Applied Digital and Iris Energy Report Q4 Earnings: Growth Amid Challenges in the Crypto Mining Sector

Earnings call: Applied Digital reports growth amid challenges in Q4 By Investing.com

Applied Digital (ticker: ADI) has announced its fiscal fourth quarter results for the period ending May 31, 2024, navigating through power outages to report significant revenue growth and progress in its strategic initiatives. Despite facing challenges, the company has made strides in developing its cloud services and data center hosting businesses, and is actively working on securing financing and finalizing lease agreements for its high-performance computing (HPC) data center campuses. In summary, while Applied Digital has faced setbacks, it remains focused on its growth initiatives, particularly in the development of its HPC data centers and the expansion of its cloud services. The company is working diligently to secure the necessary financing and finalize strategic lease agreements, which will be crucial in driving future revenue growth and achieving its long-term goals. Operator: Good afternoon, and welcome to Applied Digital's Fiscal Fourth Quarter 2024 Conference Call. My name is Shamali, and I will be your operator today. Before this call Applied Digital issued its financial results for the fiscal fourth quarter ended May 31, 2024 in our press release, a copy of which will be furnished in a report on a Form 8-K, filed with the SEC and will be available in the Investor Relations section of the company's website. Joining us on today's call are Applied Digital's Chairman and CEO, Wes Cummins (NYSE:CMI) and CFO, David Rench. Following their remarks, we will open the call for questions. Before we begin, Matt Glover from Gateway Group will make a brief introductory statement. Mr. Glover, please proceed. Matt Glover: Great. Thank you, Shamali. Good afternoon, everyone, and welcome to Applied Digital's Fourth Quarter 2024 Conference Call. Before management begins their formal remarks, we would like to remind everyone that some statements we are making today may be considered forward-looking under securities laws and involve a number of risks and uncertainties. As a result, we caution you that there are a number of factors, many of which are beyond our control, which could cause actual results to differ materially from those described in the forward-looking statements. For more detailed risks, uncertainties, assumptions relating to our forward-looking filings made with the Securities and Exchange Commission. We disclaim any obligation or any undertaking to update forward-looking statements to reflect circumstances or events that occur after the date except as required by law. We will also discuss non-GAAP financial metrics and encourage you to read our disclosures in the reconciliation tables, the applicable GAAP measures in our earnings release, which can be found on the Investor Relations section of our website carefully as you consider these metrics. We refer you to our filings with the SEC for detailed disclosures and descriptions for our business, as well as uncertainties and other variable circumstances, including, but not limited to risks and uncertainties identified under the caption Risk Factors in our Annual Report on Form 10-K, our quarterly report on Form 10-Q. You may get Applied Digital Securities and Exchange Commission filings for free by visiting the SEC website at www.sec.gov. I would like to remind everyone that this call is being recorded and will be made available for replay via a link available in the Investor Relations section of Applied Digital's website. Now I'd like to turn the call over to Applied Digital's Chairman and CEO, Wes Cummins. Wes? Wes Cummins: Thanks, Matt and good afternoon everyone. Thank you for joining our fiscal fourth quarter 2024 conference call. I want to start by expressing gratitude to our employees for their ongoing hard work and service and supporting our mission of providing purpose-built infrastructure to the rapidly growing high performance computing industry. Before turning the call over to our CFO, David Rench for a detailed review of our financial results, I would like to share some recent developments across our business. During the quarter, we faced several challenges that impacted our financial performance, due to the facility power outages in our data center hosting business. Despite these short-term setbacks, the company has made significant progress with our key growth initiatives, including the development of our cloud services business and the construction of our purpose-built 100 megawatt HPC data center in Ellendale. As previously announced, we executed an LOI with a US-based hyperscaler for 400 megawatts at our Ellendale campus, inclusive of our current 100 megawatt facility and two forthcoming buildings. Now I will provide an update on each of our business units. Let us begin by discussing our data center hosting business. Our 106-megawatt Jamestown facility has consistently met expectations, operating at full capacity with uninterrupted uptime throughout the quarter. This achievement marks the seventh consecutive quarter of full capacity operation for this facility. While we are pleased with Jamestown's performance, we encounter challenges at other facilities. As previously disclosed, our 180-megawatt Ellendale facility in North Dakota experienced a power-outage starting in January, which we determined was caused by transformer failures. By the end of the fourth quarter, we had successfully replaced the transformers and related components with equipment from industry-leading North American manufacturers. As a result of the transformers being replaced, we now have 286 megawatts of data center hosting capacity for our blockchain clients across our two fully contracted locations in North Dakota. Let's move on to our cloud services business which provides high-performance computing power for AI applications. This segment continues to experience growth, as we advance in fulfilling our existing contracts and exploring new opportunities in our pipeline. As of the end of the fourth quarter, we had four clusters online, and we brought another two clusters online in the first quarter of 2025. Lastly, let me provide an update on our HPC data centers. We currently have 400 megawatts of capacity under development across North Dakota. This is in addition to the 7.5 megawatts of IT capacity at our HPC facility in Jamestown which due to its proximity to Ellendale, should allow for a low latency interconnected extended campus in North Dakota. During the quarter, we continued to make significant strides in the construction of our first proprietary 100-megawatt high performance computing facility in Ellendale, North Dakota. This state-of-the-art facility will feature cost effective, highly efficient liquid cooled infrastructure, specifically designed for the most demanding HPC applications. We've made substantial progress in the construction of the 369,000 square foot facility. I encourage you to visit our new website for some recent images of the facility. As previously mentioned, we have entered into exclusivity and executed a letter of intent with a US based hyperscaler for a 400-megawatt capacity lease. We believe the hyperscaler has completed their technical and site due diligence on the location and now -- and are now working to finalize the details of the lease. This will be followed by finalizing the project level financing for this investment-grade tenant. We are focused on finalizing the lease and project financing for Ellendale campus and we have started marketing three additional campuses totaling 1.4 gigawatts. All of these campuses have power available in 2026. In summary, we're encouraged by the positive trends we are witnessing across our business and remain confident in our growth trajectory. We are excited about the numerous potential catalysts on the horizon and are committed to strategically allocating our capital to achieve the highest risk adjusted returns and maximize shareholder value. With that, I will now turn the call over to our CFO, David Rench to walk you through our financials and provide an update on guidance. David? David Rench: Thanks, Wes, and good afternoon, everyone. Let me begin by addressing the complexity of this quarter's financial reporting. We reported an adjusted EBITDA of approximately $4.8 million. However several onetime items significantly impacted our financial performance and comparability to prior quarters. Notably, a large portion of the power was out in our data center hosting facility in Ellendale, North Dakota, which then largely came online right at the end of the quarter. Additionally, we incurred many one-time professional service expenses primarily related to our capital-raising initiatives, financial analysis for data center financing and strategic transactions. We continue to pursue all available remedies to recoup lost revenues and additional costs incurred from the transformer outages. Let us delve into the results of the quarter. Revenues for the fiscal fourth quarter of 2024 were $43.7 million compared to $22 million for the same period in 2023. The increase was primarily driven by expanded capacity across our data center hosting facilities and revenue contributions from the cloud service contracts. Specifically, our data center hosting segment generated $26.9 million in revenue, while our Cloud Services segment contributed $16.8 million. Turning to cost of revenue for the fiscal fourth quarter of 2024, it amounted to $46.3 million, up from $15.9 million in the same quarter of 2023. This increase can be attributed to higher energy costs resulting from the increased number of megawatts used to generate hosting revenues. Additionally, depreciation and amortization expenses, along with personnel costs rose due to the growth of the business as more facilities came online. Selling and general administrative expenses for the fiscal fourth quarter of 2024 were $31.3 million compared to $12.3 million in the prior year's comparable period. The increase was primarily due to start-up costs, as we ramped up the cloud service business. This included higher depreciation, amortization and lease costs on assets not yet supporting revenue, as well as personnel costs to support the overall growth of the business. The net loss for the fiscal fourth quarter of 2024 was $64.8 million or $0.52 per basic and diluted share. This calculation is based on a weighted average share count during the quarter of approximately $124.7 million. In comparison, the net loss for the fiscal fourth quarter of 2023 was $6.5 million or $0.07 per basic and diluted share based on a weighted average share count during the quarter of approximately $94.1 million. Adjusted net loss, a non-GAAP measure for the fiscal fourth quarter of 2024 was $45.3 million, or adjusted net loss per basic and diluted share of $0.36 based on a weighted average share count during the quarter of approximately $124.7 million. This compares to an adjusted net loss of per -- I'm sorry, adjusted net loss of $100,000 or less than $0.01 per basic and diluted share for the fourth quarter of 2023, based on a weighted average share count of approximately $94.1 million during the quarter. Adjusted EBITDA, another non-GAAP measure for the fiscal fourth quarter of 2024 was $4.8 million compared to adjusted EBITDA for the fiscal fourth quarter of 2023, which stood at $3.4 million. The significant difference between our adjusted earnings and our adjusted EBITDA is largely driven by our accelerated depreciation schedule of our GPU hardware. Moving to our balance sheet. We ended the fiscal fourth quarter with $31.7 million in cash, cash equivalents and restricted cash, along with $125.4 million in debt. Subsequent to the fiscal year-end, we secured over $150 million in funding from various finances and the settlement of the Garden City contingency. We continue to explore additional financing for the cloud service business, which will better align the economics of that business with the life of the assets by extending the depreciation from two years to six years of the industry norm. I would like to reiterate that we are focused on project level financing for the Ellendale HPC campus, which we expect to fund shortly after the finalization of a lease agreement with the US-based hyperscaler. Now I'll turn the call over to Wes for closing remarks. Wes Cummins: Thank you, David. We understand the past year has seen challenges as the company has faced a multi-month outage at our Ellendale hosting facility and the financial burden of funding $1 billion data center while funding our cloud business. Nevertheless, we've made substantial progress towards securing greater than a decade long lease agreement with a Fortune 50 company for our Ellendale campus. Finalizing this lease will solidify our position as a leader in the HPC data center market and have a cascading effect on our ability to secure asset-level financing and to develop additional sites. Throughout this process, we've diligently worked to secure project level debt for our facility with multiple interested-parties. Upon execution of the lease with the hyperscaler, we anticipate our financing partner, SemGroup will release additional capital to support ongoing construction while we continue to work toward project level finance. In summary, despite significant challenges this quarter, largely due to external factors, we remain fully committed to delivering strong long-term shareholder value. Our vision is to become a development platform capable of building and operating multiple HPC data centers. This starts with our Ellendale campus and continues with three additional campuses we are actively marketing today totaling 1.4 gigawatts. To support this vision, we have added several industry veterans to our team, and we are already working on the design of our next two buildings, which will provide 300 megawatts of capacity. We are incredibly proud of the progress made this quarter and look forward to providing further updates as we move into fiscal 2025. Looking ahead, we believe Q4 marked the bottom for our revenues and anticipate sequential improvements in the top-line as we enter the first quarter. We now welcome your questions. Operator? Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Lucas Pipes with B. Riley Securities. Please proceed with your question. Lucas Pipes: Thank you very much operator. Good afternoon everyone. Wes, to you my first question is on the Ellendale HPC campus. And I wondered if you could speak to the percentage completion on the first 100 megawatts and the remaining capital requirements from here? Thank you very much. Wes Cummins: Sure, Lucas. So we have a little over $200 million into the facility as it stands today. The building, I'm sure you've seen some of the video footage is fully enclosed, we are progressing with MEP at this point, and then we'll do the final fit-out later this year -- early next year. And we go back to -- so this facility will be roughly $1 billion -- a little over $1 billion for the first 100 megawatts, which is on par with standard Tier 3 data center capacity. And so with the $200 million in, I think I've talked about this in the past. We are working with banks that typically provide project-level finance in this space. We have term sheets and we've actually selected a bank that we are moving forward with. And the expectation is that they will fund the remainder in the -- we've seen 80% to 90% loan-to-cost quotations from this, we just need to get past the lease finalization and the project level finance process is already running at this point. So we'd hope to close that shortly thereafter. Lucas Pipes: Thank you very much for the detail. Wes, did I hear it right that you said kind of fit out early next year? And would that include completion? Or how would you frame that up in terms of that timeline? Thank you. Wes Cummins: So Lucas, there is a couple of different timelines that we work through here as we've gone through the process. There is our build timeline, and then there's when our customer wants the facility ready for service. That is not completely locked in at this point. But our schedule from the build perspective is what we've talked about in the past being ready late this year or early next year. Lucas Pipes: Thank you very much for this. And change in topics really quickly. On the cloud services business, can you speak to the ramp in your fiscal first quarter, how many clusters did you have online? And how would you kind of frame up the revenue opportunity Q1 -- fiscal Q1 here versus just this fiscal Q4 period that you just reported? Thank you. Wes Cummins: Sure, Lucas. So where we are there, as we said in the prepared remarks, we're six clusters online in Q1, and it won't be for the full Q1, but those came online I believe, in June, so it will be for the majority of it. So with the six clusters up, that business is roughly $110 million revenue run rate on an annual basis. And right now, I've talked about on previous calls that our team is very focused on the enterprise market. We started with the AI labs and the AI start-ups, we are very focused on the enterprise market at this point. We have been working on it for seven or eight months now. And we've probably seen recently, we've hired a new CRO that came from IBM (NYSE:IBM) that's very focused on that market. And so we see the demand there, and we will continue to ramp that. The other piece of the puzzle here is we have been working on financing that we are putting in place that it finances this deployment, this equipment in a way that makes it run through our income statement more fairly versus what it does today. So we don't want to keep adding a lot with the capital lease structure that we currently have just because of -- you see what it does to the financials because we are forced to do the depreciation over two years versus the industry standard of five or six. So those two pieces are coming together, and then -- but we do still see a significant amount of demand, but really growing demand from the enterprise side of the market. Operator: Thank you. Our next question comes from the line of Rob Brown with Lake Street Capital. Please proceed. Rob Brown: Good afternoon. Just following up cloud -- on the AI cloud business, I think the six clusters, what's sort of the range of clusters, do you think you can grow that business into? And how do you think about that versus the data center business in terms of capital investments. Wes Cummins: On both of these businesses, Rob, we think about these businesses in the same way. These are asset heavy businesses, capital intensive businesses. We need to have the right mechanisms in place to do asset level financing for both of them. And so we've talked about that on the data center side. We are almost there. We talked about it pretty extensively on the GPU side. I think we're almost there as well. And so when we have the correct asset level financing mechanisms in place, I think we will be able to grow significantly on both sides of that business. On the AI cloud portion of the business with the data center capacity that we have in place today and what's available to us as we go through 2025, we can generate significant growth in that business, and we see the demand for it, but we need to get the right capital base in that business to grow it aggressively. Right now, we are kind of feeding both of them, and we need to move that financing down to an asset level from a company level. Rob Brown: Okay. Great. Thank you. And then on your hyperscaler contract, I assume the -- just in terms of the timeline, the long lead items there are the due diligence, I assume in the site and the technical due diligence, but sort of what percentage of completion are you at in terms of getting the contract through its process? Wes Cummins: It's hard to handicap that, but I would say we're north of 90% of the way there. Rob Brown: Okay, great. Thank you, I will turn it over. Operator: Thank you. Our next question comes from the line of Darren Aftahi with ROTH Capital Partners, LLC. Please proceed with your question. Darren Aftahi: Thanks. Just following up on the lease. I guess from a big picture perspective, like how much of this is small details being ironed out versus a larger framework, and I guess my other question in regards to the lease is just how much is a backlog in the law firm that actually doing this [holding] (ph) on this process. Thanks. Wes Cummins: That's a good question, Darren. So as far as the details, there's large items, and then there's very small items and sometimes the small items can take as long as the large items there. But there is an extensive process around fiber connectivity, power, firm power, redundancy on power that took a significant amount of time to complete, but there is a lot of small details. So I would say it is a split between those, and it's funny, sometimes some of the smaller details take longer. But the question on the - it is hard to get a view on the law firm, but there is only a few that deal with most of these contracts. And so there definitely is a backlog out there, but I can't handicap or just talk about how much slowdown is due to that. This is our first time through. So this is the only environment we've experienced. Darren Aftahi: Got it. And just one more on your pipeline of other campuses. I guess one, where are you in the marketing process? And then two, what's your propensity to diversify your customer base with those other campuses versus, say, if the existing US hyperscaler that you have the LOI will have more interest in capacity if they wanted to take that down, just if you kind of compare and contrast those thoughts. Thanks. Wes Cummins: Sure. So we've just recently kicked that process off, there is, people we send out tearsheets and binders for these sites. And we have a more refined process, I would say, at this point than we did for the Ellendale campus, but we're still pretty focused on hyperscalers for these sites. We're focusing on sites that are at least 200-plus megawatts of critical IT capacity. So that is going to equate to depending on what part of the country you are in, somewhere between 250 to 300 megawatts of utility power. So those are the types of sites and customers that we are focused on. There is other customers in the market, but we have a pretty narrow focus of how we go to market with these new sites. Darren Aftahi: Great. Thank you. Operator: Thank you. Our next question comes from the line of Mike Grondahl with Northland Securities. Please proceed with your questions. Mike Grondahl: Hi, thanks guys. Wes, could you repeat what you said, the six clusters are driving an annualized run rate of how much revenue? I heard $100 million, but it kind of came through a little garbled. Wes Cummins: Yes, it's about $100 million to $110 million, Mike. Mike Grondahl: Okay. $100 million to $110 million. And I think what you were saying is, hey, there is a lot of demand for that business, but you are kind of going to stay at about six clusters until you get a better financing structure in place, and then you would expect to see more growth. Is that a fair summary? Wes Cummins: Yes. That's a good summary is we are working on a better financing structure because you see -- I mean you can look at kind of where our adjusted EBITDA is versus where our earnings are, and that's driven largely by the accelerated depreciation schedule on those GPUs. And so we need to have the type of financing one that is at the right cost for us. And then two, allows us to depreciate these over the useful life rather than during the financing period, if that makes sense. Mike Grondahl: Sure, sure. And in the press release, you kind of referred to this development platform on the HPC side with the potential to go from 400 megawatts to 1.4 gigawatts, do you think that first hyperscaler customer is interested in more than the existing 400 you're talking to them about? Could you end up being a one-stop shop for them, for another big project or two? Wes Cummins: I definitely think we could, but there is other demand in the market as well from similar type customers. There is a significant amount of demand for this capacity, especially near-term power. So '25 power -- 2025 power is done unless we have that for Ellendale. Now we're focused on 2026 power and then 2027 power. But I think near-term power is key, and you need to have the right type of power. Again, one of the reasons when we talked about selling our Texas facility, we don't believe that facility works for HPC, at least not the way we want to develop it. So you need the right type of power. So we're really focused on near-term power. And Mike, just to clarify, the 1.4 gigawatts is just the additional three sites. It doesn't include Ellendale. So that's what we are focused on, the market there. But I think the potential current customer as well as others like them, there's a significant amount of demand for near-term power in the market. Mike Grondahl: Got it. Great, hi thanks a lot. Operator: Thank you. Our next question come from the line of George Sutton with Craig-Hallum. Please proceed with your question. George Sutton: Thank you. Wes, nothing on the call has surprised me except for one statement. You mentioned it's not clear when the customer might want to go live with the lease. Can you just clarify that statement? My assumption has been we want to get this up and running as fast as humanly possible, and that's why you're building out as rapidly as you are. Wes Cummins: Yes. So that's correct, George, a correct way to look at it. But there is different stages for this as far as when you're doing fit-out, what we are adding in for the fit-out. So there's a lot of moving parts there. I mean it is fairly buttoned down, but we'll save the details of that for when this is finished, and we can share that publicly. George Sutton: Okay. And relative to the GPU financing structure, our understanding knowing that market pretty well is it's gotten a lot better. It's gotten a lot more financeable, can you just talk about the level of interest you've had from folks in putting a structure together there, kind of where does that stand? Wes Cummins: Yes. So we started this process a while ago, and you are correct in that just the interest level has grown and the cost of capital has come down. It really, George depends on the kind of the off-taker here -- just like on the data center side. So the financing pricing depends a lot on the off-taker. And so your highest costs are going to be AI labs and start-ups and then enterprise is going to be significantly lower. And then if you were doing the deployment with a hyperscaler, it is going to go even lower from there. But we are seeing a significant amount of new entrants into that market, and we've seen a lot of interest, and I think we'll have -- be successful in putting that structure in place for ourselves. George Sutton: So just to clarify on that, the finance years are saying we are happy to put them together. We want to see the customer names. And once you provide a high-quality enough name, we would want to fund this. Is that chicken-and-egg to some extent. Wes Cummins: It kind of is, George, what you should think of is a facility that gets put in place, and it is a drawdown facility as you buy equipment and you do show customer contracts. And typically, the kind of the structures that we see in this is you'll be feel -- form like a bankruptcy remote SPV and then the loans go into that, the GPUs go into that and the customer contracts go into that, and in some cases, the colocation contracts go into that as well. And so it's kind of a self-contained financing solution. George Sutton: Got it. Okay, thank you. Operator: Thank you. Our next question comes from the line of John Todaro with Needham & Company. Please proceed with your question. John Todaro: Hi, Wes, thanks for taking my questions. Two for you. First, just trying to due diligence as much as possible, kind of the timeline for that lease agreement. So you had mentioned they finalized their technical requirements, is that kind of you think about the first stage and how many stages would you say there are? Or is it really now just kind of down to some final details. And then second question, you had mentioned the Garden City site that you didn't think it was suitable for HPC. Obviously, a lot of the Bitcoin miners out there are kind of trying to go down that West Texas route. It hasn't been done yet. Just curious why did you think that, that site and maybe that region, would it really be possible for HPC. Wes Cummins: So Hi John. On the -- I would not say, I mean, it's all kind of -- when you say is that the first step of the process on the lease side, all kind of goes together. But I would say we are finalizing the last details of that is the way I would characterize it. And then on what we've learned through this process and what we had seen previously but especially through this process is the -- I don't think, for us for our company, everyone else has their own strategy. But I don't think for us, having a large flexible load in the ERCOT market is going to be suitable for the kind of customers that we are pursuing in that business. I don't know what changes will happen, but I know there are changes in the legislature that have been proposed in the legislature in the state of Texas that will make even harder with the large flexible