Applied Digital Corporation (NASDAQ:APLD) Q2 2023 Earnings Call Transcript

Applied Digital Corporation (NASDAQ:APLD) Q2 2023 Earnings Call Transcript January 9, 2023

Applied Digital Corporation misses on earnings expectations. Reported EPS is $-0.29 EPS, expectations were $-0.06.

Operator: Good afternoon, and welcome to Applied Blockchain’s Second Fiscal Quarter 2023 Conference Call. My name is Doug and I will be your operator today. Before this call, Applied Blockchain issued its financial results for the second quarter of fiscal 2023 ended November 30, 2022 in a press release, a copy of which will be furnished in a report on 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 Blockchain’s Chairman and CEO, Wes Cummins; and CFO, David Rench. Following their remarks, we will open the call for questions. Before we begin, Jeff Grampp from Gateway Group will make a brief introductory statement. Mr. Grampp, please proceed.

Jeff Grampp: Thank you. Good afternoon, everyone, and welcome to Applied Digital’s fiscal second quarter 2023 conference call. Before management begins their formal remarks, we would like to remind everyone that some statements we’re making today may be considered forward-looking statements under securities law 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 and events to differ materially from those described in the forward-looking statements. For more detailed risks, uncertainties and assumptions relating to our forward-looking statements please see the disclosures in our earnings release and public filings made with the Securities and Exchange Commission.

We disclaim any obligation or undertaking to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made, except as required by law. We will also discuss non-GAAP financial metrics and encourage you to read our disclosures and reconciliation tables to applicable GAAP measures in our earnings release carefully as you consider these metrics. We refer you to our filings with the Securities and Exchange Commission for detailed disclosures and descriptions of our business, as well as uncertainties and other variable circumstances, including but not limited to risks and uncertainties identified under the caption €œRisk Factors€ and our annual report on Form 10-K. You may get Applied Digital’s 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 would like to turn the call over to Applied Digital’s Chairman and CEO, Wes Cummins. Wes?

Wes Cummins: Thanks Jeff and good afternoon everyone. Thank you for joining us for our fiscal second quarter 2023 conference call. Our topline results exceeded expectations with revenue of $12.3 million in the quarter above the $12 million we discussed on last quarter’s call that represents the steady state capabilities of our 100 megawatt Jamestown facility, which continues to perform as expected. When we coupled that strong performance of our Jamestown facility with our Ellendale and Garden City facilities that are expected to be energized in the near term, we are confident in our ability to deliver long-term high margin sustainable cash flow for our company. So now let me update you on the progress of our two upcoming facilities, our 200 megawatt facility in Garden City, Texas and our 180 megawatt facility in Ellendale, North Dakota.

In Garden City, construction of the facility is complete and we’re actively installing miners at the facility. We’ve received regulatory approval and are working through final technical details with the utility and our wind partner. We expect to energize by the end of our current fiscal quarter. Our Ellendale facility has made great strides on construction in spite of the harsh winter weather of North Dakota. All concrete has been poured which was the key gating item determining the construction timeline and the buildings are being actively stood up. We expect Ellendale to be energized towards the end of the current fiscal quarter as well. Recall Ellendale is fully contracted by Marathon for five years. In addition to the build out of our next generation data centers, we have also made an important branding update changing the name of our company from Applied Blockchain to Applied Digital.

The name change more accurately reflect Applied’s mission, services and broad business offerings to serve customers who require low-cost power for their high performance computing needs. Ultimately, our core assets are low cost and reliable power contracts and our next generation data centers, which we have wide-ranging use cases beyond cryptocurrency, including applications and machine learning, artificial intelligence, image processing, graphics rendering and various Web 3 applications. We will remain a premier provider of digital infrastructure for cryptocurrency miners, but it’s important for us as a company to distinguish that our next-generation data centers support many other HPC applications as we look to capitalize on the rapid, rapidly growing high performance computing market which is set to reach $65 billion globally by 2030.

To be clear, we still continue to see robust demand from cryptocurrency miners that exceed our capacity, irrespective of the macro dynamics in the sector, as low-cost hosting capacity remains the bottleneck in the system. However, we believe it is in the best interest of our shareholders to diversify our customer base, and grow our exposure to other high growth segments of the HPC market. We’re beginning to capitalize on this broader HPC market opportunities we announced last month we broke ground on a 5-megawatt standalone facility adjacent to our Jamestown site that will host several 100 graphics processing units for machine learning application with a new customer. Concurrently, we’re also — we also retrofitted a small portion of our existing facility in Jamestown to support a Web 3 application with another non-crypto customer which demonstrates our ability to modify existing locations to accommodate various HPC customer needs.

