TeraWulf Inc. (NASDAQ:WULF) Q4 2023 Earnings Call Transcript

TeraWulf Inc. (NASDAQ:WULF) Q4 2023 Earnings Call Transcript March 19, 2024

TeraWulf Inc. misses on earnings expectations. Reported EPS is $-0.09 EPS, expectations were $-0.048. WULF isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to the TeraWulf’s 2023 Fourth Quarter and Full Year Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Jason Assad, TeriWulf’s Director of Corporate Communications. Thank you. Mr. Assad, you may begin.

Jason Assad: Thank you, operator. Good afternoon, and welcome to TeraWulf’s earnings call. With me today 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 we may make additional forward-looking statements during the Q&A session of the call. 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 such forward-looking statements.

Investors are cautioned that 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 Commission, which may be viewed at sec.gov and in the Investor section of our corporate website at terawulf.com. Finally, please note that on today’s call, we’ll refer to certain non-GAAP financial measures. Please refer to our company’s periodic reports on Form 10-K and 10-Q and on our website for 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.

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

Paul Prager: Thank you, Jason, and good afternoon, everyone. We appreciate your attendance today as we discuss our fourth quarter and full year 2023 financial results. This past year has been marked by significant growth and achievements for TeraWulf, showcasing rapid organic growth at our existing sites, substantial debt repayment and enhanced liquidity. We’ve not only met, but surpassed several strategic objectives and I’m excited to share these accomplishments with you. Firstly, TeraWulf specializes in Bitcoin mining, leveraging zero carbon energy resources at our two top-tier data centers, our wholly-owned and operated Lake Mariner facility in Upstate New York, sourcing 93% zero carbon grid power, and the Nautilus Cryptomine facility in Pennsylvania, a joint venture with Talen entirely powered by nuclear energy.

As of the end of February, these two industrial scale mining facilities achieved a combined self-mining hash rate of 8 exahash per second facilitated by approximately 50,000 deployed miners, representing a more than three-fold increase from last year. Despite challenges posed by record high network difficulty, we produced 971 Bitcoin during the fourth quarter alone, contributing to a total of 3,407 Bitcoin mined throughout 2023. I’d like to take a moment to put these figures in context. During the fourth quarter, we produced 971 Bitcoin, resulting in a total value of $34.8 million and an adjusted EBITDA of $16.4 million. Utilizing Bloomberg consensus annual adjusted EBITDA estimates for 2024 of $96 million and our current enterprise value of approximately $590 million, this would suggest we are trading at a multiple of 6 times.

In comparison, some of our competitors are trading at multiples as high as 16 times with an average in our peer group of 9 times. We recognize that market value serves as an important measure of our progress over time. Our steadfast commitment lies in consistently delivering exponential growth in hash rate, with unparalleled access to low-cost, zero-carbon power at our existing facilities. The importance of infrastructure scalability cannot be overstated. It forms the very bedrock of our strategic approach. Scalability ensures not only stability and control, but also confers significant long-term cost advantages. It empowers us to optimize operational efficiency, strategically expand our operations, and enhance profitability. This unwavering focus on profitability assumes heightened significance as we approach the impending halving event.

We are committed to achieving a 300-megawatt infrastructure capacity in operation by the end of 2024, with plans to further expand to 550 megawatts of deployed infrastructure by 2025. This expansion will result in approximately 28 exahash, assuming the current generation of miners. Additionally, we are actively exploring options in addition to Bitcoin mining to optimize the utilization of our extensive proprietary infrastructure to unlock additional value. To this end, in 2023, we established Wulf Compute as our internal innovation hub, focusing on research, development and deploying our extensive and scalable digital infrastructure. Following a successful pilot phase, involving a compact NVIDIA GPU system to enhance generative AI and large language model applications, we took the step of dedicating a 2-megawatt power block at our Lake Mariner facility.

With over 300 megawatts of available infrastructure at Lake Mariner strategically positioned to cater to data center requirements, this initial allocation is part of a broader high-performance computing initiative and serves to provide diversification of the company’s revenue streams. Investments in cloud infrastructure by prominent hyperscalers such as Microsoft, Amazon, Meta, Oracle, and Google have experienced impressive average annual growth, exceeding 30% over the past five years. In 2022 alone, these entities collectively spent $158 billion. The demanding specifications of hyperscalers necessitates sites capable of accommodating several hundred megawatts to sustain multiple data center buildings ranging from 40 to 80 megawatts each. These locations must also offer direct access to extensive contiguous land suitable for constructing data centers, power banks, parking facilities, loading zones, and ancillary buildings, access to water to run in the most efficient manner, and critically must adhere to a sustainable ESG framework.