load structure to serve, again the type of customers we're looking at serving. So right now, we are not pursuing anything in the state of Texas at the moment. That could change in the future. But there's firm power, power redundancy and not just redundancy of what you build on the site, like UPS or backup gen, redundancy in having multiple power lines or feeds and from different directions into the substation or switching station that you're drawing power from. There is a lot of pieces that we've learned going through this process, and that's the type of sites that we have locked up and are locking up in marketing, but there's -- I'm not that bullish on just specifically the large flexible load in the state of Texas. John Todaro: That's helpful, Wes. I appreciate that. Thank you. Operator: And our next question comes from the line of Kevin Dede with H.C. Wainwright. Please proceed with your question. Kevin Dede: Thanks, hi Wes. I was wondering if you could take a little time just to characterize the overall environment. Understand you're targeting 1.4 gigawatts. What's the competitive environment like? And how are you confident that Applied wins versus your competitors. Wes Cummins: Sure. So there is two parts to that. So from the environment, as I mentioned earlier, we see very strong demand for near-term power. So we're very focused on power that can come online through the end of '27. So power is the Number #1 bottleneck at the moment. And then when you step back to what I believe is the Number #2 bottleneck, it's supply chain. And there are a lot of stretched components in the supply chain. I'm happy to walk through those, but that's the second part. So we have a significant amount of experience in the supply chain. A lot of the things we -- for the first data center build we had ordered last year, we bought our places in line for switchgear transformers, a lot of the key components that are needed to build these. So those are the two pieces. And I think we're in a great position from both of those kind of competitive dynamics. I think the biggest thing for us is getting through this first lease that will be something that validates what we're doing as a company in North Dakota and our ability to go and find these sites, develop them and bring them online for very large companies and demanding companies. And so there is a lot of competition in the market. We see the majority of our competition being private data center companies that have been building for hyperscalers for years already, decade even. So those are the ones that we see as the majority of the competition in the market. And there's a handful of those platforms out there that are building hundreds of megawatts or in some cases, over a gigawatt of power out for hyperscalers. So this is not necessarily a new market. It's just a new style of data center. Kevin Dede: Well, as you go up to bid for a site and you see these other private companies that have been doing this a little bit longer than Applied has, why would you win that contract? Why should we believe that you're going to have a foot up in that competition? Wes Cummins: So I think it is important to understand that the companies that we have historically -- that have historically been in this market and the way kind of data center the industry has been historically is when a company wants to build new capacity, they typically look for the region they want to be in. So let's say, I'm sitting in Dallas. Let's say they want to be in Dallas. And so there is a couple of different tools that you can license for locating data center space in the DFW area. And those tools really focus on the fiber maps. And so what it will do is basically match the type of fiber connectivity you need and then available real estate on the map, and then you'll find a location, purchase that location and then you'll make a request to the utility for power. And so what's happened in the market now is companies are still doing that, but those power requests goes in a queue and in a lot of the most popular markets that is stretching out 5-plus and in some cases, over 10 years before you are going to get that power, especially at the amounts of power that are needed for these new style facilities. And so that's the big gating item. Now us on the other hand, we go about it kind of the inverse way. We find power availability and then we make sure that -- that powers the type of power that can be used for our type of development. So what I've mentioned before on redundancy. And then we make sure that the fiber connectivity is there. And now we've refined that even further to include kind of latencies to different locations. And then we can go and either start developing that site like we did in Ellendale or marketing some of our other locations. So I think we are unique in one of the few companies that goes about it that way and is this far along, if you look back at our history, we started down this path in 2022. And so we have a few years of experience doing this, and now our knowledge level has went up dramatically in the last six months inside the company about how to go about this. So I think just the availability of power and the right kind of power at the right type of sites with the right type of fiber connectivity or what really gives us an advantage. Kevin Dede: Would you think it's also fair to say that you are looking under rocks and perhaps more rural locations with less concern on latency. Wes Cummins: So we are for sure, that's what I was mentioning earlier about how traditional data center companies go about it, and we go about it in a very different way. We've definitely tightened the bands on what we know about kind of the latency requirements. So we are not necessarily going to be looking at really far from locations, but we have a lot more knowledge base around the type of latency requirements in North America that we will need to meet for the site. So it is helped us with our site selection even more. Kevin Dede: Can you talk a little bit about the -- where Applied stands now on the cloud AI biz. How many sites do you have, and what's active? And what do you think once you are financing your structured financing in place, how you'll be able to access those this fiscal year? Wes Cummins: Yes. So we have a lot of the same locations, right? We have Minnesota. We have our site in Jamestown, we have colos capacity in Denver and Salt Lake City. Those are the primary large ones. We have a smaller one in Las Vegas. So we have that capacity. There's open capacity, which is, I think a very big asset in the market. It is extremely difficult to find and ready for deployment. We have demand that's coming through on the enterprise side, and there still is strong demand in that market. When we get the right type of financing in place, we'll be able to reaccelerate the growth of that business. Kevin Dede: So all told, can you give us a rough ballpark on the megawatts that you have access to? Wes Cummins: We have megawatt capacity secured of just over -- for deployment just over 30 megawatts. Then Kevin, that's ready now. That's not for in the future. Kevin Dede: Yes, that was the nature of my question. I appreciate the color Wes. I appreciate the color. Thank you very much. Operator: Thank you very much. Thank you. And we have reached the end of the question-and-answer session. Therefore, I'll turn the call back over to Wes Cummins for closing remarks. Wes Cummins: Thanks, operator. Thanks, everyone, for joining the call and look forward to speaking to you next quarter. Operator: And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.

Applied Digital Corporation (APLD) Q4 2024 Earnings Call Transcript

Applied Digital Corporation (NASDAQ:APLD) Q4 2024 Earnings Conference Call August 28, 2024 5:00 PM ET Company Participants Matt Glover - IR, Gateway Group, Inc Wes Cummins - Chief Executive Officer David Rench - Chief Financial Officer Conference Call Participants Lucas Pipes - B. Riley Rob Brown - Lake Street Darren Aftahi - ROTH Mike Grondahl - Northland Securities George Sutton - Craig-Hallum John Todaro - Needham & Company Kevin Dede - H.C. Wainwright Operator Good afternoon, and welcome to Applied Digital's Fiscal Fourth Quarter 2024 Conference Call. My name is Shamali, and I will be your operator today. Before this call Applied Digital issued its financial results for the fiscal fourth quarter ended May 31, 2024 in our press release, a copy of which will be furnished in a report on a Form 8-K, filed with the SEC and will be available in the Investor Relations section of the company's website. Joining us on today's call are Applied Digital's Chairman and CEO, Wes Cummins and CFO, David Rench. Following their remarks, we will open the call for questions. Before we begin, Matt Glover from Gateway Group will make a brief introductory statement. Mr. Glover, please proceed. Matt Glover Great. Thank you, Shamali. Good afternoon, everyone, and welcome to Applied Digital's Fourth Quarter 2024 Conference Call. Before management begins their formal remarks, we would like to remind everyone that some statements we are making today may be considered forward-looking under securities laws and involve a number of risks and uncertainties. As a result, we caution you that there are a number of factors, many of which are beyond our control, which could cause actual results to differ materially from those described in the forward-looking statements. For more detailed risks, uncertainties, assumptions relating to our forward-looking filings made with the Securities and Exchange Commission. We disclaim any obligation or any undertaking to update forward-looking statements to reflect circumstances or events that occur after the date except as required by law. We will also discuss non-GAAP financial metrics and encourage you to read our disclosures in the reconciliation tables, the applicable GAAP measures in our earnings release, which can be found on the Investor Relations section of our website carefully as you consider these metrics. We refer you to our filings with the SEC for detailed disclosures and descriptions for our business, as well as uncertainties and other variable circumstances, including, but not limited to risks and uncertainties identified under the caption Risk Factors in our Annual Report on Form 10-K, our quarterly report on Form 10-Q. You may get Applied Digital Securities and Exchange Commission filings for free by visiting the SEC website at www.sec.gov. I would like to remind everyone that this call is being recorded and will be made available for replay via a link available in the Investor Relations section of Applied Digital's website. Now I'd like to turn the call over to Applied Digital's Chairman and CEO, Wes Cummins. Wes? Wes Cummins Thanks, Matt and good afternoon everyone. Thank you for joining our fiscal fourth quarter 2024 conference call. I want to start by expressing gratitude to our employees for their ongoing hard work and service and supporting our mission of providing purpose-built infrastructure to the rapidly growing high performance computing industry. Before turning the call over to our CFO, David Rench for a detailed review of our financial results, I would like to share some recent developments across our business. During the quarter, we faced several challenges that impacted our financial performance, due to the facility power outages in our data center hosting business. Despite these short-term setbacks, the company has made significant progress with our key growth initiatives, including the development of our cloud services business and the construction of our purpose-built 100 megawatt HPC data center in Ellendale. As previously announced, we executed an LOI with a US-based hyperscaler for 400 megawatts at our Ellendale campus, inclusive of our current 100 megawatt facility and two forthcoming buildings. Now I will provide an update on each of our business units. Let us begin by discussing our data center hosting business. Our 106-megawatt Jamestown facility has consistently met expectations, operating at full capacity with uninterrupted uptime throughout the quarter. This achievement marks the seventh consecutive quarter of full capacity operation for this facility. While we are pleased with Jamestown's performance, we encounter challenges at other facilities. As previously disclosed, our 180-megawatt Ellendale facility in North Dakota experienced a power-outage starting in January, which we determined was caused by transformer failures. By the end of the fourth quarter, we had successfully replaced the transformers and related components with equipment from industry-leading North American manufacturers. As a result of the transformers being replaced, we now have 286 megawatts of data center hosting capacity for our blockchain clients across our two fully contracted locations in North Dakota. Let's move on to our cloud services business which provides high-performance computing power for AI applications. This segment continues to experience growth, as we advance in fulfilling our existing contracts and exploring new opportunities in our pipeline. As of the end of the fourth quarter, we had four clusters online, and we brought another two clusters online in the first quarter of 2025. Lastly, let me provide an update on our HPC data centers. We currently have 400 megawatts of capacity under development across North Dakota. This is in addition to the 7.5 megawatts of IT capacity at our HPC facility in Jamestown which due to its proximity to Ellendale, should allow for a low latency interconnected extended campus in North Dakota. During the quarter, we continued to make significant strides in the construction of our first proprietary 100-megawatt high performance computing facility in Ellendale, North Dakota. This state-of-the-art facility will feature cost effective, highly efficient liquid cooled infrastructure, specifically designed for the most demanding HPC applications. We've made substantial progress in the construction of the 369,000 square foot facility. I encourage you to visit our new website for some recent images of the facility. As previously mentioned, we have entered into exclusivity and executed a letter of intent with a US based hyperscaler for a 400-megawatt capacity lease. We believe the hyperscaler has completed their technical and site due diligence on the location and now -- and are now working to finalize the details of the lease. This will be followed by finalizing the project level financing for this investment-grade tenant. We are focused on finalizing the lease and project financing for Ellendale campus and we have started marketing three additional campuses totaling 1.4 gigawatts. All of these campuses have power available