Bit Digital, Inc. (NASDAQ:BTBT) Q4 2023 Earnings Call Transcript

Bit Digital, Inc. (NASDAQ:BTBT) Q4 2023 Earnings Call Transcript March 19, 2024

Bit Digital, Inc. 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, good afternoon, and good evening. Ladies and gentlemen, thank you for standing by. And welcome to the Bit Digital Fiscal Year 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Cameron Schnier, Head of Investor Relations. Please go ahead, Cameron.

Cameron Schnier: Thank you, Mariana. Good morning and welcome to the Bit Digital fiscal year 2023 earnings call. Joining us on the call today are Sam Tabar, Chief Executive Officer; and Erke Huang, Chief Financial Officer. Before we begin, I would like to remind all participants that some of the statements we will be making today are forward-looking. These matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. I therefore refer you to our latest 20-F filing and our other SEC filings. Our comments today may also include non-GAAP financial measures. Additional details and reconciliation to the most directly comparable GAAP financial measures can be found in our 20-F filing, which is on our website. After our prepared remarks, we will open the call up for questions. [Operator Instructions] With that, I will turn the call over to Sam.

Sam Tabar: Thank you, Cam. Ladies and gentlemen, thank you for joining us on the call today. In my prepared remarks, I’ll discuss three things, our fourth quarter and full year results, discuss a number of achievements, and three, our thoughts on the outlook of 2024 and our future ambitions. Cam and Erke will then provide more detail on our financial results. And then we’ll open the line for your questions. 2023 was quite a year. It was a rebound year for our industry and a foundational year for Bit Digital. We began last year with bitcoin prices below 17,000 and ended above 43,000 with the majority of that gain occurring in the final months of the year. The price rally has continued into 2024 with the price of bitcoin reaching new all-time highs.

The bitcoin price rally was a welcome reprieve for the mining industry, especially given the upcoming halving when mining rewards will be cut in half. However, we spent the last year focused on building a company that could withstand both halving events and cyclical gyrations in the price of bitcoin. More on that later in this call. As of December 31, 2023, our bitcoin mining fleet was approximately 93% carbon-free, which is a material improvement from our prior year levels, but a small dip below our prior 99% run rate. The decrease is because of our geographical diversification into new regions, namely Texas and Kentucky, where the power grids there use more carbon-based energy sources. While we continue to strive to be entirely carbon-free, we are willing to make certain compromises as we search for the best economics and the benefits of geographical diversification.

As of December 31, we had approximately 101 megawatts contracted with six hosting partners. We have since added six megawatts, bringing the total to 107 megawatts. We are using approximately 80 megawatts as of that date, providing roughly 27 megawatts to support our growth initiatives. We are targeting an active hash rate of six exahash by the end of the year, roughly double where we are today. This means we’ll have to secure approximately 37 incremental megawatts if we fill the capacity with new generation miners, such as the S-21. We are actively engaged in discussions with several hosting partners for new sites, and we have a strong pipeline of new potential locations. At this time, we did not foresee hosting capacity as a bottleneck for achieving our six exahash target in 2024.

While we continue to believe in our infrastructure light approach, which is conducive to our own goals, we would consider owning a portion of our infrastructure at the right price and returns profile. Our balance sheet remains a core strength with approximately $140 million worth of cash and digital assets at the end of February and zero debt. We believe, we continue to believe, a strong balance sheet and liquidity position is one of the most important features to withstand halving events. In October, we proudly announced a new business line, Bit Digital AI. Importantly, we didn’t just announce an aspiration to start a business in AI because we noticed it was trending. We had carefully considered this business long before the announcement, and it was critical to us that we not only – we were not only confident in our ability to execute on this strategy, but to secure an anchor customer prior to any announcement.

Our core competencies include sourcing specialized computer systems, data center selection, and network design. Our GPU business fits seamlessly within these strengths, allowing us to go from signing a customer contract to installing and deploying an incredibly complex network of more than 2000 GPUs in a matter of months. This contract is now generating over $50 million of annualized revenue, and our sights are set on expanding this business line, both through expanding the scope of our existing customer contract and by onboarding new customers. We’re actively engaged in conversations with new prospects, and we hope to be able to announce growth initiatives soon. We are targeting a minimum of $100 million in annualized run rate revenue from this business by year-end, and we are confident in reaching that goal.

While we have purposely remained debt-free to date, we would consider leverage as a means to accelerate the growth of our Bit Digital AI business, as we believe predictable cash flows from that segment are much more conducive to debt relative to bitcoin mining. We understand that we are unlikely to receive full credit for this business until we start reporting the financials. Given that this business started earning revenue at the end of January of 2024, our first quarter 2024 results will be the first time that this business shows up in our financial statements. While we can’t offer guidance on the specifics of the margin profile, we will state that even at current bitcoin prices, our Bit Digital AI business earns substantially higher margins than our mining business, even on a pre- halving basis.

I’ll now hand over the line to Erke who will discuss our financial results.