We’re optimistic about our growth opportunities in the HPC market where our next-generation data centers offer a more purpose built solution than traditional data centers that are generally higher cost and more focused on delivering low latency than high compute power. Before I turn the call over to David, I want to address a few line items in our financials. First, our stock-based compensation expense was extremely high in the quarter. This is a result of almost two years of stock-based comp being recognized in a single quarter, which was triggered by our resale registration statement becoming effective in October. In addition to the multi quarters being recognized in a single quarter the value of the RSUs in many cases were significantly higher than any price our stock is traded at since our NASDAQ Listing.

This was due to the RSUs having been granted when the stock was thinly traded on the OTC. Second, our gross margin was lower in Q2 partially due to billing adjustments that happened in September from the partial outage of the Jamestown site that occurred in the first fiscal quarter. Gross margins are expected to be significantly higher in our current fiscal quarter, as you will see in David’s guidance. This is a more normalized level. I will now turn the call over to our CFO David Rench to walk you through our financials before providing my closing remarks. David?

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David Rench: Thanks Wes and good afternoon, everyone. Before I begin my remarks, I would like to note that like last quarters call since we did not have operations in a year ago comparable period, we will not be providing any year-over-year comparisons. Revenues in the fiscal second quarter were $12.3 million, which were entirely attributable to our hosting operations in Jamestown, North Dakota. The Jamestown site operated at full capacity throughout the quarter. Cost of revenues in the fiscal second quarter were $11.8 million, consisting of $10.3 million of energy costs to generate our hosting revenues, $900,000 of depreciation, amortization expense and $700,000 of personnel expenses for employees directly working at our Jamestown hosting facility.

Note that while our energy services agreement for Jamestown has a largely fixed costs, there can be quarter-to-quarter variability based on seasonal power prices, which were higher in our second quarter than other recent periods. This may also impact our revenues in our fiscal third quarter, but this is expected seasonality and that normalizes itself over full year periods. Adjusted gross profit and non-GAAP measure that excludes depreciation embedded in costs of revenue and one time electricity charges was $1.5 million or 12% of revenue for the fiscal second quarter of 2023. Operating expenses for the fiscal second quarter of 2023 were $27.2 million, which included $21.8 million of stock-based compensation, $4.7 million of other selling, general and administrative costs and $700,000 of depreciation and amortization expenses.

The elevated stock-based compensation during the quarter is anomalous with as accounting rules dictated that we have a catch up of recording these expenses as we had our registration statement declared effective related to the potential resale of previously awarded restricted stock and restricted stock units. We do not expect such events to occur going forward based on our currently outstanding awards. And it’s important to note that the stock-based compensation is of course a non-cash expense. Adjusted net loss from continuing operations for the fiscal second quarter of 2023 was a loss of $3.7 million, or a loss of $0.04 per basic and diluted share based on the weighted average share count during the quarter approximately $93.4 million. Net loss attributable to Applied Digital for the fiscal second quarter of 2023 was a loss of $26.6 million or a loss of $0.29 per basic and diluted share based on a weighted average share count during the quarter of approximately $93.4 million.

Adjusted EBITDA, a non-GAAP measure for the fiscal second quarter of 2023 was a loss of $2.1 million. Lastly, on our balance sheet, we ended the fiscal second quarter of 2023 with $18.1 million in cash and cash equivalents and $20.5 million in debt. During the second fiscal quarter of 2023, we received $10.6 million in net customer deposits, and $10.2 million in net deferred revenue, which collected collectively amounted to $20.8 million in net cash inflow, due to the structure of our commercial arrangements with customers that incorporate upfront deposits and pre payments. In certain contracts, the pre payments are amortized back to the customers over the first year of their contract with no impact to revenue recognition, but the timing of the cash flow with the upfront cash to us is a major benefit to the company in that helps with our CapEx funding needs as we build out our data centers.

Now turning to guidance, similar to last quarter, we will not be providing explicit guidance for the forward quarter, given revenue materiality of our Garden City and Ellendale facilities that we expect both to come online in the current quarter. With regard to our Jameson site, we expect our revenue generated to be slightly sequentially. With regard to our Jamestown site, we expect our revenue generated to be up slightly sequentially from fiscal Q2. We expect gross margin and non-GAAP numbers to be 25% of revenue or higher. That completes my financial summary. Now I’ll turn the call over to Wes for closing remarks.

