TeraWulf Inc. (NASDAQ:WULF) Q2 2023 Earnings Call Transcript

TeraWulf Inc. (NASDAQ:WULF) Q2 2023 Earnings Call Transcript August 14, 2023

TeraWulf Inc. misses on earnings expectations. Reported EPS is $-0.08 EPS, expectations were $0.02.

Operator: Ladies and gentlemen, good morning and welcome to the TeraWulf Inc. Second Quarter 2023 Earnings Conference Call. At this time, all participants are in the listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator instructions] It is now my pleasure to introduce your host Jason Assad, Director of Corporate Communications. Please go ahead, Mr. Harrison.

Jason Assad: Thank you, operator. Good morning, and welcome to TeraWulf’s second quarter 2023 earnings call. Thank you for joining us today for our call. With me on today’s call are Chairman and Chief Executive Officer Paul Prager and our Chief Financial Officer; Patrick Fleury. Before we get started, I’d like to remind everyone that our prepared remarks may contain forward-looking statements, which are subject to risk and uncertainties and that we may make additional forward-looking statements during the question-and-answer session. These forward-looking statements are subject to risk and uncertainties and actual results may differ materially. When used in this call, the words anticipate, could, enable, estimate, intend, expect, believe, potential, will, should, project and similar expressions as they relate to TeraWulf are as such a forward-looking statement.

Investors are cautioned that all forward-looking statements involve risk and uncertainties which may cause actual results to differ materially from those anticipated by TeraWulf at this time. In addition, other risks are more fully described in TeraWulf’s public filings with the U.S. Securities and Exchange Permission, which may be viewed at www.scc.gov and in the Investor section of our corporate website at www.therawolf.com. Finally, please note that on today’s call, we will refer to certain non-GAAP financial measures. Please refer to our company’s periodic reports on Form 10-K and 10-Q and to our website for a full reconciliation of these non-GAAP performance measures to the most comparable GAAP financial measures. We’ll begin today’s call with prepared remarks from Paul and Patrick, then we’ll proceed to Q&A.

It’s my pleasure to now turn the call over to TeraWulf’s CEO, Paul Prager. Paul?

Paul Prager: Thank you, Jason, and good morning everyone. Thank you for joining us on our second quarter 2023 earnings call. We’ve accomplished quite a lot since our last formal call, and I would like to review a few key milestones that we’ve achieved during the first half of 2023. One, we successfully executed our rapid growth plans. We launched TeraWulf just over a year and a half ago and, as promised, achieved 5.5 exahash and 160 megawatts of power capacity by the end of Q2 2023. This past March, we began the energization and deployment of 50 megawatts of zero-carbon mining capacity at our jointly-owned, 100% nuclear-powered Nautilus facility. And in June, we completed Building 2 at our Lake Mariner facility, housing an additional 50 megawatts.

To exceed the accomplishments of our peers in such an abbreviated period of time is testament to the excellence, perseverance, and professionalism of the TeraWulf team, and especially our folks on the ground. Two, we assembled one of the most efficient miner fleets in the sector and as we continue to scale, remain confident our price and efficiency per exahash metrics will prove even more impressive. Our recently announced expansion plan involving 18,500 of the latest generation S19j XP bitcoin miners will only further establish Wulf as one of the most efficient mining fleets in the sector at an efficiency of 25.7 joules per terahash. You should rest assured our development and operations teams will continue to work to differentiate Wulf as the preeminent miner.

Three, we are setting the standard for financial and operational transparency. Our CFO, Patrick Fleury, a former partner, 20-year investor and lender, you will hear from him in a moment. He has significantly raised the bar on reporting financial metrics. By setting the standard for the industry with our operational and financial transparency, we hope investors will confidently evaluate us alongside the other miners. Four, we’ve greatly enhanced our investor communications. In April, we were fortunate to welcome Jason Assad on board, a respected 20-year communications veteran to our team. Investors may recognize him as one of the first team members of Marathon Digital Holdings upon their initial pivot into bitcoin mining. Thanks to this new addition, we have advanced our investor communications by implementing a comprehensive strategy that includes regular updates, increased transparency, and enhanced engagement opportunities.