in 2026. In summary, we're encouraged by the positive trends we are witnessing across our business and remain confident in our growth trajectory. We are excited about the numerous potential catalysts on the horizon and are committed to strategically allocating our capital to achieve the highest risk adjusted returns and maximize shareholder value. With that, I will now turn the call over to our CFO, David Rench to walk you through our financials and provide an update on guidance. David? David Rench Thanks, Wes, and good afternoon, everyone. Let me begin by addressing the complexity of this quarter's financial reporting. We reported an adjusted EBITDA of approximately $4.8 million. However several onetime items significantly impacted our financial performance and comparability to prior quarters. Notably, a large portion of the power was out in our data center hosting facility in Ellendale, North Dakota, which then largely came online right at the end of the quarter. Additionally, we incurred many one-time professional service expenses primarily related to our capital-raising initiatives, financial analysis for data center financing and strategic transactions. We continue to pursue all available remedies to recoup lost revenues and additional costs incurred from the transformer outages. Let us delve into the results of the quarter. Revenues for the fiscal fourth quarter of 2024 were $43.7 million compared to $22 million for the same period in 2023. The increase was primarily driven by expanded capacity across our data center hosting facilities and revenue contributions from the cloud service contracts. Specifically, our data center hosting segment generated $26.9 million in revenue, while our Cloud Services segment contributed $16.8 million. Turning to cost of revenue for the fiscal fourth quarter of 2024, it amounted to $46.3 million, up from $15.9 million in the same quarter of 2023. This increase can be attributed to higher energy costs resulting from the increased number of megawatts used to generate hosting revenues. Additionally, depreciation and amortization expenses, along with personnel costs rose due to the growth of the business as more facilities came online. Selling and general administrative expenses for the fiscal fourth quarter of 2024 were $31.3 million compared to $12.3 million in the prior year's comparable period. The increase was primarily due to start-up costs, as we ramped up the cloud service business. This included higher depreciation, amortization and lease costs on assets not yet supporting revenue, as well as personnel costs to support the overall growth of the business. The net loss for the fiscal fourth quarter of 2024 was $64.8 million or $0.52 per basic and diluted share. This calculation is based on a weighted average share count during the quarter of approximately $124.7 million. In comparison, the net loss for the fiscal fourth quarter of 2023 was $6.5 million or $0.07 per basic and diluted share based on a weighted average share count during the quarter of approximately $94.1 million. Adjusted net loss, a non-GAAP measure for the fiscal fourth quarter of 2024 was $45.3 million, or adjusted net loss per basic and diluted share of $0.36 based on a weighted average share count during the quarter of approximately $124.7 million. This compares to an adjusted net loss of per -- I'm sorry, adjusted net loss of $100,000 or less than $0.01 per basic and diluted share for the fourth quarter of 2023, based on a weighted average share count of approximately $94.1 million during the quarter. Adjusted EBITDA, another non-GAAP measure for the fiscal fourth quarter of 2024 was $4.8 million compared to adjusted EBITDA for the fiscal fourth quarter of 2023, which stood at $3.4 million. The significant difference between our adjusted earnings and our adjusted EBITDA is largely driven by our accelerated depreciation schedule of our GPU hardware. Moving to our balance sheet. We ended the fiscal fourth quarter with $31.7 million in cash, cash equivalents and restricted cash, along with $125.4 million in debt. Subsequent to the fiscal year-end, we secured over $150 million in funding from various finances and the settlement of the Garden City contingency. We continue to explore additional financing for the cloud service business, which will better align the economics of that business with the life of the assets by extending the depreciation from two years to six years of the industry norm. I would like to reiterate that we are focused on project level financing for the Ellendale HPC campus, which we expect to fund shortly after the finalization of a lease agreement with the US-based hyperscaler. Now I'll turn the call over to Wes for closing remarks. Wes Cummins Thank you, David. We understand the past year has seen challenges as the company has faced a multi-month outage at our Ellendale hosting facility and the financial burden of funding $1 billion data center while funding our cloud business. Nevertheless, we've made substantial progress towards securing greater than a decade long lease agreement with a Fortune 50 company for our Ellendale campus. Finalizing this lease will solidify our position as a leader in the HPC data center market and have a cascading effect on our ability to secure asset-level financing and to develop additional sites. Throughout this process, we've diligently worked to secure project level debt for our facility with multiple interested-parties. Upon execution of the lease with the hyperscaler, we anticipate our financing partner, SemGroup will release additional capital to support ongoing construction while we continue to work toward project level finance. In summary, despite significant challenges this quarter, largely due to external factors, we remain fully committed to delivering strong long-term shareholder value. Our vision is to become a development platform capable of building and operating multiple HPC data centers. This starts with our Ellendale campus and continues with three additional campuses we are actively marketing today totaling 1.4 gigawatts. To support this vision, we have added several industry veterans to our team, and we are already working on the design of our next two buildings, which will provide 300 megawatts of capacity. We are incredibly proud of the progress made this quarter and look forward to providing further updates as we move into fiscal 2025. Looking ahead, we believe Q4 marked the bottom for our revenues and anticipate sequential improvements in the top-line as we enter the first quarter. We now welcome your questions. Operator? Question-and-Answer Session Operator Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Lucas Pipes with B. Riley Securities. Please proceed with your question. Lucas Pipes Thank you very much operator. Good afternoon everyone. Wes, to you my first question is on the Ellendale HPC campus. And I wondered if you could speak to the percentage completion on the first 100 megawatts and the remaining capital requirements from here? Thank you very much. Wes Cummins Sure, Lucas. So we have a little over $200 million into the facility as it stands today. The building, I'm sure you've seen some of the video footage is fully enclosed, we are progressing with MEP at this point, and then we'll do the final fit-out later this year -- early next year. And we go back to -- so this facility will be roughly $1 billion -- a little over $1 billion for the first 100 megawatts, which is on par with standard Tier 3 data center capacity. And so with the $200 million in, I think I've talked about this in the past. We are working with banks that typically provide project-level finance in this space. We have term sheets and we've actually selected a bank that we are moving forward with. And the expectation is that they will fund the remainder in the -- we've seen 80% to 90% loan-to-cost quotations from this, we just need to get past the lease finalization and the project level finance process is already running at this point. So we'd hope to close that shortly thereafter. Lucas Pipes Thank you very much for the detail. Wes, did I hear it right that you said kind of fit out early next year? And would that include completion? Or how would you frame that up in terms of that timeline? Thank you. Wes Cummins So Lucas, there is a couple of different timelines that we work through here as we've gone through the process. There is our build timeline, and then there's when our customer wants the facility ready for service. That is not completely locked in at this point. But our schedule from the build perspective is what we've talked about in the past being ready late this year or early next year. Lucas Pipes Thank you very much for this. And change in topics really quickly. On the cloud services business, can you speak to the ramp in your fiscal first quarter, how many clusters did you have online? And how would you kind of frame up the revenue opportunity Q1 -- fiscal Q1 here versus just this fiscal Q4 period that you just reported? Thank you. Wes Cummins Sure, Lucas. So where we are there, as we said in the prepared remarks, we're six clusters online in Q1, and it won't be for the full Q1, but those came online I believe, in June, so it will be for the majority of it. So with the six clusters up, that business is roughly $110 million revenue run rate on an annual basis. And right now, I've talked about on previous calls that our team is very focused on the enterprise market. We started with the AI labs and the AI start-ups, we are very focused on the enterprise market at this point. We have been working on it for seven or eight months now. And we've probably seen recently, we've hired a new CRO that came from IBM that's very focused on that market. And so we see the demand there, and we will continue to ramp that. The other piece of the puzzle here is we have been working on financing that we are putting in place that it finances this deployment, this equipment in a way that makes it run through our income statement more fairly versus what it does today. So we don't want to keep adding a lot with the capital lease structure that we currently have just because of -- you see what it does to the financials because we are forced to do the depreciation over two years versus the industry standard of five or six. So those two pieces are coming together, and then -- but we do still see a significant amount of demand, but really growing demand from the enterprise side of the market. Lucas Pipes Wes, I appreciate your details, you and team best of luck. Wes Cummins Thanks Lucas. Operator Thank you. Our next question comes from the line of Rob Brown with Lake Street Capital. Please proceed. Rob Brown Good afternoon. Just following up cloud -- on the AI cloud business, I think the six clusters, what's sort of the range of clusters, do you think you can grow that business into? And how do you think about that versus the data center business in terms of capital investments. Wes Cummins On both of these businesses, Rob, we think about these businesses in the same way. These are asset heavy businesses, capital intensive businesses. We need to have the right mechanisms in place to do asset level financing for both of them. And so we've talked about that on the data center side. We are almost there. We talked about it pretty extensively on the GPU side. I think we're almost there as well. And so when we have the correct asset level financing mechanisms in place, I think we will be able to grow significantly on both sides of that business. On the AI cloud portion of the business with the data center capacity that we have in place today and what's available to us as we go through 2025, we can generate significant growth in that business, and we see the demand for it, but we need to get the right capital base in that business to grow it aggressively. Right now, we are kind of feeding both of them, and we need to move that financing down to an asset level from a company level. Rob Brown Okay. Great. Thank you. And then on your hyperscaler contract, I assume the -- just in terms of the timeline, the long lead items there are the due diligence, I assume in the site and the technical due diligence, but sort of what percentage of completion are you at in terms of getting the contract through its process? Wes Cummins It's hard to handicap that, but I would say we're north of 90% of the way there. Rob Brown Okay, great. Thank you, I will turn it over. Operator Thank you. Our next question comes from the line of Darren Aftahi with ROTH Capital Partners, LLC. Please proceed with your question. Darren Aftahi Thanks. Just following up on the lease. I guess from a big picture perspective, like how much of this is small details being ironed out versus a larger framework, and I guess my other question in regards to the lease is just how much is a backlog in the law firm that actually doing this [holding] (ph) on this process. Thanks. Wes Cummins That's a good question, Darren. So as far as the details, there's large items, and then there's very small items and sometimes the small items can take as long as the large items there. But there is an extensive process around fiber connectivity, power, firm power, redundancy on power that took a significant amount of time to complete, but there is a lot of small details. So I would say it is a split between those, and it's funny, sometimes some of the smaller details take longer. But the question on the - it is hard to get a view on the law firm, but there is only a few that deal with most of these contracts. And so there definitely is a backlog out there, but I can't handicap or just talk about how much slowdown is due to that. This is our first time through. So this is the only environment we've experienced. Darren Aftahi Got it. And just one more on your pipeline of other campuses. I guess one, where are you in the marketing process? And then two, what's your propensity to diversify your customer base with those other campuses versus, say, if the existing US hyperscaler that you have the LOI will have more interest in capacity if they wanted to take that down, just if you kind of compare and contrast those thoughts. Thanks. Wes Cummins Sure. So we've just recently kicked that process off, there is, people we send out tearsheets and binders for these sites. And we have a more refined process, I would say, at this point than we did for the Ellendale campus, but we're still pretty focused on hyperscalers for these sites. We're focusing on sites that are at least 200-plus megawatts of critical IT capacity. So that is going to equate to depending on what part of the country you are in, somewhere between 250 to 300 megawatts of utility power. So those are the types of sites and customers that we