TeraWulf is uniquely positioned to fulfill all these requirements. Our large-scale energy infrastructure, coupled with access to zero-carbon, low-cost power is invaluable for meeting the growing demand from Bitcoin mining and AI applications. Our infrastructure plays a pivotal role in enabling this demand growth. Turning now to our financial position. We remain steadfast in our strategy to leverage our resilient low-cost infrastructure to maximize profits, repay debt, and return value to shareholders. Our performance in the fourth quarter highlights TeraWulf’s consistent achievement of industry-leading profitability. We estimate that our cost to mine a Bitcoin is among the lowest compared to other publicly-listed Bitcoin mining companies at approximately $25,000 per Bitcoin before the halving and $37,000 after the halving.

As the halving approaches in a month’s time, we anticipate that our position as the lowest-cost producer of Bitcoin will only be further strengthened, underscoring the value of our vertically integrated and sustainable business model. We’ve also made significant strides in debt repayment and liquidity. We repaid $40 million of principal in the last four months, bringing our debt balance to $106 million. With liquidity of almost $56 million as at the end of February and substantial projected free cash flow for the first quarter, we have the ability to reduce debt even further with an anticipated debt paydown of roughly $30 million in early April, which will bring the debt balance to $76 million. Allow me to address the matter of dilution. Throughout the fiscal year 2023, we exercised prudent management of our ATM facility, strategically selling approximately 58 million shares at an average price of $2.05 per share, resulting in a discernibly accretive impact.

From the proceeds, approximately $18 million was used for a voluntary debt repayment. The remaining funds were directed towards essential miner and infrastructure capital expenditures, with an additional $20 million retained as surplus liquidity on our balance sheet to navigate the halving in a few weeks. While I am fully cognizant of the concerns surrounding dilution, both out of my fiduciary responsibilities to you and as a leading and significant shareholder, I urge you to consider the substantial and accretive impact of these allocated funds. Looking forward, we have far more flexibility in sourcing capital given our current cash flow generation. For instance, in February, we produced 364 Bitcoin at an average cost of approximately $26,000 per Bitcoin, providing total value of $17.8 million, with $8.4 million flowing directly to the bottom-line.

That’s significant. As of April, we expect our net debt will stand at approximately $55 million, nearly 50% lower than at the beginning of the year, placing the company in its strongest position ever. Finally, I’d like to take a moment to thank the incredible team at TeraWulf for their dedication, innovation, and hard work, which have been critical in achieving the milestones I’ve highlighted today. It is your effort that drives our success, and I’m proud to lead such an outstanding group of professionals. Now, I’ll hand the call over to our CFO, Patrick Fleury, for a detailed financial review.

Patrick Fleury: Thank you, Paul. During 2023 and continuing into the first quarter of 2024, the company accomplished several notable steps to achieve positive cash flows from operations: number one, it amended its debt to remove fixed principal amortization and utilized a free cash flow sweep to rapidly reduce our debt balance; number two, commenced mining operations at Nautilus; number three, commenced mining operations at Buildings 2 and 3 at Lake Mariner; and number four, we paid over $40 million of debt and positioned the company with over $20 million of excess liquidity to navigate the upcoming halving. While my remarks for year-end would typically focus solely on annual results in year-over-year financial comparisons, our fiscal year 2022 results are less relevant given we only recently achieved targeted run rate operations of 5.5 exahash in the middle of 2023.

Therefore, in my remarks, I will focus on fourth quarter versus third quarter results in addition to year-over-year comparisons. All references to 2024 guidance in my remarks can be found in our March 6, 2024 press release. Before diving into the numbers, a quick reminder, there is a key difference between our GAAP financials and the monthly operating reports and 2024 guidance. 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 income or loss of investee net of tax line item on the GAAP income statement. In the fourth quarter of 2023, we mined 608 Bitcoin at Lake Mariner, and our net share of mined Bitcoin at Nautilus was 364 Bitcoin for a total of 972 Bitcoin or about 10.5 Bitcoin per day or a 2% decline over the 994 Bitcoin mined in third quarter 2023.

