Applied Digital Corporation (NASDAQ:APLD) Q2 2024 Earnings Call Transcript

Applied Digital Corporation (NASDAQ:APLD) Q2 2024 Earnings Call Transcript January 16, 2024

Applied Digital Corporation misses on earnings expectations. Reported EPS is $-0.1 EPS, expectations were $-0.00614. APLD isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to Applied Digital Fiscal Second Quarter 2024 Conference Call. My name is Sheri and I will be your operator today. Before this call, Applied Digital issued a financial result for the fiscal second quarter ended November 30, 2023, in a 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, Alex Kovtun from Gateway Group will make a brief introductory statement. Mr. Kovtun, please proceed.

Alex Kovtun: Thank you, operator. Good morning, everyone, and welcome to Applied Digital’s fiscal second quarter 2024 conference call. Before management begins formal remarks, we would like to remind everyone that some statements we’re making today may be considered forward-looking statements under securities laws and involve a number of risks and uncertainties. As a result, we caution you that there are 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 any 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 the reconciliation tables, the 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 Risk Factors in our quarterly report on Form 10-Q.

You may get Applied Digital’s Securities and Exchange Commission filings for free by visiting the SEC website at www.sec.gov. I would also 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 will turn the call over to Applied Digital’s Chairman and CEO, Wes Cummins. Wes?

Wes Cummins: Thanks, Alex, and good morning, everyone. Thank you for joining our fiscal second quarter 2024 conference call. I want to start by thanking our employees for their ongoing hard work and service in supporting our mission of providing digital infrastructure solutions 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’d like to discuss some recent developments across our business. Let’s start with our data center hosting operations. Our 100-megawatt Jamestown facility continues to perform as expected and operated at full capacity with consistent uptime throughout the quarter. This marks the fifth consecutive quarter in which the Jamestown facility has operated at full capacity.

Our 180-megawatt Ellendale facility in North Dakota also operated at full capacity with consistent uptime during the quarter, bringing our total hosting capacity to 280 megawatts across our North Dakota facilities. Both facilities are contracted out to customers on multiyear terms. During the quarter, we announced the initial energization of our 200-megawatt Garden City facility in Texas. This is a significant milestone in Applied Digital’s ongoing efforts to meet the growing demand for low cost scalable digital infrastructure. The Garden City facility had a small contribution to our results this quarter and is currently operating at approximately 132 megawatts, with the remainder of the capacity expected to come online in the next several months.

As we brought on the facility, we realized there were additional infrastructure improvements needed for the grid. We expect these improvements to be made no later than April. Our customers continue to send miners to the facility and we are actively installing them. With the increase in the cost of bitcoin, we are seeing demand increase significantly for hosting services. As a reminder, our Garden City facility is fully contracted with fixed prices, so we are not exposed to volatility in the crypto markets heading into the halving event this year. Once our Garden City facility becomes fully energized, we will have approximately 500 megawatts of hosting capacity across our three data center hosting facilities. We expect our three sites to deliver up to $300 million in revenue and $100 million of adjusted EBITDA on an annualized basis.

Operating cash flow from data center hosting services will ramp up significantly in March as the majority of our prepayments burn off in February. Let’s move on to cloud services, which provide high-performance computing power for primarily AI applications. It continues to grow quickly as we progress further in supporting our existing contracts and pursue additional opportunities in our pipeline. Since our last earnings announcement, we have added an additional cloud customer, which brings our total annual contract value of cloud service contracts at full capacity to approximately $398 million. We tailor our agreements to our customers so that they — as they raise money, we can exercise options embedded in the contract to deploy GPUs and ramp-up hosting capacity over time.

While the typical customers for our cloud service have been private VC-backed companies, we are now also seeing strong demand from the enterprise market for large amounts of GPU compute capacity. We are excited to see demand increasing from this important segment of the market and have plans to hire sales talent to enhance our outreach efforts. We continue to secure access to GPUs, however, there have been some delays in installations attributable to pending deliveries of networking components. We believe it’s prudent to receive GPU deliveries only when all associated equipment is on-site and ready for installation, which is how we structure our client deposits. Additionally, we continue to actively explore vendor financing and other tailored financing options to support the capital requirements for the 34,000 H100 GPUs we have on order to support our current customer demand.

To date, we have four 1,024 clusters installed and are planning to ship an additional four in the next two weeks. These clusters, as they are currently configured put us in an elite class of next-generation supercomputers in terms of raw compute power or petaflops for the most demanding AI applications. We expect to reach a minimum of 10 before the end of the fiscal year with the Jamestown cluster representing the opportunity to put us in the top 10 supercomputers for AI workloads. The fully commissioned clusters are expected to generate over $200 million of annualized revenue. Lastly, let me provide an update on our purpose-built HPC data centers. During the quarter, we broke ground on our first 100-megawatt high-performance compute facility in Ellendale, North Dakota.

