their applications, create proofs-of-concept, and ultimately transition those into production. This is crucial as it supports the quantum compute as a service aspect of our business and contributes to building a reliable backlog and consistent revenue growth, given the straightforward nature of revenue recognition in QCaaS, as both John and I have highlighted before. Currently, we are emphasizing this aspect, which includes upselling to our existing customers. I've mentioned this previously, and Mastercard, which presented at our Qubit’s Conference, serves as an excellent example. Steve Flinter from Mastercard discussed customer loyalty rewards optimization, and we are progressing well in that area. He also referenced several other applications. Our current focus is on guiding customers toward production and then upselling to them. The sales team is very dedicated to facilitating this upsell, which is certainly a key factor behind the increase in our customer base.

Quinn Bolton, Analyst

Thanks, Alan for that perspective. John, if I annualize the first quarter EBITDA loss, it seems you're on track for about a $68 million EBITDA loss. Your guidance for the year is $62 million or lower. Is this primarily due to revenue ramping and increasing gross margins that would help reduce the EBITDA loss, or do you anticipate limiting discretionary spending on the expense side as part of your strategy to reach the $62 million target as the year progresses? Thanks.

John Markovich, CFO

We have some one-time costs in the first quarter that will not recur, such as the audit fees, and we also have certain obligations that will decrease throughout the year. On the revenue side, we anticipate that the growth in our gross profit during the year will help mitigate those expenses.

Quinn Bolton, Analyst

Got it. Thank you.

Operator, Operator

Thank you. We reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments.

Alan Baratz, CEO

Okay. Well first of all, thank you all for taking the time to be here with us today. I think the biggest takeaway from today's call is that we're seeing positive momentum and traction with the commercial adoption of our quantum annealing technology as evidenced by a number of commercial customers, sequential quarter-over-quarter growth in bookings and increased size of quantum computer-as-a-service and professional services engagements. Companies are recognizing that they should start exploring and incorporating quantum technology into their compute infrastructures now or be left behind, and they're engaging with D-Wave and our commercial-ready practical quantum computing solutions to get started with their quantum journey today. So with that, again, I thank you all for your time, and we'll look forward to talking with you at the end of next quarter.

Operator, Operator

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.