Erke Huang: Thank you, Sam. I will now discuss certain financial results for fiscal year 2023 and the fourth quarter of 2023. The total revenue for 2023 was $44.9 million, a 39% increase compared to the prior year. The revenue increase was primarily driven by increase of deployed mining fleet and a modestly higher average bitcoin price. Our bitcoin production increased 21% year-over-year to 1,507 with an increase in our active cashflow partial offset by increase of network difficulty. Our ETH staking strategy generated approximately $700,000 in 2023 in its full year of operations. Cost of revenue was $29.6 million for 2023, an increase of approximately $9 million from 2022. The increase was primarily driven by increase our active mining fleet.

Our electricity price was approximately $0.05 cents kilowatt hour for 2023. Our production cost per bitcoin defined as electricity and other hosting fees divided by bitcoin production amounted to approximately $15,700 for 2023. Profit sharing fees amounted to around 3,900 per bitcoin for 2023. Depreciation amortization expense was $14.4 million in 2023 compared to $26.8 million in 2022 with a decrease due to – primarily due to lower carrying values for miners. But we expect [DNA] increase in this year due to our recent GPU procurement and new miner purchases. Adjusted EBITDA was $2.4 million in 2023 compared to a loss of $26.9 million in 2022. The improvement was primarily driven by better cash margins and reduced digital assets impairment charges.

As a note, we have not yet adopted new FASB fair value accounting rules but plan to implement the change for our first quarter earnings report this year. GAAP earnings per share for 2023 was a loss of $0.16 compared to a loss of $1.34 in 2022. That’s a great improvement. Adjusted earnings per share was approximately $0.12 compared to a loss of $0.34 in 2022. Adjusted earnings per share exclude approximately $16 of DNA, $10 of, sorry – $0.16 cents of DNA, $0.10 of share-based compensation and $0.02 from a loss or write-off of a deposit. Our average fleet efficiency for active fleet was 28.8 joule per terahash as of December 31, 2023. Our goal is to improve the metric materially as we progress through this year. CapEx for 2023 was approximately $66.7 million.

Approximately $55 million of that was related to our digital AI business. The remaining spent for the initial contract was largely offset by the proceeds we received from the sale-back lease transaction we executed for 768 GPUs. We raised approximately $66 million of net proceeds from the insurance of 21.5 million ordinary shares in 2023. Approximately 14.7 million shares were sold in connection with our ATM offering, the majority of which were issued during the first quarter. The proceeds were used to fund our growth initiatives for general corporate purposes and to fortify a balance sheet ahead of the halving. And we’re cautious of dilution and owning [indiscernible] equity when we have identified opportunity to deploy capital in higher return areas, such as our digital AI business.

I will now turn the call back to Sam for closing remarks.

Sam Tabar: Thanks, Erke. We have a great team in place and I’m proud of the foundation we built in 2023. 2023 was an interesting year for the mining sector, to say the least. It seemed as if up until the third quarter, the industry’s overarching focus was on improving resilience ahead of the halving. That is to say, mining companies were seemingly focused on deleveraging, improving the balance sheet and lowering costs so that they would be in a more stable position when mining rewards were cut in half in 2024. As many of you probably noticed, that sentiment changed dramatically in October as bitcoin charged past 30,000 and then above 40,000 by year-end as optimism around a bitcoin ETF reached fever pitch. The improvement in bitcoin price changed the narrative from resilience to growth and ambitious growth announcements were generally rewarded by the market.

Now in 2024, bitcoin is up around 50% year-to-date and mining stocks are generally in the red for the year. It’s as if market participants temporarily forgot about the halving in late 2023 and then recently remembered. We never forgot. We are of course very pleased with the improvement in digital asset prices. It has had a material impact on the value of our liquidity position and we are less likely to have to make difficult decisions following the halving compared to where we would have been if bitcoin was near October 2023 levels. That said, we think improved bitcoin prices are masking the fragility of certain business models. We think current bitcoin prices are causing investors to overlook the importance of having non-correlated revenue streams that could produce enough cash flow to cover fixed expenses.

Even if bitcoin goes parabolic, we think there is significant value in having cash flow streams that serve as a downside hedge. Look, we are a fundamental long-term believer in both Bitcoin and Ethereum. However, if we could accurately predict and consistently – if we could accurately predict, sorry, apologies. If we could accurately and consistently predict the price of bitcoin, we’d be trading call options and not buying ASICs. We are trying to build a company that is less driven by speculation and more driven by strong underlying fundamentals. The historical trend for bitcoin prices has been higher and we’re in the camp of course, that bitcoin will continue to achieve new all-time highs as time progresses. However, if you want to enjoy the good times, you have to survive the hard times and that’s the mentality we rely to plan our business.

We are differentiated in the realm of bitcoin miners. Our operational and treasury management strategies are unique. We own over 15,000 ETH at the end of February and over 12,000 of that is actively staked. As far as I can tell, we own one of the largest ETH stacks of any publicly listed company in the United States. It’s our view that a portfolio with both ETH and Bitcoin will outperform a bitcoin-only portfolio over the medium term, especially when you layer in the rewards from staked ETH. We also see the potential SEC approval of a spot ETH ETF as a major medium term catalyst for the price of ETH. But we fundamentally believe that ETH’s strong monetary policy and strong ecosystem provides a compelling path forward, regardless of the SEC’s decision.