This facility will offer low cost, high-efficiency liquid-cooled infrastructure designed for HPC applications. Construction is proceeding as expected. Our unique proprietary architecture and design implementation together with the strategic placement of the Ellendale facility near sources of abundant and renewable power will offer scalable infrastructure for these workloads. It will offer significant cost reduction to our customers and deliver best-in-class performance that maximizes high power density compute. We believe that this advantage is sustainable in this emerging market for data centers specialized in running AI workloads. Our contracted power and adjoining land at our facilities will become valuable assets over the next 18 months.

We believe there will be a significant supply constraint for power in the data center market. We have already seen a robust demand for our data centers, which driven by the burgeoning AI landscape has exceeded our initial expectations. We believe we’ll be in a strong competitive position to support this demand. As a reminder, we have 400 megawatts of capacity in development across North Dakota and Utah. This does not include the current 9 megawatts of capacity we have at our standalone facility in Jamestown to support cloud service customers. As we enter the second half of fiscal 2024, we’re well-positioned to capitalize on the demand we’re seeing across both our cloud service and HPC data center business and we will continue to allocate our capital appropriately to the highest risk-adjusted returns to maximize shareholder value.

With that, I’ll 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 morning, everyone. Revenues for the fiscal second quarter of 2024 were $42.2 million compared to $12.3 million for the fiscal second quarter of 2023. The increase was driven primarily by the full quarter of revenue generation from the Ellendale facility, the Garden City facility beginning revenue generation during the fiscal second quarter of fiscal year 2024, and additional revenue from the Jamestown facility due to increased uptime. In addition, the company recognized a full quarter of revenue from the first cloud service contract during the fiscal second quarter of 2024. Cost of revenues for the fiscal second quarter of 2024 was $29.2 million compared to $11.8 million for the fiscal second quarter of 2023.

The increase in cost of revenues was attributable to higher energy costs used to generate hosting revenues, depreciation and amortization expense, and additional personnel expenses, driven by the growth of the business as more facilities were energized. Selling, general, and administrative expenses for the fiscal second quarter 2024 were $21.1 million compared to $27.2 million in the prior year comparable period. The decrease was primarily due to lower stock-based compensation expense and was partially offset by increases in depreciation, amortization, and personnel costs. Net loss for the fiscal second quarter of 2024 was $10.5 million or a loss of $0.10 per basic and diluted share based on a weighted average share count during the quarter of approximately 109.7 million.

This compares to a net loss of $26.8 million or a loss of $0.28 per basic and diluted share in the fiscal second quarter of 2023 based on a weighted average share count during the quarter of approximately 93.4 million. Adjusted net loss, a non-GAAP measure for the fiscal second quarter of 2024, was $5.2 million or adjusted net loss per basic and diluted share of $0.05 based on a weighted average share count during the quarter of approximately 109.7 million. This compares to an adjusted net loss of $3.8 million or $0.04 per basic and diluted share for the fiscal second quarter of 2023 based on a weighted average share count of approximately 93.4 million during the quarter. A significant headwind we faced during the fiscal second quarter of 2024 was amortization and occupancy charges for leases of computing equipment and data center space that have been assessed — accessed by the company but are not yet supporting revenue.

The lease expense for the colocation sites not supporting revenue totaled $1.5 million and were not added back to — into adjusted EBITDA or adjusted earnings. Amortization of GPUs not supporting revenue was $3.7 million and was not added back to adjusted earnings. We expect this impact to decrease in future quarters as we resolve supply chain delays and are able to stand up full computing clusters that support revenue. Adjusted EBITDA, a non-GAAP measure for the fiscal second quarter of 2024, was $10.6 million compared to an adjusted EBITDA loss for the fiscal second quarter of 2023 of $2.2 million. Lastly, on our balance sheet, we ended the fiscal second quarter with $34.6 million in cash equivalents — cash, cash equivalents, and restricted cash, and $42.8 million in debt.

During the first two quarters of 2024, we received $81.8 million in customer payments due to the structure of our commercial arrangements with our customers that incorporate upfront deposits and prepayments. In certain contracts, the prepayments are credited back to the customers over the term of the contract. This has no impact on revenue recognition, but the upfront cash flow is a major benefit for the company as it helps with our CapEx funding as we build out our data centers. Since the quarter closed, we have received an additional $11.1 million in customer prepayments and $23.1 in net proceeds from the ATM offering. The ATM offering is now complete. Now, turning to guidance, due to the delayed delivery of certain networking components for our GPU clusters, we now expect our revenue and EBITDA to be below the low end of our previously guided range for the fiscal year 2024.

Network component deliveries improved in recent weeks, but did have a significant impact on the timing of commissioning clusters and our revenue and EBITDA. We now expect to exit the fiscal year 2024 at an annual revenue run rate of approximately $500 million and an annualized adjusted EBITDA run rate of $250 million. Now, I turn the call over to Wes for closing remarks.

