Hut 8 Mining Corp. (NASDAQ:HUT) Q3 2022 Earnings Call Transcript

Hut 8 Mining Corp. (NASDAQ:HUT) Q3 2022 Earnings Call Transcript November 10, 2022

Hut 8 Mining Corp. misses on earnings expectations. Reported EPS is $-0.12 EPS, expectations were $-0.03.

Operator: Welcome to the Hut 8’s Third Quarter Analysts and Investor Call. In addition to the press release issued earlier today, you can find Hut 8’s financial statements and MD&A on the Company’s website at www.hut8mining.com under the Company’s SEDAR profile at www.sedar.com, and under the Company’s EDGAR profile at www.sec.com and under the Company’s EDGAR profile at www.sec.gov. Unless noted otherwise, all amounts referred to during this call are denominated in Canadian dollars. Any comments during this call may include forward-looking statements within the meaning of the applicable securities legislation regarding the future performance of Hut 8’s Mining Corp. and its subsidiaries. The statements reflect current expectations and as such, are subject to a variety of risks and uncertainties that could cause actual results to differ materially from current expectations.

These risks and uncertainties include, but are not limited to, the factors discussed in the quarterly MD&A for the quarter ended September 30, 2022, as well as the company’s MD&A and annual information form for the year ended December 31, 2021. I would now like to turn the call over to Hut 8’s CEO, Jaime Leverton. Please go ahead.

Jaime Leverton: Thanks so much, Karlen. Good morning everyone, and thank you for joining us to discuss Hut 8’s financial results for the third quarter of the year. The industry continues to face challenging headwinds, fluctuating energy prices, and increasing global hash rate, the Ethereum merge and Bitcoin now in its fifth month of hovering around the US$20,000 range. With the benefit of hindsight, it’s clear that we were prescient in taking a balance sheet first approach, which has allowed us to continue operating thoughtfully and strategically. Throughout the quarter we remained focused on optimizing operations for both our mining and high performance computing businesses. We were successful in reducing our cost per coin by nearly 30% over the second quarter, and installed an aggregate of 2,205 new miners at our mining sites during Q3, bringing our operating capacity to 3.07 exahash, which is a 10% improvement over Q2.

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In our HPC business we completed re renovations and upgrades to our flagship data center in Kelowna, British Columbia, and generated $4.4 million in revenue, comprised primarily of monthly recurring revenue from a number of client segments, including the Blockchain and emerging technology industry. Ahead of the Ethereum merge we redeployed 180 GPU units to the Kelowna data center and are currently redeploying the balance of our fleet to our data centers to explore new opportunities to leverage the hardware, including in the zero-knowledge proof and Layer 2 space. Moving on to Bitcoin, with the largest self-mined, unencumbered reserves of any publicly listed company, we continue to be bullish on Bitcoin. In spite of the prolonged downward pressure on the digital asset over the last several months, huddling continues to be the right approach for Hut 8 and our shareholders, particularly as we get closer to the next halving, we believe we’ll see Bitcoin go up and to the right, which will further enhance our balance sheet.

In the meantime, our stack sets us apart from our peers, given the inherent flexibility it affords us as we continue to prudently manage the business going forward. While we still intend to explore opportunities that will allow us to generate additional income from our stack, given the ongoing market instability and risk profile at the present time, we will remain conservative and maintain our stack in cold storage. We have a long-term vision to execute a business strategy with three pillars continuing to mine Bitcoin in a pool environment, maximizing the value of our Bitcoin reserves and growing our HPC data center business. This strategy continues to be the right one for Hut 8, it is keeping us focused through this bear market, and we are in a strong position to continue to make the right decisions for our continued growth.

Before I turn it over to our CFO, Shane Downey, who will review our key financial results, I would like to thank our Board for their ongoing support and guidance, our executive team for their leadership and our team for their execution across the business. To our investors, thank you. We know it has been a very dynamic time for the broader industry, and your support of Hut 8 is very much appreciated. Shane, over to you.