are focused on. There is other customers in the market, but we have a pretty narrow focus of how we go to market with these new sites. Darren Aftahi Great. Thank you. Operator Thank you. Our next question comes from the line of Mike Grondahl with Northland Securities. Please proceed with your questions. Mike Grondahl Hi, thanks guys. Wes, could you repeat what you said, the six clusters are driving an annualized run rate of how much revenue? I heard $100 million, but it kind of came through a little garbled. Wes Cummins Yes, it's about $100 million to $110 million, Mike. Mike Grondahl Okay. $100 million to $110 million. And I think what you were saying is, hey, there is a lot of demand for that business, but you are kind of going to stay at about six clusters until you get a better financing structure in place, and then you would expect to see more growth. Is that a fair summary? Wes Cummins Yes. That's a good summary is we are working on a better financing structure because you see -- I mean you can look at kind of where our adjusted EBITDA is versus where our earnings are, and that's driven largely by the accelerated depreciation schedule on those GPUs. And so we need to have the type of financing one that is at the right cost for us. And then two, allows us to depreciate these over the useful life rather than during the financing period, if that makes sense. Mike Grondahl Sure, sure. And in the press release, you kind of referred to this development platform on the HPC side with the potential to go from 400 megawatts to 1.4 gigawatts, do you think that first hyperscaler customer is interested in more than the existing 400 you're talking to them about? Could you end up being a one-stop shop for them, for another big project or two? Wes Cummins I definitely think we could, but there is other demand in the market as well from similar type customers. There is a significant amount of demand for this capacity, especially near-term power. So '25 power -- 2025 power is done unless we have that for Ellendale. Now we're focused on 2026 power and then 2027 power. But I think near-term power is key, and you need to have the right type of power. Again, one of the reasons when we talked about selling our Texas facility, we don't believe that facility works for HPC, at least not the way we want to develop it. So you need the right type of power. So we're really focused on near-term power. And Mike, just to clarify, the 1.4 gigawatts is just the additional three sites. It doesn't include Ellendale. So that's what we are focused on, the market there. But I think the potential current customer as well as others like them, there's a significant amount of demand for near-term power in the market. Mike Grondahl Got it. Great, hi thanks a lot. Operator Thank you. Our next question come from the line of George Sutton with Craig-Hallum. Please proceed with your question. George Sutton Thank you. Wes, nothing on the call has surprised me except for one statement. You mentioned it's not clear when the customer might want to go live with the lease. Can you just clarify that statement? My assumption has been we want to get this up and running as fast as humanly possible, and that's why you're building out as rapidly as you are. Wes Cummins Yes. So that's correct, George, a correct way to look at it. But there is different stages for this as far as when you're doing fit-out, what we are adding in for the fit-out. So there's a lot of moving parts there. I mean it is fairly buttoned down, but we'll save the details of that for when this is finished, and we can share that publicly. George Sutton Okay. And relative to the GPU financing structure, our understanding knowing that market pretty well is it's gotten a lot better. It's gotten a lot more financeable, can you just talk about the level of interest you've had from folks in putting a structure together there, kind of where does that stand? Wes Cummins Yes. So we started this process a while ago, and you are correct in that just the interest level has grown and the cost of capital has come down. It really, George depends on the kind of the off-taker here -- just like on the data center side. So the financing pricing depends a lot on the off-taker. And so your highest costs are going to be AI labs and start-ups and then enterprise is going to be significantly lower. And then if you were doing the deployment with a hyperscaler, it is going to go even lower from there. But we are seeing a significant amount of new entrants into that market, and we've seen a lot of interest, and I think we'll have -- be successful in putting that structure in place for ourselves. George Sutton So just to clarify on that, the finance years are saying we are happy to put them together. We want to see the customer names. And once you provide a high-quality enough name, we would want to fund this. Is that chicken-and-egg to some extent. Wes Cummins It kind of is, George, what you should think of is a facility that gets put in place, and it is a drawdown facility as you buy equipment and you do show customer contracts. And typically, the kind of the structures that we see in this is you'll be feel -- form like a bankruptcy remote SPV and then the loans go into that, the GPUs go into that and the customer contracts go into that, and in some cases, the colocation contracts go into that as well. And so it's kind of a self-contained financing solution. George Sutton Got it. Okay, thank you. Operator Thank you. Our next question comes from the line of John Todaro with Needham & Company. Please proceed with your question. John Todaro Hi, Wes, thanks for taking my questions. Two for you. First, just trying to due diligence as much as possible, kind of the timeline for that lease agreement. So you had mentioned they finalized their technical requirements, is that kind of you think about the first stage and how many stages would you say there are? Or is it really now just kind of down to some final details. And then second question, you had mentioned the Garden City site that you didn't think it was suitable for HPC. Obviously, a lot of the Bitcoin miners out there are kind of trying to go down that West Texas route. It hasn't been done yet. Just curious why did you think that, that site and maybe that region, would it really be possible for HPC. Wes Cummins So Hi John. On the -- I would not say, I mean, it's all kind of -- when you say is that the first step of the process on the lease side, all kind of goes together. But I would say we are finalizing the last details of that is the way I would characterize it. And then on what we've learned through this process and what we had seen previously but especially through this process is the -- I don't think, for us for our company, everyone else has their own strategy. But I don't think for us, having a large flexible load in the ERCOT market is going to be suitable for the kind of customers that we are pursuing in that business. I don't know what changes will happen, but I know there are changes in the legislature that have been proposed in the legislature in the state of Texas that will make even harder with the large flexible load structure to serve, again the type of customers we're looking at serving. So right now, we are not pursuing anything in the state of Texas at the moment. That could change in the future. But there's firm power, power redundancy and not just redundancy of what you build on the site, like UPS or backup gen, redundancy in having multiple power lines or feeds and from different directions into the substation or switching station that you're drawing power from. There is a lot of pieces that we've learned going through this process, and that's the type of sites that we have locked up and are locking up in marketing, but there's -- I'm not that bullish on just specifically the large flexible load in the state of Texas. John Todaro That's helpful, Wes. I appreciate that. Thank you. Operator And our next question comes from the line of Kevin Dede with H.C. Wainwright. Please proceed with your question. Kevin Dede Thanks, hi Wes. I was wondering if you could take a little time just to characterize the overall environment. Understand you're targeting 1.4 gigawatts. What's the competitive environment like? And how are you confident that Applied wins versus your competitors. Wes Cummins Sure. So there is two parts to that. So from the environment, as I mentioned earlier, we see very strong demand for near-term power. So we're very focused on power that can come online through the end of '27. So power is the Number #1 bottleneck at the moment. And then when you step back to what I believe is the Number #2 bottleneck, it's supply chain. And there are a lot of stretched components in the supply chain. I'm happy to walk through those, but that's the second part. So we have a significant amount of experience in the supply chain. A lot of the things we -- for the first data center build we had ordered last year, we bought our places in line for switchgear transformers, a lot of the key components that are needed to build these. So those are the two pieces. And I think we're in a great position from both of those kind of competitive dynamics. I think the biggest thing for us is getting through this first lease that will be something that validates what we're doing as a company in North Dakota and our ability to go and find these sites, develop them and bring them online for very large companies and demanding companies. And so there is a lot of competition in the market. We see the majority of our competition being private data center companies that have been building for hyperscalers for years already, decade even. So those are the ones that we see as the majority of the competition in the market. And there's a handful of those platforms out there that are building hundreds of megawatts or in some cases, over a gigawatt of power out for hyperscalers. So this is not necessarily a new market. It's just a new style of data center. Kevin Dede Well, as you go up to bid for a site and you see these other private companies that have been doing this a little bit longer than Applied has, why would you win that contract? Why should we believe that you're going to have a foot up in that competition? Wes Cummins So I think it is important to understand that the companies that we have historically -- that have historically been in this market and the way kind of data center the industry has been historically is when a company wants to build new capacity, they typically look for the region they want to be in. So let's say, I'm sitting in Dallas. Let's say they want to be in Dallas. And so there is a couple of different tools that you can license for locating data center space in the DFW area. And those tools really focus on the fiber maps. And so what it will do is basically match the type of fiber connectivity you need and then available real estate on the map, and then you'll find a location, purchase that location and then you'll make a request to the utility for power. And so what's happened in the market now is companies are still doing that, but those power requests goes in a queue and in a lot of the most popular markets that is stretching out 5-plus and in some cases, over 10 years before you are going to get that power, especially at the amounts of power that are needed for these new style facilities. And so that's the big gating item. Now us on the other hand, we go about it kind of the inverse way. We find power availability and then we make sure that -- that powers the type of power that can be used for our type of development. So what I've mentioned before on redundancy. And then we make sure that the fiber connectivity is there. And now we've refined that even further to include kind of latencies to different locations. And then we can go and either start developing that site like we did in Ellendale or marketing some of our other locations. So I think we are unique in one of the few companies that goes about it that way and is this far along, if you look back at our history, we started down this path in 2022. And so we have a few years of experience doing this, and now our knowledge level has went up dramatically in the last six months inside the company about how to go about this. So I think just the availability of power and the right kind of power at the right type of sites with the right type of fiber connectivity or what really gives us an advantage. Kevin Dede Would you think it's also fair to say that you are looking under rocks and perhaps more rural locations with less concern on latency. Wes Cummins So we are for sure, that's what I was mentioning earlier about how traditional data center companies go about it, and we go about it in a very different way. We've definitely tightened the bands on what we know about kind of the latency requirements. So we are not necessarily going to be looking at really far from locations, but we have a lot more knowledge base around the type of latency requirements in North America that we will need to meet for the site. So it is helped us with our site selection even more. Kevin Dede Can you talk a little bit about the -- where Applied stands now on the cloud AI biz. How many sites do you have, and what's active? And what do you think once you are financing your structured financing in place, how you'll be able to access those this fiscal year? Wes Cummins Yes. So we have a lot of the same locations, right? We have Minnesota. We have our site in Jamestown, we have colos capacity in Denver and Salt Lake City. Those are the primary large ones. We have a smaller one in Las Vegas. So we have that capacity. There's open capacity, which is, I think a very big asset in the market. It is extremely difficult to find and ready for deployment. We have demand that's coming through on the enterprise side, and there still is strong demand in that market. When we get the right type of financing in place, we'll be able to reaccelerate the growth of that business. Kevin Dede So all told, can you give us a rough ballpark on the megawatts that you have access to? Wes Cummins We have megawatt capacity secured of just over -- for deployment just over 30 megawatts. Then Kevin, that's ready now. That's not for in the future. Kevin Dede Yes, that was the nature of my question. I appreciate the color Wes. I appreciate the color. Thank you very much. Operator Thank you very much. Thank you. And we have reached the end of the question-and-answer session. Therefore, I'll turn the call back over to Wes Cummins for closing remarks. Wes Cummins Thanks, operator. Thanks, everyone, for joining the call and look forward to speaking to you next quarter. Operator And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.

