Xanadu Quantum Technologies Limited (XNDU) Earnings Call Transcript & Summary

Good day, and welcome to Xanadu Quantum Technologies Second Quarter 2026 Earnings Conference Call. My name is Jerico, and I will be your conference moderator for today's call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Brett Harris, Vice President of Investor Relations. Please proceed.

Thank you, and good afternoon, everyone. Welcome to Xanadu's second quarter earnings conference call. Joining me today are Dr. Christian Weedbrook, Founder and Chief Executive Officer; Michael Trzupek, Chief Financial Officer; and Rafal Janik, our Chief Operating Officer. This call is being webcast live and will be made available on Xanadu's Investor Relations website. This call contains time-sensitive information accurate only as of the date of this live webcast on this call, August 5, 2026. This call may include forward-looking statements and information, which are based on current expectations. These statements and information are subject to significant risks and uncertainties, and actual results may differ materially from the conclusions, forecasts and projections in the forward-looking statements and information. Certain material factors and assumptions were applied in drawing the conclusions or making the forecasts and projections reflected in the forward-looking statements and information. These risks, factors and assumptions are discussed in our periodic filings with the SEC and applicable Canadian securities regulators, including our most recent quarterly and annual reports and should be reviewed by anyone considering an investment in our securities. Management disclaims any obligation to update these forward-looking statements and information, except as required by law. Now I'd like to turn the call over to Dr. Christian Weedbrook, Founder and CEO of Xanadu. Christian?

Thank you, Brett, and good afternoon, everyone. At Xanadu, every decision we make is guided by a single mission to build quantum computers that are useful and available to people everywhere. That means building a fault-tolerant quantum computer that can solve real-world problems. It's been an eventful few months with steady progress on the technology, partnership and fundraising fronts. I'll walk you through where things stand on our hardware, our software and our partnerships, and then Michael will take you through the financials. On the hardware side, we made further progress on optical loss. This is one of the most important engineering challenges in photonic quantum computing and a critical driver of system performance on the path of fault tolerance. Specifically, this quarter brought a new milestone ultra-low-loss photonic chip packaging an average edge coupling loss of just 0.085 dB per facet. That's a meaningful step forward in our ability to deliver high efficient, scalable quantum hardware. And that's the product of several things coming together at once. Our internal advanced photonic chip packaging facility, which we brought online last year, a close collaboration with Corning on customized fiber and fiber array solutions, and with DISCO on wafer singulation. Behind that packaging work, we accelerated the pace of fabrication itself. Working inside our foundry partners, we increased fabrication runs on our 2 core material platforms. Thin-film lithium niobate, up roughly 75% and silicon nitride up roughly 50%. Higher tape-out volume means we can iterate faster on the chip designs that feed directly into our qubit factory development and improve fabrication processes more quickly. At the same time, we continue investing in the infrastructure that will accelerate our development. In July, we announced a significant expansion of our U.S. operations, anchored by our growing presence in Albany, New York. Albany has become a real hub for quantum computing and semiconductor research, giving us a strategic base close to key partners and closer collaboration across teams. This is part of a broader U.S. build-out. Our workforce here has grown more than 5-fold since 2023. We expect that head count to grow significantly again by year-end. Albany also gives us direct access to established U.S. semiconductor and photonics supply chains. That's a real advantage of our photonic approach, and we believe it will help accelerate both our R&D and manufacturing timelines. On the software side, we continue finding ways to improve efficiency within the quantum computing stack. Our research team published an algorithmic breakthrough in Quantum Read-Only Memory, or QROM. The common subroutine found across algorithms that lows classical data onto a quantum computer and it's a bottleneck that has not seen meaningful improvement in about 7 years. By replacing iterative qubit swapping with more efficient copy method and cutting unnecessary data unlocking set, our approach cuts to Toffoli gate operations needed by roughly half, making quantum algorithms more efficient today or reducing the resource requirements on the fault-tolerant hardware of tomorrow. This breakthrough is protected by a patent filing as proprietary Xanadu IP, and is available today inside PennyLane. We're also pushing the boundary of quantum machine learning. Our team published new work using Fourier-based methods to train a quantum model for over 1 million parameters. It's large enough to accurately learn the distribution of ribosomal RNA and serves as an example of quantum techniques scaling to problems of real scientific interest. We shipped PennyLane version 0.45 and Catalyst version 0.15, which together makes it easier for our users to assemble full quantum algorithms end-to-end. And the foundational PennyLane white paper surpassed 2,000 citations, cementing a new industry standard. Every new researcher and developer who builds on PennyLane deepens both our commercial and our community moat. As we like to say, the people learning and building on PennyLane today are our partners and customers of 2029 to 2030. With Lockheed Martin, we're building on our existing research relationship with a joint initiative in quantum machine-learning, battling a key bottleneck across the industry, talent. We announced a new effort to scale quantum training through their Quantum Talent Pipeline, giving engineers across the organization access to PennyLane, our educational resources and dedicated workshops from our team. Together, these are building practical quantum skills for aerospace, defense and advanced engineering. It's a case study in how a leading organization can build quantum readiness from within. We also deepened our work with Los Alamos National Laboratory, where we're engaged with their 2026 Summer School in co-supervising student projects. And we've joined the Unitary Foundation as a member, formalizing a long-standing collaborative relationship in support of open source quantum software and PennyLane. On the high-performance computing front, we partnered with Oak Ridge National Laboratory to bring PennyLane to the Frontier exascale supercomputer, one of the most advanced classical computing systems in the world. They added distributed computing support to our Lightning simulator, enabling multi-node quantum simulation across Frontier's AMD-powered hardware. And ran a hands-on workshop for Oak Ridge Leadership Computing Facility community. We continue to strengthen relationships across our partner ecosystem, renewing several long-standing collaborations while expanding our engagement with the financial services industry. We re-signed a multiyear collaboration with Rolls-Royce focused on quantum algorithms for computational fluid dynamics and aerodynamics, 2 problems that sit at the core of their engineering work. And this is a great example of where chronic computing can be transformative because these are exactly the kinds of challenges that are central to modern aerospace design. We're also seeing growing opportunity in the financial sector. Our ongoing research collaboration with the Fidelity Center for Applied Technology, FCAT, has included jointly published work adapting the hidden subgroup problem for practical data analysis. Beyond FCAT, we're in advanced-stage engagements with several major banks and quantum algorithms, and we continue to scout actively across the sector for high-value applications. We're modeling systematic risks, capturing multi-input correlations with quantum methods. With that, let me hand it to Michael to walk through the financials. Thanks, Michael.