Shane Downey: Great, thanks Jaime. And good morning everyone. Given the challenging macro environment, we produced solid results for Q3 2022. We achieved revenue of $31.7 million for the quarter an $18.6 million decrease relative to the prior year, third quarter of $50.3 million. This year-over-year decrease was driven by the price of Bitcoin, which more than offset the expansion of our Bitcoin mining fleet and incremental contributions from the high performance computing business we acquired in Q1 of this year. We achieved revenue of $27.3 million from digital asset mining activities as we mined 982 new Bitcoin. This compares with $47.9 million of digital asset mining revenue in the same quarter of 2021, when we mined 905 Bitcoin.

We increased our mining capacity by a further 10% in the quarter, while our average cost of mining Bitcoin fell by 29% relative to the second quarter of 2022, reflecting favorable power rates combined with our progressively more efficient fleet. Our high performance computing business contributed an additional $4.4 million of revenue in the quarter, the majority of which is monthly recurring revenue. Cost of revenue for the quarter was $45.6 million compared to $21.2 million in the prior year, and consists of site operating costs and depreciation. The increased depreciation expense from $5.2 million in Q3 2021 to $25.3 million in Q3 2022 is primarily attributed to the increased number of miners deployed as well as mining infrastructure and data center assets acquired.

Site operating costs increased by $4.3 million to $20.3 million from Q3 2021. Within the digital asset mining operation, site operating costs increased by $2 million consistent with expansion of our mining fleet. We incurred $2.3 million in operating costs related to the high performance computing operations, all of which are incremental year-over-year. Of note, with respect to our operations, late yesterday, we delivered a notice of events of default to Validus Power Corp., a third party supplier of energy to our North Bay site over failure of Validus to achieve key operational milestones, while the dates contemplated under the power purchase agreement. Validus has also demanded that the company make payments for delivery of energy that are higher than those negotiated under the terms of the PPA.

We intend to pursue all legal remedies available to us to enforce the terms of the PPA, and we’ll share additional updates as appropriate. In terms of margins, our digital asset mining operation generated mining profit of $9.3 million versus $33.5 million in the prior year period, reflecting the combination of lower Bitcoin price and increased electricity costs. In light of these external factors, we are generally satisfied with the operating performance in the quarter. General and administrative costs in Q3 were $11.2 million compared to $10.8 million in the prior year. The increase was due to a combination of higher personnel costs, insurance premiums, and other costs, largely in support of the high performance computing line of business.

This increase was partially offset by lower sales tax expense and share based compensation payments expense. Sales tax expense decreased by $2.5 million, primarily related to an overall decrease in the company’s purchases and imports of mining equipment relative to the third quarter of 2021. SG&A expense related to the high performance computing business was $1.6 million for the quarter. We recorded a net loss of $23.8 million for the quarter compared to net income of $23.4 million in the prior year period. This net loss was primarily driven by lower revenue from digital asset mining operations and higher cost of revenue in the third quarter of 2022. Also impacting the net loss, we recorded a $7.3 million non-cash gain on revaluation of our digital assets, as a result of the increase in price of Bitcoin quarter-end-over-quarter-end, and we incurred a non-cash loss of $2.9 million on revaluation of warrants liability.

Reflecting the operating results discussed previously, Hut 8 achieved the adjusted EBITDA of $2.1 million for Q3 2022 compared with $30.7 million in the prior year period. Turn to the financial position, our balance sheet remains healthy with minimal debt and a cash balance of $33 million as of September 30, 2022. On August 17, 2022, we entered into an equity distribution agreement pursuant to which we established an out-the-market equity program with maximum proceeds of up to US$200 million or approximately C$270 million. To-date, we’ve raised US$2 million or approximately C$2.6 million in net proceeds under this program. In light of the challenging capital markets environment generally, combined with ongoing volatility impacting the digital asset space, we remain committed to our conservative approach to balance sheet management.