Iris Energy Limited (IREN) Q4 2024 Earnings Call Transcript

Lincoln Tan - Director of Investor Relations Daniel Roberts - Co-Founder and Co-Chief Executive Officer Belinda Nucifora - Chief Financial Officer Good day and welcome to IREN's Fiscal Year 2024 Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker Mr. Lincoln Tan, Director of Investor Relations. Please go ahead. Lincoln Tan Good afternoon to all of our North American participants and good morning to those joining us from Australia. Welcome to IREN's FY'24 Results Conference Call. I'm Lincoln Tan, Director of Investor Relations and I'm joined today by Daniel Roberts, Co-Founder and Co-CEO; and Belinda Nucifora, CFO. Please note that certain statements that we make during this call may constitute forward-looking statements. These statements are based on certain assumptions and risk factors that could cause actual results to differ materially from our expectations. Listeners should not place undue reliance on forward-looking information or statements. For further details, please refer to the disclaimer on Slide 2 of the accompanying presentation. Thank you for joining us. Thank you, Lincoln. Welcome everyone and good afternoon. So moving through the presentation, obviously, this is our full-year results. We have a year end of 30 June, so very pleased to report on what's been an exciting 12 months for IREN and its shareholders and, obviously, an exciting outlook over the coming months and years. So jumping straight into it, disclaimer, please all read it, very important. And then into a quick overview of where we are as a business right here, right now. So we're pleased to announce that we have increased our installed capacity Bitcoin mining to 15 exahash. So the last reported update was 10.5. And we reiterate our original unchanged guidance that we will hit 20 exahash by the end of next month and 30 exahash by the end of this year. So in about three and a half months' time, three months' time, time's flying. So that's exciting. We're on track and the team's doing an absolutely tremendous job. On the AI cloud service front, we continue to build good, strong momentum there, month-on-month revenue growth. Our fleet continues to be fully utilized and the pipeline looks promising to further expand that business. And we'll get into that in a little bit more detail. In terms of our data centers that are underpinning this growth. We're up to 300 megawatts now of energized, commissioned and now operating data centers. And that's from a target of 510 megawatts by the end of December. Again unchanged. Reiterating that guidance, we continue on the trajectory of where we said we would be. So all very good, all very positive, and again, huge effort from the team, but everything proceeding according to the original plan. And then, finally, a quick overview of our current power and land portfolio. As most of you would be aware, we have 2,310 megawatts of secure grid-connected capacity and the land to go with that. In addition, we've got over a gigawatt of additional development sites around the world, which we continue to progress with even more vigor over the last few months, given the scarcity around power and land and the demand for that, to underpin not only our own growth ambitions, but also potentially to leverage into, I guess, others growth, which we'll get onto shortly. So, jumping ahead to expand a little bit more on the Bitcoin mining side of the business. So again, a little bit of a recap of where we've been. It was only the beginning of last year, we were operating with 1.7 exahash. Doesn't sound super impressive today, given the numbers that we're talking, but it is good to reflect and for us, for me, for Will to congratulate the internal team on the tremendous amount of growth and execution that they've achieved in that relatively short time period. So to hit 15 exahash today and to continue on a trajectory to double that again over the coming three months is super exciting. We're also pleased to announce that we have purchased an additional 10 exahash of latest generation Bitmain miners, the S21 XPs. Their efficiency is 13.5 joules per terrahash and that will drop our overall fleet efficiency based on the 30 exahash to 15 joules per terrahash. So again, very positive, positions us very well as a low-cost miner, particularly combined with some updates on our power strategy, which I'll come to in Texas in a minute. So, again, just reiterating, we have retained the current 20 exahash of miner options, which are exercisable in 2025, which provides us a pathway to expand to 50 exahash next year. So again, 30 exahash by the end of December and 50 exahash next year. So these miners, they require data centers and real-world construction. And again, the team continues to perform extremely well on that front. You can see the growth since our IPO, in 2021, obviously, it was a challenging period early on IPOing in November 2021 and where the markets went shortly thereafter. But as the markets have recovered, we've been able to capitalize on a lot of the work that we've done in the investment in land planning, grid connections, et cetera to really build some strong cadence and momentum into the end of this year and beyond. The team has done a fantastic job in continually trying to challenge how we procure items, how we build, how do we design, and that's resulting in us achieving significant efficiencies. The first efficiency is we're now building 25 megawatt data centers rather than 20 megawatt data centers and we're now targeting two of those every month. So 50 megawatts of additional data center capacity every month is what we're targeting internally and that's driving significantly rapid expansion, as we're seeing illustrated in these charts. In addition, the other efficiency we're seeing is cost savings, which is always very welcome. So, previously, many of you would recall, we've been guiding towards $750,000 per megawatt. As a result of all these optimizations that we're running, we're happy to report that we're now running at around $650,000 per megawatt. So again, the guys have reviewed all elements of the building design to optimize for both speed and cost without compromising quality. We've worked closely and continuing to deepen our relationships with the supplier network and reduce those lead times, reduced bottlenecks, and again, improving speed and flexibility through construction through internally developed and IP designs around miner racking, filter banks, et cetera. So, again, we're continuing to challenge how we do things. We're not sitting here complacent. We want to continue to get better and we're going to continue to try and do faster and better than what we're doing today. So that underpins a significant growth pathway. But if you haven't got the power and land, then it's very difficult to grow, which is a great segue onto my next slide. We have single site expansion at Childress, which we continue to build into. As you can see on the left-hand side, it's been a fantastic trajectory to-date. On the top left, that is a picture, an image from August last year. A lot of empty space there. And if you scroll down to the bottom left-hand side, you can see considerable amount of construction and data center progress. If we look at the image on the right, it shows you a larger perspective of our overall landholding in Childress available for us to expand into. So, based on the current 750 megawatts available at Childress, you can see the little green area that we're utilizing for our 350 megawatts, which is being built and commissioned over the next four months, into the end of December and then we have a rough guide as to where the next 400 megawatts will be located. At the moment, the initial plan says for that to be continued to be built for Bitcoin mining as the primary use case. But equally there's more opportunities arising on the AI side, potential colocation, potential cloud, which I'll come to shortly. So an update on our pricing and power strategy for Childress. So as many of you are aware, in July, our power costs were high. It was a result of a hedge contract that we had in place. And historically, we have had to hedge, we have had no choice. And a lot of that is down to retailers being very nervous, historically, around allowing Bitcoin miners to take spot power. The risk with that for them and for the miner is that their curtailment systems fail and do not work when power prices are high. So, for example, ERCOT can be very volatile. We can see $5,000 per megawatt hour pricing. If you are operating during that then you're accruing a considerable liability. So the history of miners in this sector has resulted in retailers being very nervous about that. The good thing about July is it brought it to ahead. It allowed us to have those conversations on a very assertive basis and point to the demonstrated track record of our curtailment systems, the scale of who we are now, and our ability to curtail automatically multiple levels of failsafe, and successfully negotiate a contract that allows us to take direct spot pricing from the market from August the 1st. So very exciting for us. It's been something in our pipeline ever since we launched at Childress. But finally, now, off the back of the events in July, off of the back of our demonstrated track record in systems, we've been able to successfully negotiate that. So the benefit of spot pricing is it allows us to optimize our power costs in real time and simply avoid the high-price time periods without incurring the costs and risks associated with entering into near-term hedges. So there's one-off cost of around $7 million to close out the existing hedges. So that is done. That will be booked as a one-off cost in the accounts. And for August month to-date at the time of this presentation, our power price has been 3.1 cents all in at Childress, which equates roughly to about $23,000 per bitcoin in terms of cost per bitcoin mined. So on the right-hand side, you can see our power prices, the average monthly cost since inception. On the left-hand side, that bar chart shows the 4.3 cents, which is our average historically actually. So that encompasses all the hedging costs. On the right-hand side, the 3.5 cents is illustrative of what power price we would have achieved if there was no hedge. So, simply, if all we did was operate on the same profile, with the same curtailment, and took spot market power, 3.5 cents would have been the resultant price. So it's a material cost saving going forward. It gives us material flexibility to adjust to market conditions going forward. At the moment, we're able to set our parameters dynamically around where we want to trade power. So if Bitcoin mining profitability increases, we're able to increase that threshold to divert more of our electrons into the Bitcoin network. If, on the other hand, Bitcoin mining profitability falls, we're able to sell more power back into the ERCOT market, because at that point, it's going to be more profitable to do so. So the profit maximization opportunity is only enhanced through this change in our contracting structure. So, very positive development, something we're excited about, particularly as we now start to hit real scale at Childress and get momentum, building a significant amount of additional capacity there over the coming months. So onto a quick update around our AI Cloud Service. So we continue to service multiple customers with our 816 NVIDIA H100s. As you can see on the right-hand side, it's been a really good experience year-to-date since we launched in February. Month-on-month revenue growth, month-on-month growth in the number of customers that we are serving, which is equally as important. The opportunity to get exposure to more players in the industry, more companies doing different applications, approaching their systems, their operations in different ways has been fantastic opportunity for us and the team to service them and continue to build our profile through the industry. We're now launching our GPU pilot at Childress in the second half of this year, which is really exciting, the opportunity to see the flexibility across different jurisdictions, different climates. So we look forward to reporting back on the results of how that goes. Poolside, recently extended their contract again, that's now expected to roll off at the end of August. They're looking to consolidate their cluster or clusters into a more larger cluster and the pathway they're going down is for strategic reasons. Confidentiality, we're not able to say too much more, and they haven't told us too much more, but it has been clear that they remain very positive, on IREN, they look forward to continuing the dialogue as their growth continues. And most importantly, they continue to be one of our best salespeople in the market. So the number of testimonials, the number of direct customer referrals that they are providing to us is really helping us continuing to grow that business. So, again, it's a testament to the internal team, the systems, the product that we've launched, the ability to look after every customer that comes through our clusters and drive that market awareness, word of mouth, to ensure that we're recognized as a good operator in this space. Our pipeline remains strong. So at the end of the August, we look forward to redeploying our capacity that will be freed up from Poolside. There's a number of active conversations going on there. We would expect that capacity to be redeployed in relatively swift order, but it may take a little bit of time. Following that, we will continue to assess the opportunity to grow that fleet, but we're very mindful of the capital intensity of growing out our GPU fleet. They are expensive and that's not to say that we won't, but equally, we're now very focused on things like customer credit-worthiness, the amount of prepayments, the tenor of contracts. We've proven the concept. We've grown the business from a standing start six months ago. And now really it's about optimizing the capital allocation to this business and we look forward to growing it sustainably and prudently into the future. Power and land. So a quick update and a recap perhaps to start on what we have when it comes to power and land. We've got 510 megawatts of operating data centers that will be built and online by the end of December this year. That is part of a 2.3 gigawatt overall portfolio of secured grid-connected power. Again grid-connected being very important. You're directly connected into these large-scale transmission lines and get access to wholesale markets. We're not behind the meter. We're not reliant on counterparties. We have our destiny in our own hands. We're connected into public infrastructure and have access to wholesale markets. Very important in terms of risk management. In addition, we continue to develop our 1 gigawatt global development pipeline. We're progressing connection agreements, land options, design, planning and approval for a variety of sites around the world. We look forward to providing further updates on these in due course. But this power and land really underwrites our ability to continue that hyper growth profile that we outlined earlier and the growth that we've experienced over the last 18 months to continue building, to continue to deliver shareholder value. A quick update on other opportunities to monetize this portfolio. So last month, July, we announced that we had appointed Morgan Stanley to evaluate AI data center opportunities for our 1.4 gigawatt West Texas site. That process continues to play out. We're signing NDAs. We're providing information and data room access to interested parties, so that's exciting. It's a process that will take some time. But equally, the traction that we're getting early on, the early conversations, the engagement looks promising, that there will be robust conversations around