In addition, we’ve released a virtual site tour in June, providing our investors an inside look at our state-of-the-art mining facilities and remarkable operations team. After highlighting some of our accomplishments so far in 2023, I would like to underscore what we believe continues to unquestionably set TeraWulf apart from our peers. First, we have the best assets. Our mining facilities are arguably the best in class in the industry with unmatched power costs, ideal climate, and significant expansion capability. In energy markets, location is everything, and our facilities are located in robust, well-developed markets where we are able to service the grid and the surrounding communities. As a zero-carbon miner, we are strategically positioned relative to our peers in what we believe will be an increasingly stringent regulatory environment.

Second, we have the energy advantage. Our team has been working together in the energy infrastructure sector for decades. Bitcoin is all about energy, and we are experienced in procuring low-cost energy both at term and at scale. Our two-cent power at Nautilus and abundant low-cost power in upstate New York, translates into a power cost per Bitcoin that is among, if not the lowest in the sector. We are one of only a few Bitcoin miners that discloses our true power cost each month and if you check our monthly production and operations reports, you will find us unrivaled in this metric. Third, we have organic expansion capability. When it comes to Bitcoin mining, size matters. Our two sites were developed with expansion potential as a key element, and everything from our power import capacity to the layout of our warehouses is designed to grow.

We are in the process now of expanding our Lake Mariner facility by another 43 megawatts. Scalability and adaptability are vital, and our Lake Mariner and Nautilus facilities have both. The time and cost to replicate these facilities is substantial and represent a significant barrier to entry. Fourth, we are uniquely aligned with our investors. As a significant shareholder in TeraWulf myself and investor, my goals are in complete alignment with yours. In only the last year, I have personally invested over $12 million of my own money, and collectively, our insiders own approximately 55% of the company’s shares. Why does this matter? Because you can bet that if we ever dilute the stock, it will only be accretive and in the very best interest of the company and its shareholders.

In short, we only win if you win. Every move from this point forward is about advancing our mission and pushing the boundaries of what is possible for our vertically integrated business and our shareholders. We remain laser-focused on scaling mining operations at our existing sites while opportunistically pursuing strategic opportunities in a financially responsible manner. Importantly, we believe that not all Exahash is created equal and that the upcoming halving in April is likely to lead to a changing of the guard. We have positioned ourselves for profitability both now and post-halving. We look forward to taking advantage of what we expect may happen as the fundamental flaws of some of our peers are illuminated and acknowledged by investors.

TeraWulf is led by an accomplished diverse management team with 30-plus years of experience in developing and managing energy infrastructure. Our core management team has been together and working side by side with one another for the last 15-plus years. I believe it is this unique experience and perspective that is paying and will continue to pay dividends as we build out our operations, focused squarely on building shareholder value. As a fellow shareholder with a material interest in our collective success, I want to thank you for your invaluable trust and support as we focus on building the leading mining company. I will now hand the call over to our CFO, Patrick Fleury, for a more detailed financial review. Patrick?

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Patrick Fleury: Thank you, Paul. As Paul highlighted in the beginning of this call, TeraWulf performed exceptionally well in Q2 this year, showcasing consistent growth both year-over-year and quarter-over-quarter. Notably, our production has seen a steady increase in the first half of 2023, resulting in positive operational outcomes reflected in our Q2 financials. These results demonstrate a continued upward trend in revenue, enhanced liquidity, and free cash flow, positive momentum we’re committed to sustaining moving forward. A quick reminder, there is a very key difference between our GAAP financials and the monthly operating reports and guidance presented in our July investor presentation. As a result of our 25% ownership in Nautilus, the revenue, cost of revenue, operating expenses, depreciation and amortization at Nautilus are not consolidated into our GAAP financial statements.