For fiscal year 2023, we mined 2,168 Bitcoin at Lake Mariner and our net share of mined Bitcoin at Nautilus was 1,239 Bitcoin for a total of 3,407 Bitcoin, inclusive of Bitcoin received from hosting profit share. Our GAAP revenues also saw outstanding growth of 23% quarter-over-quarter, reaching $23.3 million in 4Q ’23 from $19 million in 3Q ’23. Our value per Bitcoin self-mined this quarter, a non-GAAP metric that includes Bitcoin mined at Nautilus, averaged $35,836 per Bitcoin for a total of $34.8 million, as detailed and defined in our monthly operating reports and press releases. Our GAAP revenues year-over-year increased 361% from $15 million in 2022 to $69 million in 2023. Looking now at our gross profit. We saw an increase of 34% quarter-over-quarter from $10.6 million in 3Q ’23 to $14.3 million in 4Q ’23.

Our total power cost per Bitcoin mined, a non-GAAP metric that includes Bitcoin mined at Nautilus, was $10,178 in 4Q ’23 compared to $9,322 in 3Q ’23. Gross profit for the year increased from $4 million in 2022 to $41.9 million in 2023. As a reminder, in our GAAP financials, unlike our monthly operating reports, the company records proceeds received and to be received for demand response programs as a reduction in cost of revenue. These expected proceeds totaled $1 million in 4Q ’23 and $3.5 million in 2023. As disclosed in our 2024 guidance, we expect to achieve an average power cost, including demand response revenues and the impact of Nautilus’ $0.02 power contract of $0.035 per kilowatt hour in 2024. For 2023, we achieved an average power cost of $0.032 per kilowatt hour.

Operating expenses increased slightly quarter-over-quarter from $1.2 million in 3Q ’23 to $1.7 million in 4Q ’23. Annual operating expenses also increased slightly year-over-year from $3.3 million in 2022 to $4.9 million in 2023. These quarterly and annual increases were due to increases in repair costs, property insurance and staffing costs as we scaled operations at Lake Mariner. As disclosed in our 2024 guidance, we expect $13.5 million of operating expenses in 2024, which includes operating expenses at Nautilus. Of the $13.5 million total anticipated for 2024, approximately 50% is expected to be incurred at Lake Mariner and 50% at Nautilus. SG&A expenses decreased quarter-over-quarter from $10.3 million in 3Q ’23 to $8.8 million in 4Q ’23.

For the year-over-year period, SG&A expenses increased slightly from $36 million to $37 million. However, this increase was primarily due to an increase in: number one, non-cash stock compensation due related party for achieving a performance milestone; and number two, an increase in stock-based comp. Adjusting for these items, SG&A decreased 13% year-over-year from $32.3 million in 2022 to $28.2 million in 2023. As disclosed in our 2024 guidance, we anticipate approximately $27.5 million of SG&A in 2024. Depreciation remained stable quarter-over-quarter at $8.2 million in 3Q ’23 and $8.3 million in 4Q ’23. Year-over-year depreciation increased materially from $6.7 million in 2022 to $28.4 million in 2023, which was the result of an increase in mining capacity and infrastructure placed into service in 2023 at Lake Mariner.

During 2023, we recorded a loss on disposal of property, plant and equipment of $1.2 million related to disposals of miners at Lake Mariner. GAAP interest expense in 4Q ’23 and fiscal year 2023 was $9.3 million and $34.8 million, respectively, which includes cash interest expense and amortization of debt issuance costs and debt discount related to the term loan financing. However, cash interest paid during the three and 12 months ended December 31, 2023, was $4 million and $19.6 million, respectively. Notably, cash interest paid during the 12-month period actually includes 14 months of interest payments due to accrued interest for the fourth quarter of 2022 paid in January 2023 and 11 months of interest payments made in 2023 as interest is paid monthly in arrears as of May 2023.

In 4Q ’23, we reported $3.3 million in equity and net income of investee, net of tax, as compared to $0.9 million in 3Q ’23. For the full year 2023, we reported a $9.3 million loss in equity of investee, net of tax, as compared to a $15.7 million loss in 2022. These amounts represent TeraWulf’s proportional share of income or losses of the Nautilus joint venture. For the 2023 and 2022 fiscal years, these amounts include impairment losses of $13.6 million and $11.5 million, respectively, related to the distribution of miners from Nautilus to the company, whereby the miners were marked to fair value from book value on the date distributed. Our GAAP net loss for the fourth quarter was $10.8 million compared to a net loss of $19.4 million in 3Q ’23.