opportunities for that site. Where it ends up, I don't know, but it's exciting to go through the process. And the fact that we're engaged with some of the largest companies in the world, active in this space is optimistic for the asset base that we've built and the opportunity set that lies ahead. In addition, these conversations, in conjunction with existing relationships that we have are also opening up additional conversations around our existing sites in Canada in Childress, where a range of structures have been discussed with potential partners around AI cloud services, around colocation and a variety of other options. And again, to recap, the attractiveness of these existing sites is they have grid-connected power right now. We have the ability to retrofit additional generation and batteries. We have the ability to retrofit liquid cooling if that's required and suitable for customer clusters. And finally, the latency. We've got sub 10 milliseconds from our Texas sites into major hubs. There are 1,000 milliseconds in a second. We've got 10 milliseconds. So latency is great. It should support a vast variety of applications and really not be a constraining factor. In Canada, 20 milliseconds, still more than sufficient for the majority of the applications that we're seeing. So we look forward to providing further updates on all this in due course and to some Q&A at the end. But in the meantime, I'll pass over to Belinda to give us an update on the numbers. Thanks, Belinda. Belinda Nucifora Thank you, Dan and good morning to those in Sydney and good afternoon to those in North America. Thank you for joining us for our full-year earnings update and I'm pleased to report for the year ended 30 June, 2024, the adjusted EBITDA is $54.7 million, being a significant year-on-year increase of $53.3 million and the highest recorded EBITDA for the company. With Bitcoin mining revenue increasing from $75 million to $184 million as the average operating hash rate increase from 5.6 exahash to 9.4 exahash, resulting in 4,191 Bitcoin mined and an average realized price of 44k being an 89% increase in price year-on-year. During the financial year, as Dan mentioned, we commenced our AI Cloud Services business and we recorded revenue in relation to that business of $3.1 million. Average net electricity costs per Bitcoin mined increased from 11k to 18.1k, primarily due to the increase in global hash rate and the impact of the halving event in April 2024. Our other costs increased from $38 million to $56 million. These include employee benefit expenses of $22 million, site expenses of $8.7 million and these include the procurement of RECs which is consistent with our commitment to utilising 100% renewable energy. We had insurance costs of $7 million, professional fees of $6 million and we also had our provision for Canadian non-refundable sales tax of 6.3 which is an ongoing CRA audit. The increase in the OpEx reflects a larger business today than FY'23, including the expansion of our Childress site and the commencement of the AI Cloud Service businesses as we recruit resources to support that growth which has delivered significant growth during the financial year and we project that growth to continue over coming years. We also have increased costs in relation to expanded risk compliance and reporting obligations which come with being a listed NASDAQ company. Depreciation increased from $30.9 million to $51 million due to commissioning of assets at Childress as well as accelerated depreciation for the S19 J Pro miners scheduled to be sold in quarter one of FY'25 due to our recent fleet upgrade. So I might now turn to our cash flows for the year. We had very strong cash flows with a net increase of $336 million which resulted in a closing cash position of $404.6 million. That increase in net cash came from primarily operating activities resulting in net cash of $53 million and included $184 million of receipts from our daily liquidation of our Bitcoin mined. These positive operating cash flows highlight the quality of our underlining operations and are reinvested to support our ongoing expansion plans. Increase in net cash used in investing activities was $499 million and is due to the expansion of the Childress data center as well as our purchase of the Bitcoin, sorry, the Bitmain S21 Pro and T21 miners as part of our pathway to 30 exahash in 2024 and 40 exahash beyond as well as our purchase of the NVIDIA H100 GPUs of 816. Our increase in cash from financing activities was $782 million with the sale of 108.1 million shares sold under the ATM and 12.9 million of shares sold under the ELOC facility. So might move on to now our balance sheet and as mentioned in our cash flows, we have a very strong closing cash at 30 June of $404.6 million. We continue to have no external debt, so no debt facilities, and we have strong operating cash flows as discussed on the previous slide. Our total equity increased to $1 billion with gross proceeds of $823 million from the sale of 121 million shares sold under the ATM and the ELOC. This excludes 463,000 shares settled in early July, which raised a further $5.2 million of cash proceeds. Effective today, we have a remaining 223 million on our ATM facility. We have a strong balance sheet with total assets of $1.2 billion, which provides flexibility to fund our future growth. So that's a highlight of the key earnings highlights for the FY'24 year against FY'23. I think now we're going to turn to Q&A. Thank you. [Operator Instructions] One moment while we compile the Q&A roster. Our first question comes from the line of Joseph Vafi with Canaccord Genuity. Your line is open. Joseph Vafi Hey, everyone. Good morning. Thanks for all the updates here, very thorough. Just maybe we'll start off, Dan, you did a New York analyst update for us all a few weeks ago. Anything kind of material since then or incremental to add in, I guess, in both strategies. And what's your latest thoughts here on attractiveness in Bitcoin mining versus perhaps putting more CapEx into the hosting side shorter term? And I have a follow-up. Daniel Roberts Yeah, hi, Joe. A few short weeks ago in New York, it was a really good event and appreciate you and 100 others in the room taking the time. Look, things continue to evolve like every day, every week. Will and I are learning more of the team and continue to iterate our thinking. It doesn't result in materially different decisions, but at the margins it does start to refine your thinking. What I will say about Bitcoin mining is we are in control. We're the masters of our own destiny. With 2.3 gigawatts of power, we can plan to build a lot of Bitcoin mining capacity over the coming few years. So that's a fantastic position to be in, particularly when we can do that accretively, particularly when capital markets are rewarding for that growth. So that's really exciting because it's something that we can control and plan for. On the AI side, so the non-Bitcoin applications, frankly, the challenge there is you're dealing with partners, you're dealing with counterparties, and that takes more time, there's more complexity, there's more nuance. The Cloud Service is essentially a commodity in the sense that you're selling GPU hours online. So we provide a VPN, people log in, they use the GPUs for their own purpose. And the contracting structure is relatively simple. When it comes to larger-scale deals, whether it's on the AI cloud or colocation or perhaps leasing a site perhaps selling a site if we got the right price, obviously, you're dealing with a different scale and a different set of complexities involving counterparties. So when we talk to partners or prospective partners, I should say, around potentially building them out, data center facilities for them to host their own GPUs in, there's a whole variety of considerations around what those data centers need to look like. The technical specs, things around backup generation, things around chillers, things around how the rack density looks and the internal network in the software. So there's a lot to it, and it means that in a few weeks, there's not a material update on that, because these things take time. But the best thing for us that gives us so much excitement about this business is we are the masters of our own destiny, where Bitcoin can continue to underwrite significant growth in this business. And this was the plan six years ago when we set the business up. Bitcoin bootstraps the business. We build multifunctional data centers and then we can leverage into other applications. Once we have the opportunity to sign the right type of contract to grow the business in the right way on non-Bitcoin application, absolutely we're going to do it. But equally, it's not like we sit here feeling pressure to do a deal that's suboptimal, we're able to really control and throttle both sides of the business in a way that makes sense. Joseph Vafi Sure. Thanks for that color, Dan. And then you've got a pretty big portfolio now, but you're still kind of in site acquisition mode with a big pipeline. Just kind of maybe kind of, again, talk about your thought process of further site acquisition, given how large your portfolio is now and CapEx for more site acquisition versus CapEx for site build-out? Thanks a lot guys. Daniel Roberts Yeah, absolutely. I mean, things change so quickly, and this is part of the original thesis, the scarcity that we see come in over the next 5, 10, 20 years for power and land as the world continues to be digitized. And, look, it was probably only six months that we had analysts very skeptical of our ability to ever build out 600 megawatts at Childress. But the world changes really quickly, and it comes back to the original thesis six years ago when Will and I set up this business which is the dislocation between the digital world and the real world. The real world cannot and will not keep up because the digital world moves in these exponential functions. You've got adoption curves that go vertical, this insatiable demand, the things that pop up in relative terms overnight, Bitcoin, AI, we don't know what's next. But the point is those demand drivers are exponential, whereas the ability to service that in the real world, it's hard and it takes a long time and it takes longer and harder, the bigger that digital world gets because the low-hanging fruit gets taken early, and then it gets harder and harder and the order of magnitude grows to get more power, more land, navigate supply chains, build stuff in the real world. And that's the vision for the business originally and that's the thesis that's playing out. So we're not going to stop. Absolutely not. I want gigawatts more of power because I fundamentally believe in 10 years, the scarcity dynamic that we're seeing in the market now is nothing compared to what's probably going to come. And we talk about CapEx. It doesn't really involve CapEx like you sign in land options for $20,000 here, $30,000 there. Yes, we've got a big team internally that costs us a little bit of overheads to go and do that, but most of it is time, relatively small amounts of money, and building up this incredible optionality on a future that we still fundamentally believe in. Joseph Vafi Great. A lot to look forward to. Thanks a lot for those comments, Dan. Thank you. One moment for our next question. And that will come from the line of Lucas Pipes with B. Riley Securities. Your line is open. Nick Giles Thank you very much, operator. This is Nick Giles on for Lucas. You've made some key hires related to HPC here recently and so I was wondering if you could expand on what these teams are focused on today. Should we see this as a read through for more substantial GPU purchases in the near-term? Thank you very much. Daniel Roberts Potentially, if we get the right structure, I mean, my appetite to go and dilute shareholders and take on debt, to spend hundreds of millions of dollars on spec to build out an AI Cloud Service business is frankly quite low. The market should speak to that and we should be able to negotiate contracts that in our minds have the right risk return. If we never do another contract because the risk-return doesn't make sense then I'm cool with that as well. We're not going to pursue it just for the sake of pursuing it. But as we prove out our credentials, we prove out our operating performance data and we provide those metrics to customers and we have an increasing amount of current and past customers providing those referrals, those testimonials, I'm optimistic that we're in a really good position to grow that business. So it's something we're really optimistic on, but equally, I'm not going to sit here and just grow for the sake of growing. The investment in people and platform within our business is really important. And we've always said we need to invest ahead of the curve. You don't grow a business by focusing on every dollar of your expense line when you're growing in a hyper growth manner. I mean, we're 10x in our Bitcoin mining capacity from 18 months, 20 months ago, right. We've grown an AI Cloud Service business that was zero six months ago that's now doing annualized revenue of $15 million, servicing half a dozen customers, and the ability to continue investing in people systems processes. Given the optionality in the business that we've created with all that power and land, the data center design and the existing team, it's a really valuable investment for us. And it covers a whole span of different capabilities from network engineering to AI sales, to general commercial, investment banking funds, management backgrounds helping us negotiate prospective structures and large-scale transactions all the way through to people that have had development experience with batteries, wind, solar. As I said in response to Joe's question, we're not stopping. We're going to continue pursuing this hyper growth because we fundamentally believe that the growth and demand for renewable energy power compute is not only not going away, it really just started the exponential growth curve. Nick Giles Dan, I really appreciate all that color. My follow-up would be, do you have any target levels of prepayments in mind, target contract duration and then maybe any additional color you could add around the GPU pilot at Childress, the capital spend there, how many incremental GPUs you would add? Thank you very much. Daniel Roberts So the hard thing about giving guidance on contract structure like it's a great question and it's really relevant. The hard thing is every situation is slightly different. So as a base case, we'd love a reasonable proportion of prepayment, we'd love contract terms, one, two, three years. And that's got to be the base case target. But equally, every circumstance is different. Every customer is different. There are strategic reasons why you might do something different. For example, it might be a trial, it might be a small opportunity to give them a small cluster, seeing that they've got large growth ambitions, and there could be a larger cluster coming thereafter once you've proved yourself. So it's really hard to give specific guidance. But I think we're talking 10 or 12 months plus, ideally, and perhaps a bit longer, and yeah, several months of prepayments, if not a little bit more. But again like please don't hold me to that, because we want to remain flexible and make the right decisions and circumstances are always unique when it comes to these decisions. Nick Giles Dan, that certainly won't hold you to it, but congratulations to you and the team so far and continued best of luck. Thank you. One moment for our next question. And that will come from the line of Paul Golding with Macquarie. Your line is open. Paul Golding Thanks so much. Just a couple from me. First on the Poolside capacity that sounds like you're going back to market with to find a client for it. Could you speak a bit to how you're