Instead, the financial impact of the Nautilus joint venture is reflected in the equity and net loss of investee net of tax line item on the GAAP income statement. Diving into the numbers for the second quarter of 2023, we mined 506 Bitcoin at Lake Mariner, and our net share of mined Bitcoin at Nautilus was 403 Bitcoins for a total of 909 or about 10 Bitcoin per day, nearly double our Bitcoin production of 533 Bitcoins in Q1 of this year. Our revenues saw an outstanding growth of over 1,000% compared to the same period last year, reaching 15.55 million, and our revenue from hosting also saw a notable rise. Our revenue per Bitcoin this quarter averaged 27,912 for a self-mining revenue equivalent of 25.3 million, as detailed and defined in our monthly operating reports and press release.

Looking now at our gross profit, we saw an increase of over 1,200% to $10.3 million compared to last year’s second quarter, as well as an increase in our gross profit margin from 57% to 67%. Our total power cost per Bitcoin mine was approximately 7,200 in 2Q compared to approximately 8,400 in 1Q of this year, a decrease of approximately 15% that can be attributed to the full 2Q contribution of Nautilus’s fixed $0.02 power. I want to note, these power costs are fully loaded and include taxes, capacity fees and transmission costs. Unlike Nautilus, power costs do float at our Lake Mariner facility, where we are confident that we will achieve an average annual power cost of 4.5 cents per kilowatt hour or lower, despite the facility subjectivity to seasonal power price fluctuations.

Operating expenses remain stable year-over-year at approximately $1.1 million. SG&A expenses increased year-over-year from $6.8 million in 2Q’22 to $8.6 million in 2Q’23. This increase was primarily due to increases of $1.3 million and $1.6 million in stock-based compensation and employee compensation and benefits, respectively, offset by decreases of $1.1 million and $500,000 in legal fees and insurance expenses, respectively. We continue to expect to realize SG&A of about $22 million to $23 million in 2023 per page 12 of our latest Investor Presentation, which reflects cost savings of over $10 million compared to 2022’s actual SG&A of about $36 million. Depreciation for the three months ended June 30, 2023 and 2022 was $6.4 million and $200,000, respectively, and the increase was primarily due to the increase in mining capacity due to infrastructure constructed and placed into service.

Interest expense for the three months ended June 30, 2023 and 2022 was $8.5 million and $4.1 million, respectively, an increase of $4.4 million. The increase in interest expense year-over-year is primarily due to an increase in the average principal amount outstanding from $123.5 million in June of 2020 to $146 million in June of 2023 and an increase in amortization of debt issuance costs and debt discount related to the term loan financing. Importantly, cash interest paid during the six months ended June 30, 2023 was $11.3 million, which included eight months of interest payments due to accrued interest for the fourth quarter of 2022 paid in January of 2023 and five months of interest payments made in the first half of 2023 as interest is paid monthly in arrears as of May 2023.

Equity and net loss of investee net of tax for the three months ended June 30, 2023 and 2022 was negative $3.3 million and negative $1.1 million, respectively. For 2Q’23, this amount includes an impairment loss of $4.6 million on the distribution of minors from Nautilus to the company whereby the minors were marked a fair value from book value on the date distributed. The impairment loss was the result of a reduction in the price of the minors between initial purchase and distribution. The remaining amounts represent TeraWulf’s proportional share of income or losses of Nautilus, which commenced commercial operations in February 2023. Our GAAP loss for the second quarter was $17.8 million compared to $13.9 million in the same quarter of last year.

Our non-GAAP adjusted EBITDA for 2Q’23 was $7.6 million, increasing by $14.7 million this quarter over the same quarter last year due to the ramp-up of operating capacity at both of our mining facilities. Turning our attention now to the balance sheet, as of June 30, we held $8.2 million of cash with total assets amounting to approximately $300 million and total liabilities of approximately $165 million. With the achievement of our targeted 160 megawatts and 5.5 exahash of operating capacity exiting 2Q ’23, we anticipate a consistent and rapid reduction in our long-term debt moving forward. Regarding our most recent expansion announcement, I’d like to emphasize for a moment just how significant this announcement is for TeraWulf. The purchase of 18,500 of Bitmain’s latest generation S19j XP miners is meaningful, not only because it is the first of its kind worldwide, but also because of the significant operating efficiencies it will drive ahead of next year’s halving event.