Thanks, Christian. I'll cover our financial position, the capital actions we took this quarter and our operating results. Revenue was $1.5 million in the quarter compared to $2.8 million in Q1 2026 and $1.1 million in the prior year quarter. Revenue this quarter was primarily driven by DARPA Stage B. R&D expense was approximately $19.7 million, an increase of $2.4 million from Q1 of 2026. As we said last quarter, we continue to expect R&D spend to increase over time as we add engineering talent and accelerate wafer and chip production, and that remains very much our expectation. The modest sequential increase this quarter reflects an increase in head count and stock-based compensation associated with adding manufacturing and engineering teammates as we scale our R&D capabilities. We expect R&D growth to accelerate into Q3 as we continue to add to our team and increased tape-outs. G&A expense was approximately $11.1 million as compared to $9.8 million in Q1 of 2026. The sequential increase primarily reflected higher head count, stock-based compensation associated with annual grants, the synthetic ATM, Capital Market adviser fees and other public company-related expenses. This quarter, we recognized $2.3 million in nonrecurring fees associated with our SPAC combination and launching our synthetic ATM program. Adjusted EBITDA loss was $21.3 million compared to a loss of $13.9 million in Q1 2026. The increase in loss mainly was driven by increased R&D, G&A and lower grant revenue. CapEx investment increased to approximately $6.4 million in the quarter, primarily reflecting investments in specialized equipment to test, refine and scale our chip manufacturing capabilities. We expect CapEx to increase further in the second half of the year as we continue investing in R&D and manufacturing infrastructure. We ended the quarter with $312.8 million of cash. In May, we entered into a standby equity purchase agreement with Yorkville Advisors, establishing a synthetic ATM equity facility for up to $300 million, which gave us the ability, but not the obligation, to issue Class B subordinate voting shares to Yorkville over a 3-year term, opportunistically based on market conditions and valuation. During the quarter, we raised $67.2 million under the synthetic ATM facility, selling 5.5 million shares at an average net price of $12.28. As we said when we announced this facility, we intend to be disciplined and only draw on it when we believe conditions are favorable to shareholders and net proceeds go directly to Xanadu's balance sheet as primary issuance. With that, I will turn the call over to the operator for questions and answers.

[Operator Instructions] Your first question comes from the line of Tanu Chauhan From Rosenblatt.

This is Tanu. I'm asking on behalf of John. You published results on edge coupling losses, and you spoke about them today, too. Can you talk a little bit about the 16 other components that you were engineering to minimize losses?