Bit Digital remains categorized as a bitcoin miner, but frankly, we are much more than that. We have a growing HPC business that is already on track to produce more revenue in 2024 than our mining business generated in 2023. These are complementary business lines that we believe strengthen our financial profile and will provide an incredible optionality in terms of capital allocation. And with that, I’d like to open the line for some questions.

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Q&A Session

Operator: Thank you, Sam. [Operator Instructions] Our first question comes from Mike Grondahl, Northland Securities. Please go ahead, Mike.

Mike Grondahl: Thank you. The first question, Sam, is really about capital allocation. Can you kind of talk about how you’re investing between the HPC opportunities and the bitcoin mining opportunities? Like, how do you think about payback, margins, and then really funding both of those growths? But first, talk about the returns and margins and payback, bitcoin versus HPC.

Sam Tabar: Sure, Mike. Thanks very much for your question. Look, it depends on – the way we think about capital allocation between GPUs and miners depends on the market prices for the equipment when we execute the respective orders. So to reach our $100 million revenue target for Bit Digital AI, we’d probably need to invest around $60 million at the current prices. And to double our fleet size, to add three exahash, that cost would be around $45 million at the current pricing. It depends on the model we select. So capital allocation decisions are going to be based on a returns basis model. We don’t want to just grow both businesses, but we’re not going to just grow for the sakes of growth if the returns don’t justify the expenditure. Cam and Erke, do you want to add a little bit to that?

Erke Huang: Yes, if I may add, the return for bitcoin mining and return for HPC hosting or computing power hosting, they’re different, but it really depends on the market conditions and for bitcoin price and for the contract we sign with the customer and especially for the HPC equipment we procure. So those are generally good businesses where we’re monitoring them closely, especially for bitcoin, there’s a [half a million] ahead of us. So we want to see where the market stands and to make decisions.

Cameron Schnier: And yes, Mike, I mean, at current market pricing, it would be about $60 million or so to double the run rate revenue for Bit Digital AI to $100 million. And then to add three exahash is about $45 million, depending on the model. So, I mean, that’s all based on what we could see now, but obviously that could change.

Mike Grondahl: Great. And then kind of following up on that, you mentioned your eagerness, or desire, to kind of layer some debt into the business, potentially on the HPC side, but you also have, if I read it right, like $140 million of liquidity with $34 million of that being cash. How would you see funding, some of this growth in 2024?

Sam Tabar: Well, just before I – I’ll let Erke respond to that a little bit, but I just want to take a step back and mention that philosophically, the company never took on leverage in the past to fund it – sort of a Bitcoin fleet. And the reason for that, is that you can’t predict cash flows. So, if you can’t predict cash flows, because you don’t know where the Bitcoin price is going to be, taking on leverage to buy Bitcoin mining equipment is stupid, frankly. So, we never took on leverage philosophically for that reason. However, on the HPC business side, that’s very different. There’s certainty of revenue. We have a contract. We know exactly how much we’re going to make. So taking on leverage when you can predict cash flow that, makes a lot of sense. But on that front, to that point, I’ll just leave it to Erke, to respond in a more detailed manner.

Erke Huang: Yes, thanks, Sam. And just like you said, for the AI business, we can model it out, and the contract is, for three years. And the reason we’re thinking, about taking on debt on that business, to – further improve the profit margins, and which the model allows. So, the future growth can be funded, by existing cash on balance sheet and the credits, or debt we’re taking on and the prepayment, or deposits from the customers. So, that would be sufficient for our growth. And again, we’re cautious about dilution. So, we want to input the capital to work as much as we can. But, you know, and the condition of the business, the underlying business, or model allows us to do so.

Mike Grondahl: Got it. And then maybe lastly, I would just ask, the 2,000 GPUs you’re renting to this one customer. Can you talk about, the incremental opportunity with that customer, and how that plays out? And then you mentioned, you were talking to other new prospects too, like how deep is the pipeline?

Erke Huang: Sure, I’ll take that. Just as first brush. Just on that front, with respect to diversifying the customer base for HPC business, we’re engaged with a number of clients, of prospective clients. I could think right now, I believe five. Although there are many, many more knocking on our doors. We’ve shortlisted a very small number that, we’re actively working on. There are various stages, in terms of how advanced each discussion is. But there are several clients, beyond our anchor client, where the talks are pretty advanced. And the types of customers we’re talking to, are quite diverse. They’re both big and small, startups and later stage tech companies. And some of these prospective clients, are not yet renting GPUs, and others are currently working with other providers, and they wish to diversify.

So, we’ve had customers approach us that, are working with another HPC provider, but again, they’re trying to diversify their vendors. So it’s been very promising and that is simply outside the anchor client that we have. With respect to our anchor client, there is insatiable appetite, to continue growing the business. And that’s why we’re pretty confident that, we’ll get to a $100 million run rate by the end of the year.

Mike Grondahl: Maybe one more, could it be larger than a $100 million? I mean, I understand it’s capital heavy, but?

Erke Huang: It can be, but we’re targeting end of, we’re targeting $100 million by the end of the year.