deciding between going back to a single customer to take a significant swath of this capacity versus putting it on the market for on-demand customers to use? How do you think about that equation, now that this will become available at the end of the month? Daniel Roberts Yeah, it's a great question, and we think about this a lot, Paul, and the short answer is we want to do all of it and retain flexibility. And it's kind of funny like Poolside extended the contract again that was due, so they've doubled down, and extended a couple of times now, but the last one to roll off was earlier this month and they extended again to the end of August. And then they said, we're consolidating elsewhere, and gave us a little bit of color. But essentially it makes sense from their side. And initially, our reaction was, oh, that's pretty disappointing. We enjoyed working with Poolside. They're a great name, they've been a great thing for launching this business. But the funny thing is now having that available capacity immediately is opening up all the opportunity to pursue other avenues and provide people the opportunity to use a small amount of these 500 GPUs that become available as a segue and hopeful pathway to deploying larger scale capacity with it. So it's ended up being a bit of positivity coming out of it. And then in terms of long-term contracts versus spot and on-demand, we're pursuing both. So we're developing additional on-demand software capabilities. Internally, we're looking to provide some of that into the market at the moment, but equally in parallel, we're pursuing longer-term contracts. So it's just getting that mix right and retaining the flexibility. Do I envisage having thousands of GPUs operating on an on-demand basis in the near-term where we've got customers cycling through on a lifetime basis and not a huge contract bank for it? No. But do we want to continue building the flip capability, continuing servicing that market, learning about the depth of that market and what it might look like in the future? Absolutely. Paul Golding Thanks, Dan. And then just one more on the data centers themselves, the structures. It sounds like you've iterated on the design. In Texas, you're now down to $650,000 per megawatt cost, and you've got an extra 5 megawatts for structure. Could you give some extra color around what is enabling that extra 5 megawatts? Is that something where you can go retroactively to the six or so buildings that you've already constructed and flow that through there as well on a like-for-like basis or is this more of just a go-forward? Thank you. Daniel Roberts Yeah, sure. No, it's just a go-forward. I mean all these existing -- the existing 20 megawatt buildings were designed for 20 megawatts. So the form factor, the size, the low-voltage electricals, the network cables, et cetera, so they're optimized for 20 megawatts. So simply, the 25 megawatt design is just a bigger version of the 20 megawatts with some increases in density, efficiency, et cetera and the way that we do it. But really it's a go-forward thing that's allowed us to save a material amount of CapEx on the data centers and also build out megawatts on a faster basis. Paul Golding Great. Is even larger than 25 megawatts on the table or is 25 what we should expect for the foreseeable future? Daniel Roberts Everything's always on the table, Paul. So we're looking at that and a lot of other options, but for now, we're pretty happy with 25 megawatts. We'll keep punching them out and grow into it. But there's absolutely, there's lots of innovation challenge ideas being worked on in the background. So I would expect us not to sit still and just be sitting on that one design for the long-term. Thank you. One moment for our next question. And that will come from the line of Mike Colonnese with H.C. Wainwright. Your line is open. Mike Colonnese Hi. Good morning, Dan and team, and congrats on all the progress at Childress. First one, for me, Dan, you guys always had a really great perspective on some of these market dynamics, so it would be great to get your outlook for hash prices here, which, as we know, have been really trending around all-time lows. Do you think we've bottomed out here? And when do you think we can reasonably see a breakout above this 4.5 cents per terrahash range? Daniel Roberts Thanks, Mike. Easy question. I mean, it's a big world out there and there's lots of different miners and all have got their own kind of cost structures, availability of capital, power, land, and it just gets fed into that equation. So the key driver is the price of Bitcoin, right? Bitcoin rallies, hash price skyrockets, and everyone's making money, and everyone's scrambling to invest and bring online more capacity. So that is the absolute key driver. What the price of Bitcoin does day-to-day? I've got no idea. What it does long-term? Feels like it's inevitable. It's going significantly higher. So the key for our business is positioning that we can survive extended periods where the Bitcoin price isn't that exciting and be really well positioned when it does run. So when you look at our cost per Bitcoin mine at Childress this month, in the low 20s Bitcoin mined, the increases in efficiency come in. We're on good gross profit margins. We're feeling good at the current Bitcoin price levels. Now, it's a good business. That's why we're continuing to put more capital in. It's accretive, it's generating significant cash flow, but not everyone can do it. And that's part of the hurdle and I guess the moat that we've got and the opportunity and challenge for others in this space. So, ultimately, if that hash price wants to grow, then you need the price of Bitcoin to move, and then people will try and build into it, but the challenge is how you do that. So we're probably at, what, 20 gigawatts to 25 gigawatts of power globally today dedicated to Bitcoin mining capacity, but that's no small feat. I think the global data center industry is maybe 25 gigawatts to 30 gigawatts, I haven't seen the latest numbers, but that is a lot of power. And the whole thing comes back to, I keep repeating around the digital world, real-world dislocation, you can't click your fingers and respond to these exponential functions that are moving in the digital world. And if you look at the price of Bitcoin today, Bitcoin happens to double over the coming period then how do you possibly find 20 gigawatts to 25 gigawatts of power in any timeframe that's in the short, medium term, to try and normalize mining profits or the hash price to where it is today? So that's the whole opportunity in saying that expect the hash rate, the global network to grow, but it's getting harder to grow because of that access to power and land. And really, it's probably more going to be growing through a function of increased efficiency on the chip side, which, again, is going to be slow, again is going to require capital. Not all miners have access to that capital. Mike Colonnese Got it. I appreciate the color there. And you cited in your July production update that there were some T21 minor performance issues, which we've seen with a couple other miners as well. I'm just curious if you can specify what those issues were for you and how much exahash is being replaced and when Bitmain should get those replacements to you? Daniel Roberts Yeah, I'm not sure how granular we've been on the details. And Bitmain are a really good partner of ours. So I'm reluctant to speak too negatively about them because they've been fantastic for us over the long-term. But there were some manufacturing defects around heat sinks and ability to operate in the higher temperatures. And just general construction and assembly quality relative to their high standards that we see across other units. But again, testament to Bitmain, their response times and them accepting this issue and taking 100% responsibility for it has been fantastic. So again, everyone makes mistakes. I make mistakes all the time. There's always issues. It's how you respond, it's how you fix things. And Bitmain have been absolutely fantastic. It's around about potentially 1.5 exahash of capacity and that is being replaced lifetime. So you would expect to see that resolved over the coming months. One moment for our next question. And that will come from the line of Joe Flynn with Compass Point Research. Your line is open. Joe Flynn Hi. Thanks for the question. The question regarding the 1.4 gigawatt West Texas site. And you mentioned in the past you've been chipping away at the CapEx there, but can you provide some color on what actually is on site, whether there be transformers, substation, long haul fiber, et cetera, and also if there's any remaining ERCOT approvals? Thanks. Daniel Roberts So there's nothing on site at the moment. It's a greenfield site. We're in the design planning phase around mapping out how we will build there. But part of us coming to market on that site with Morgan Stanley is we're at that decision point now where energization isn't far away and the utility is working on that energization, it's into an existing network substation. So in relative terms, it's not an overly complicated connection. So they're working through their construction and procurement processes. And then for us, it's really design at this stage and coming to market now is because we need to crack on with it. We need to make decisions because the real world takes time and there's long lead items. So we're thinking already and working through the process for procuring high-voltage transformers and key lead items. But there's nothing material to report at this particular juncture. Joe Flynn And if you would just comment on that, like, in your conversations with Morgan Stanley and potential, customers or deal structures. I mean, have you seen kind of valuations from just dollar per megawatt basis start to improve in areas like West Texas and just anything you could comment on there would be great. Daniel Roberts Yeah, I've got nothing to say. We're just not at that point with the Morgan Stanley process. We've had kind of indicative conversations around what colocation and AI Cloud looks like at a smaller scale, the 1.4 gigawatts, but the reality is it's such a dynamic market. You look at how it's kind of evolved over the last six to nine months. Every month that goes by, the whole sector is thinking about, well, how real is this power and land scarcity dynamic. What are these things worth? What's the price that I'm willing to pay? So again, we've seen market benchmarks and there's a couple of them out there which we can point to and others can point to, which are informative in these negotiations and discussions. But again, it's so dynamic that really from our perspective, it's just looking at every opportunity on its face and saying, well, does the risk-return make sense if we're allocating capital. If we're not allocating capital, what's the opportunity cost of giving up that power and land. Recognizing we've got a lot of it, we've got a lot more coming with our development pipeline. So again, it's, yeah, I wish I could give more color, but it's nuanced, it's dynamic. And until we get to that actual decision point, it's really hard to give firm guidance because whatever I say will be wrong. Like that's the reality. Everything's just so dynamic. Thank you. One moment for our next question. And that will come from the line of Brett Knoblauch with Cantor Fitzgerald. Your line is open. Brett Knoblauch Hey, guys, thanks for taking my question and congrats on the quarter and thanks for all the updates. Maybe starting with the new 10 exahash of Bitmain mining machines, should we have those machines being plugged in this year or those machines will be plugged in next year? Daniel Roberts Hey, Brett. This year. So a key part of that negotiation was trying to ensure that they'll be delivered this year. Some of it might be a little bit tight going into December, but that's a good challenge for us. But the whole idea of that additional purchase was to bring it forward into this year. Given that we're making the investment decision to go to 30 exahash, we're fully funded to do so, and then the ability to roll the existing optionality, the existing 20 exahash of options into next year. And I guess kick the can on that decision point was a key part of that decision for us. Brett Knoblauch Awesome. Appreciate that. And then on the AI HPC pilot at Childress that you're expecting to finish in the second half of this year, could you maybe just first broadly talk about what type of kind of returns you're seeing from what you're doing right now in BC, how much did you spend on the GPUs? And I guess just talk through the return dynamics of that business? And maybe just another follow-up on the size of this pilot, should we expect something similar in size to what you guys are doing in BC? Daniel Roberts Yeah, and apologies to Nick. He actually asked me about this earlier from B. Riley and I forgot to answer it. So the size of the pilot in BC is small. Like it's about 16 GPUs, I think. So just under a million dollars' worth. And, look, we're looking to start training and utilizing it imminently, so that's happening. So that's exciting. We'll learn a lot very quickly around that. But in terms of the return decision, again, it's pretty much unchanged from prior guidance in the sense that you're looking at roughly two-year paybacks on these GPUs. Maybe it's extended a little bit to 24 to 30 months for the H100s, as the Blackwells, the H200 start to come to market. So you've seen that impact of better technology coming through. But again, you've got to weigh up that breakeven point in terms of the CapEx against how much capital are we putting to work, i.e., there are other prepayments at work, what's the contract tenor, what's the level of risk behind that contract, et cetera. So like prima facie, it looks like a great business, the near-term paybacks, but you've got to get the contracting structure right, you've got to be mindful of the demand. And it's an uncertain world so far as AI training and the demand for these GPUs over the coming years. It all sounds and looks really exciting and we think we're on that exponential curve and we probably are inevitably at some point. But there's always bumps in the roads, so we don't want to be caught out there. And then on the supply side, the impact of new technology coming to market, the iteration and the efficiency of these GPUs. Again, you just don't want to get caught holding a whole bunch of older GPUs where the revenue profile of those GPUs falls a little bit faster than what you're expecting. Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Co-Founder and Co-CEO, Mr. Dan Roberts. Daniel Roberts Thank you. I feel like I've done a lot of talking and sorry Lincoln, Belinda, but thanks everyone for dialing in. It's been a great 12 months behind us, but probably a more exciting three months to six months plus ahead of us. We feel like we're in a really good position, billion plus of equity on the balance sheet, $400 million of cash, zero debt. So a really robust base platform. And we continue to prove our ability to grow significantly. I mean, we've grown to our Bitcoin mining capacity 8x since the start of last year. We've built it 2.5x since the start of this year and we're going another 2x again in the next four months, all fully funded. So to go from 1.7 exahash started last year to 30 exahash at the end of this year, it's just great. Like, we're super excited about it. But for us, 2025 is not far away and the world doesn't end on 31 December. So the opportunity to grow substantially into next year and beyond both on Bitcoin mining and the AI side of the business is something we're really excited about. So appreciate everyone's support. Thanks for dialing in and have a good evening. This concludes today's program. Thank you all for participating. You may now disconnect.