Yes, for sure. Thank you for the question. So as you mentioned, 16, 17 major components. One of our biggest challenges is loss reduction. So we look at the major components in reducing them and reducing the loss further. So we can come from an architectural point of view, where we're saying -- well, originally, we needed, say, x amount of beam splitters as one example. We can now do away with half of them, for instance. So that's one way to do it. Another way is the platform or the loss propagation of the actual substrate. So we use 3 different types of substrates. And in terms of the components that you mentioned, they really fill out this sort of end-to-end aspect of the computer. So wherever the laser travels through, that's going to be loss. So there's the aspects of the qubit generation, the sort of gate aspect and the detector side of things. So beam splitters, that's a classic example. Phase shifters is another one. The ring resonators which create a nonlinear light medium, which allows us to create the squeezers, fiber to the chip coupling, the edge coupling you mentioned, and then a variety of different detectors, their detector efficiencies. So there's 16 or 17 of them. They are just a few examples of the components.

Your next question comes from Kingsley Crane from Canaccord Genuity.

Great to speak with you all. I just wanted to check in on Project Optimism? And just if there was any update there on potential to secure that funding or the timing around that? Just any incremental understanding of the milestones there.

Yes. The last bit of information we publicly mentioned is it's in final discussions now. We can't say too much more, but maybe the best way to describe it is final, final discussions now. So stay tuned over the next month or 2, we hope to have more information for you.

Okay. That's really helpful. And then maybe just on the joint QML and workforce training that you're doing with Lockheed Martin. I'm kind of just curious how that came about, how excited you are about the program and then potential to evangelize PennyLane, but also just quantum computing in general?

Yes, absolutely. Lockheed Martin has been a long-time user of PennyLane. So they've been quite excited to actually get involved with us first on the QML side and recently, the workforce training side. Every year, they're looking to convert a number of their -- whether it be AI developers or other research engineers into actually people that are able to develop quantum algorithms, but they're bottlenecked by the number of internal quantum experts that they have. So they're actually leveraging our platform along with our educational resources and PennyLane itself to be able to accelerate that at a quite rapid pace. For us, it's really exciting. We're able to get PennyLane into the hands of many, many more developers, push novel algorithm development with one of our key partners and continue developing our educational resources.

Your next question comes from Nehal Chokshi from Northland Capital Markets.

So going on more on just optical loss reduction. Is 0.085 dB per facet loss sounds like a really good number? But can you give us some context as far as like where was that before? How many facets are there across the system? And really, what I'm trying to get at is understanding how big is this particular factor relative to other success factors that you're also looking to bring down? Is it proportional or is it just proportionally much larger than all the other ones here?

That's a good question. I would say it's one of the major ones, but it's not the only one. As we mentioned, the 16 or 17 of them. Some were already -- so as you know, we need to get to levels below fault-tolerant that allows you to scale up in principle indefinitely. Some of these ones were already at the right amount of 9s in terms of fidelity, which is really impressive by the team. So it's hard to really say how impressive this one was in terms of the overall picture. When you look at the actual fiber-to-chip coupling in this specific example, it's world class. So in and of its own, it's, we believe the lowest loss anywhere in the world. And so it's just another important building block in terms of the overall system. Another thing to mention, which we mentioned previously when we went public, is we'll be having a detailed loss road map and hardware milestone road map coming at the end of summer. So we're still on track for that. And the reason I bring that up, if you remember the earnings, our first earnings call and also our investor deck, when we were public, we had loss reduction broken into 2 major paths. And so to really think of that as a summary of all the 17 elements kind of aggregate into 2 different paths or directions, we had that up to the point of when we went public. And so we hope to have that by the end of the summer, extrapolating out to 2030 plus or minus basically where we need to get to. So stay tuned for that, and that's a much better way to sort of examine the context of how everything fits together.

Okay. I got a follow-up question. R&D engineers, R&D talent is key to achieving the 2030 objective. Has this talent pipeline for R&D engineers changed materially since becoming public?

That's a good question. I think it has in a good way, though. We've made a number of hires that I think the sort of awareness of Xanadu after going public has risen, and we've had a lot more inbound. And just as important, more ability to sort of attract even better talent to complement already the great talent we have. And a lot of the reasons is now the compensation can kind of change, you have the ability to offer RSUs and so forth and ultimate liquidity. So I would say, overall, it's really helped us apart from the capital, the awareness that's led to things like improved hiring, even though we had really great people, we're seeing a larger pool of talent applying to our position. So overall, I'd say, yes, it has changed in a positive way.