Wes Cummins: Thank you, David. We’re well-positioned to capitalize on the growing opportunities across our business and look forward to continuing our momentum in the second half of the year. I’d like to thank all of our team members for their dedication in making Applied what it is today and our shareholders for your continued trust on our mission and execution. We are now happy to take questions. Operator?

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question is from Lucas Pipes with B. Riley Securities. Please proceed.

Lucas Pipes: Thank you very much, operator. Good morning, everyone. My first question is on the HPC hosting side and the conditional agreement that you announced and a few ones. First, in terms of the total value you cite there, should we kind of think of $220 million of revenue per year? And then are your margin expectations for the segment still around 40% and on the capital cost side? I’ve been working with the $5 million per megawatt assumption. I wondered if that’s still a good number to use. Thank you very much for your details.

Wes Cummins: Good morning, Lucas. Thank you. So there’s not a lot more detail that I can give versus what we announced, but let’s talk about the cost. I think we talked about in our shareholder — in Analyst Day, and the Shareholder Day, that cost moving towards $6 million to $7 million per megawatt versus the $5 million as we’ve worked through the new design. So the $5 million was more for the previous design and this is the three story design that we’re working for. So that’s what we’re looking at. But as far as economics, this fits in the economics that we’ve talked about previously, right, which is about $2 million per megawatt in revenue and $1 million of EBITDA per megawatt.

Lucas Pipes: Got it. That’s very helpful. Thank you for that. And turning to guidance for a moment, in terms of the components that have been delayed, what exactly has been the bottleneck? Could you add a little bit more color on that? And then I think previously you provided some color on GPUs online for the average in physical Q3 and Q4. I think you mentioned it in your prepared remarks but I was trying to take notes and couldn’t quite keep up. So if you have maybe an expectation around kind of Q3, Q4 GPUs, would appreciate the color around all of this. Thank you.

Wes Cummins: Sure. So the components that are the issue for delivery, It’s not the GPUs themselves. It’s specific networking components related to the InfiniBand networking piece of the cluster. And I’ve talked about this several times already, and this has been the bottleneck, I would say for the last kind of three or four months. We are getting delivery of those. It’s a matter of making sure you get delivery of every component because you need all of the components to stand up the cluster, commission it, and get it operating for customers. So we’re seeing improvement in the delivery of the InfiniBand. It’s been specifically on the transceiver side of the InfiniBand deployments. So we had one cluster up and running last quarter.

We have four deployed now. As I said in my prepared remarks, we expect to receive another four. And on the cluster, just as a reminder, Luke, is the cluster for us. I know it can be a little bit confusing, but it’s 1,024 GPUs per cluster is how we refer to it. So we’ll receive another four in the next two weeks is our expectation. And so also think of where pricing has gone for us on these clusters. You should think about $20 million of annual revenue per cluster deployed. So the difficulty we have is just a few weeks, because right now, let’s say we’re running about eight weeks behind our original expectation. But when you think about the revenue ramp and the revenue generation on a week by week basis, we go from one cluster, so we’re generating $20 million of revenue per year for that cluster to our business goes to four clusters, which is $80 million of revenue per year.

And then in a few weeks, our business goes to eight clusters, which is $160 million of revenue per year. So when we look at our guidance, we’re just assuming 10 clusters deployed by the end of our fiscal year, which is May, about 4.5 months away. And so that 10 clusters plus our blockchain hosting solutions, that gets us to that $500 million run rate. I think we can do better than that, but that’s the number that I think is a very conservative number for us to hit by the end of the year.

Lucas Pipes: That’s very helpful. Thank you, Wes, for all the color. One quick one, the $45.8 million in property, equipment and other assets that have been purchased year-to-date, are you able to provide a breakdown between HPC and GPUs in that number? Thank you.

Wes Cummins: I’m sorry, Lucas, which number was that? The purchase year-to-date?

Lucas Pipes: Yes, that’s the number of property and equipment that’s been purchased to date.

Wes Cummins: So the majority of that goes into HPC. So when you look on our balance sheet — so as you look at our balance sheet, where the GPUs are showing up because of how we’re financing the GPUs is the lease asset, the right to use asset.

Lucas Pipes: Okay.

Wes Cummins: And then we’ll have a — and then on the liability side you’ll see a capital lease. One of the things I would call out with this is the — on the leases, we deploy the GPUs, the entire right to use asset goes into long-term assets, whereas on the lease liability, it’s split about half and half between long-term liability and short-term liabilities. So when you look through the balance sheet, the leases right now, because we’re doing what I always refer to as equipment finance. These are capital leases. That’s how we’re financing the GPUs. So when you look through CapEx, the vast majority of what you’ll see is CapEx on equipment, is the HPC facility, the data center. And then on the lease right to use and the capital leases and the liabilities is where you’ll see the GPUs.

Lucas Pipes: That is very helpful. Thank you, Wes, for all the color and best of luck.

Wes Cummins: Yeah. Thanks, Lucas.

Operator: Our next question is from George Sutton with Craig-Hallum Capital Group. Please proceed.