We are pleased with the modest level of non-recourse equipment financing we have in place, and that our substantial digital asset holdings remain fully unencumbered. Our Bitcoin holdings are marked at fair value and totaled $223.4 million as of September 30, 2022 based on 8,388 Bitcoin held and reserve. Our conservative approach to balance sheet management means we’ve been able to continue our long-term huddle strategy. We have not sold any Bitcoins since early 2021. With that, I will turn the call back to Karlen for analyst Q&A.

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Q&A Session

Operator: Thank you. Ladies and gentlemen, we’ll now conduct a question-and-answer session. Your first question comes from Joseph Vafi from Canaccord Genuity. Joseph, please go ahead.

Joseph Vafi: Hi, good morning, everyone. Nice to see your conservative strategy shining right here today. Maybe we’ll just start with looking as we are sitting here, getting ready to exit 2022 and we look to next year, I mean, there’s a lot of uncertainty out there relative to Bitcoin, the macro, et cetera. And I know you’re staying conservative. I was just wondering if you could provide some insight for us and what the plan may be for next year in terms of maybe increasing hash rate or power capacity or continuing to diversify the business maybe over in the high compute side. And then I have a quick follow up.

Jaime Leverton: I’ll take that. Thanks so much, Joe. We’ve been transparent since €“ really a year ago now with our strategy to be opportunistic for both organic and inorganic growth. So obviously, I can’t give any guidance but that continues to be our plan.

Joseph Vafi: Got it. I think that short answer goes today a lot. So maybe I’ll just kind of follow up on that Jamie, and how do you €“ when you look at the industry, there’s clearly some distress out there in the industry today. How do you think this industry evolves in 2023? Given what’s happening, do you expect to see merger activity accelerate industry wide or perhaps some other dynamics? And what do you think happens with this hash rate with Bitcoin down here, it’s been kind of a very resilient hash rate, so just any comments you have on that would be great. Thanks a lot.

Jaime Leverton: Yes, no, my pleasure. I think the hash rate has continues to surprise us all. I mean, it’s not €“ it isn’t behaving the way we would’ve thought it would behave, given the continued pressure on the price of Bitcoin and the increases we’ve seen in the energy markets. So really difficult to predict whether it’ll continue kind of defying expectations and continue to climb or start to behave in a more expected manner. So we really €“ it’s impossible to guide, Joe. It’s quite a dynamic situation more so now than I think we’ve seen in cycles in the past. And I think with respect to your first question inevitably, we will see consolidation in this space. I think we’ve seen a number of announcements come out from various parties in this space that are struggling on the leverage side of their business. So I do think over the next six to 12 months, we inevitably will see consolidation.

Joseph Vafi: Great. Thanks for those comments and thoughts, Jamie.

Jaime Leverton: My pleasure. Thanks, Joe.

Operator: Your next question comes from Gus Gala from Truist. Gus, please go ahead.

Gus Gala: Hi, Jamie. I wanted to follow up on Validus. I mean, it seems €“ I just want to get the sense, does this maybe push strategically, consider further €“ getting further vertical? Maybe look at the power generation side of things. And I just wanted to unpack like the dynamics of what’s going on with Validus exactly, is essentially they offered a price there not be able to like attain in the power markets themselves. Is that essentially like the nature of what’s going on and is there any chance we’re able to actually retain that nice pricing they had previously offered? Thanks.

Jaime Leverton: Yes, so it’s difficult for us to comment on it given that it is an active and live negotiation. But as we have updates on how the situation unfolds, of course, we’ll share them.

Gus Gala: Got you. But do we consider getting further vertical? I mean, just strategically we have, there’s a bit of a nice pile cash there. I know that things are distressed out there. It just plays into that type of question.

Jaime Leverton: Yes, we are actively looking at a variety of different opportunities and it’s really difficult to say at this point, what’s going to be the most strategic opportunistic path forward.