These miners will reduce our unit economic cost to mine Bitcoin by over 17% immediately. Come 2024, we believe that our fleet efficiency will be among the most efficient in the sector at 25.7 joules per terahash, and when coupled with a realized average power cost of 3.5 cents per kilowatt, positions us to maximize profits both before and after the halving. For a more detailed analysis of our unit economic costs, please see Page 12 of our latest Investor Presentation. In conclusion, I hope that during this call today, our financial objectives were made clear and simple. Maximize profits, repay debt, and return value to shareholders while providing investors access through transparency and accountability. With that, I’ll pass it back to the operator and I look forward to answering your questions.

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Q&A Session

Operator: [Operator instructions] Our first question comes from the line of Lucas Pipes with B Riley Security. Please go ahead.

Nick Giles: Good morning, everyone. This is Nick Giles on for Lucas. Really appreciate all the color. It would be great to just hear an updated view on organic growth opportunities that you have. How should we think about organic growth beyond these next 50 megawatts that you’ve outlined, maybe just from a site perspective and timing. Thank you very much.

Patrick Fleury: Hey, Nick. It’s Patrick and I’m here with Paul. So, good question. I think as we mentioned, this expansion, which is about 43 megawatts and then we’ll also have a little bit more 43 megawatts and then we’ll also be replacing the machines that we are hosting at Lake Mariner, so about 5,000 slots with the new order of the S19j XP as well. So, that’s obviously right in front of us and will be done by year end. We also have an additional 50 megawatts of potential expansion at Nautilus that’s shovel ready. And then obviously the Lake Mariner site can be expanded up to 500 megawatts if and when we want. So, I think we’re — as you know, we are very focused at staying at sites where we know and can control power cost. That is the number one focus of our team and these sites are very scalable. There’s a lot of economies of scale in this industry, as you know, and so we’re pretty pleased with the two sites that we have.

Paul Prager: Yeah. The only thing, Nick, I’d want to add is we have the team to do that, right? Our team’s been together 15 years, 20 years and we’ve done all sorts of M&A as well in the energy infrastructure space. So, if you look around the public miners, you kind of want to scratch your head sometimes at some of these deals that have been announced and some of the crazy valuations that people have come to on some of these stock for stock deals. That’s not going to happen here. Any acquisition we do has got to be accretive. It’s got to be right for the business and we have the team with the experience to negotiate those deals, value them properly, and execute on them.

Nick Giles: Thank you both for that. Maybe just on the M&A front, it would be great to just maybe get some additional color there. Would you say you’re seeing more opportunities come up as we approach to having, how would you describe the size of some of these opportunities? Thank you very much.

Paul Prager: Yeah, sure. If I could start and then Patrick. Again, our focus is going to be on some of the internal organic because it’s the low hanging fruit and it’s the one where we don’t have to worry about merging teams or other sites that we don’t know quite as well as our own. But certainly there are going to be winners and losers coming into the halving and it’s all going to be about efficiency and the cost to mine, but it’s also about the thesis. We’re very regulatory sensitive and therefore we built our business to be focused on zero carbon mining. So anything we do has got to be accretive and got to be consistent with our thesis. But go ahead, Patrick.

Patrick Fleury: Yeah, Nick, I would just add, look, I think, as we’ve talked, there’s 20 something public companies in the space. That’s just too many and anybody that’s been around commodity markets long enough has seen consolidation, whether it was in the early 2000s with the independent power producers or the 2010s with oil and gas companies, right? So I think that’s a really natural, as the sector becomes more mature, there’s got to be consolidation and the natural cycle we have in Bitcoin mining but having every four years, I think will drive that. So certainly a lot of discussions on that front, both public, private, but I think as Paul mentioned, there will be very natural winners and losers post-halving. And so I think that will like, our view is we’re really getting our house in order and preparing for that event and trying to position the company as strongly as we can.