Wes Cummins: Thank you, David. Before we get to Q&A, I’d like to quickly go over some goals and initiatives for our company as we look to the future of Applied Digital. To start, we remain focused on the execution of our day-to-day business, and that includes operating Jamestown with high uptime and reliable performance and energizing our Garden City and Ellendale facilities in the near term. We continue to expect that once online, this hosting capacity should put us at an annualized adjusted EBITDA run rate of close to $100 million. To execute on this growth trajectory, we have also focused on remaining in a strong financial position. As David stated, we ended the quarter with $18 million of cash and cash equivalents and have over $7 million of undrawn capacity on our loan agreement for our Garden City facility.

Also, our Ellendale facility is currently unlevered providing us optionality for a additional non-dilutive sources of liquidity to fund future build out. Lastly, the other strategic focus for us is to continue building out our non-crypto use cases to demonstrate the broad capabilities of our next generation data center assets. We are eager to initiate our pilot operations that I previously discussed and are actively in discussions with additional prospective customers for other HPC applications. We see significant potential in this part of our businesses as traditional data centers are a higher cost and less efficient solution than we can provide. With our proven ability to construct and operate low cost next generation data centers, we remain confident that Applied Digital will continue to be a leader in digital infrastructure in the digital infrastructure industry and capitalize on this market opportunity that is set to hit approximately $65 billion by 2030.

To close while this is a difficult time for the crypto industry, we are extremely confident that we’re in a position to come out of these turbulent times stronger than ever. This is an incredibly exciting time to be part of Applied Digital as we continue to build out our facilities to accommodate the strong demand we have secured by both crypto and non-crypto customers for our services. I remain optimistic about our future and want to thank all of our team members for the dedication and service to Applied Digital. We’re now happy to take questions, Operator?

David Rench: Hi, everyone, this is CFO David Rench. I want to quickly clarify that I misspoke on one metric during the remarks. I referenced adjusted net loss from continuing operations of $3.7 million. It was actually $3.8 million loss, which is reflected in today’s earnings release. Thank you operator, we can now take questions.

Q&A Session

Operator: Thank you. Our first question comes from the line of Lucas Pipes with B. Riley. Please proceed with your question.

Lucas Pipes: Thank you very much, operator. And good afternoon, everyone. Happy New Year, everyone. And congratulations on the progress on the HPC side. Thank you for taking my questions. My first question is in regards to Ellendale and Garden City. I wondered if for both sides, you can walk us through the in more detail on the kind of the current status. If we were at the site today, what would we see? And then more specifically to Garden City, what exactly is preventing the facility from being energized today? Thank you very much for your color on this.

Wes Cummins: Sure. Thanks. Thanks, Lucas, for the comments and the question. So at Garden City what you would see is as you can see pictures, I think up on our social media feed, but basically, fully constructed facility. There’s some — I think six of the buildings have miners racked in them. And so we’re continuing to do that. We very recently, last week, received the approvals that we need. The last pieces of the puzzle here are mostly technical around metering and instrumentation transformers. And so we’re finalizing that. And then so we expect to finalize that, obviously on the timeline that we said and energize before the end of February. So the way that energization looks is like we’ve talked, you really light up the buildings that are available. But we expect that facility to be fully online, by the by the May, June timeframe. Recall for our largest customer there, there’s 90, we expect to bring that online sooner than that timeframe.

Lucas Pipes: That’s, that’s very helpful. Thank you.

Wes Cummins: Let me follow up. No, I missed the Ellendale piece. There, you’ll see 4 to 6 buildings standing. We’re putting racks in the buildings. The timeline there is we sat in front of the PSC in late December. I think we’ll get the finalized approvals there. Feel very confident about that process. There’s some work to be done by the utility on the substation, for interconnection. That’s kind of the primary gating item but also our buildings aren’t ready to turn on yet there either. But we expect that again by the end of February.

Lucas Pipes: Thank you, Wes. My second question is on Jamestown. Your customer, in a press release last week noted installing additional miners there. What allows that to take place given that this facility was already fully contracted? That’s it, thank you for your color on this.

Wes Cummins: That’s a good question. So we’re getting additional power, a little bit of additional power in Jamestown. So there’s two pieces, it’s optimizing Jamestown to have some additional power. And with Marathon, we’ve installed 6 immersion containers on site. It will be a trial for us for immersion. I think they’ve already been through that pretty in depth and know how it works. So those are there, we’re waiting for a final sign-off, they’re actually connected and mostly ready to turn on. So hopefully those turn on in the next few weeks for us and for Marathon. And so and then we have some additional space in the air cool. And we were shuffling one of our customers down to Garden City and not I guess, again, it’s not any of the 90 megawatts that we’ve contracted with Marathon, we’re moving some of their capacity or some of their miners to Garden City, and we’re putting Marathon in place in Jamestown, and that will happen this month mostly.