Our GAAP net loss for 2023 was $74.5 million compared to a net loss of $91.6 million in 2022. Our non-GAAP adjusted EBITDA for 4Q ’23 was $16.4 million, an 81% improvement over $9 million in 3Q ’23, and 2023 adjusted EBITDA was $30.7 million. Turning our attention now to the balance sheet. As of December 31, we held $54 million in cash, with total assets amounting to $378 million and total liabilities of $155 million. With the recent achievement of our targeted 210 megawatts and 8 exahash of operating capacity in first quarter ’24, we anticipate a consistent and rapid reduction in our long-term debt with an approximate $30 million payment anticipated the first week of April. Furthermore, in fiscal year 2023, we reduced our net working capital, excluding the current portion of long-term debt from approximately negative $60 million at December 31, 2022, to positive $31 million as of December 31, 2023.

As I’ve mentioned in previous quarters, you may note from our balance sheet that we do not hold our Bitcoin in treasury, but rather execute a “monetize what we mine” strategy, whereby we liquidate Bitcoin to pay operational expenses and capital expenses and overhead as needed rather than dilute shareholders to fund these costs. We mine Bitcoin more efficiently and profitably than most of our peers with the intent to return that profit to shareholders in the form of debt paydown, organic growth and potential future dividends and share buybacks. We are among the lowest marginal cost producers in the industry and provide full cost transparency and guidance to our shareholders as any reputable and leading commodity business does. As a former institutional investor myself, I believe the simple fact that certain of our peers, the largest public Bitcoin mining companies and self-declared industry leaders, do not is an insult to investors and research analysts.

One can only logically presume that their lack of transparency is by design, knowing that their cost figures is adequately disclosed may materially impact investor sentiment. With the April halving fast approaching and all of us about to lay our cards on the table for all to see, I’m very confident in the hand TeraWulf is holding. We’ve long suggested that not all exahash was equal and that we anticipate a likely changing of the guard post halving and upon second quarter 2024 earnings results being reported. As disclosed in our 2024 guidance, we expect to achieve a marginal cost of production, which includes every single cost in the company of approximately $36,000 per Bitcoin post halving. In conclusion, I hope that during this call today, our financial objectives were reiterated and 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 Paul and look forward to answering your questions.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Mike Grondahl with Northland Securities. Please proceed with your question.

Mike Grondahl: Hey, thanks guys. Two questions. I’ll ask both of them upfront. But the first one, as it relates to your HPC initiative, what are the two assets that have the most value for you guys as you’re going out to the market there? And related to that, how do you value those assets? And what’s kind of the timeline to harness that value? And then, secondly, any thoughts on kind of the elevated short interest in the stock?

Patrick Fleury: Yeah. Hey, thanks, Mike. Can you hear me okay? It’s Patrick.

Mike Grondahl: Yes.

Mike Grondahl: Okay. Great. So, sorry for the — we’ve got management team all over the country at different conferences and a lot going on today. So, I’ll start, Paul, but feel free to jump in. But Mike, with regard to HPC and AI, look, I think size and scale and economies of scale matter. And so, there’s very few sites left in the United States that have over 50 megawatts. We have 300 megawatts at Lake Mariner, but also have access to land, abundant and cheap and largely zero carbon power and water. Remember, we’re at the site of a retired coal plant that used to pull hundreds of thousands of gallons of water from the lake. And so, I think being able to check the box on all of those items is very rare, and it positions you for value creation, similar to our partner talent and what they just realized at their site. So, I’ll pause there. Paul, do you want to add anything to that?

Paul Prager: No, I think you got it. I would want to underscore how important ESG is to these hyperscalers. So, land, power, cost of power and that green focus is fundamentally critical to these guys. I think one other element here is how quickly they could get active. And I think our sites already years earlier than maybe some of the competitors that are currently in development, looking for their connections. So, I think the proximity or the immediacy of their availability for a hyperscaler is very compelling to them as well.

Patrick Fleury: And then, Mike, just to address your second question, it’s not lost on us. I see short reports weekly. So, just to give you an idea, we have about 47 million shares sold short today. And as you know, insiders and management, we have among the largest among all the Bitcoin miners, insider ownership, which is why we’re so careful and prudent with the ATM. And we have, I think, around 300 million common shares outstanding. Of that amount, just broadly speaking, probably 100 million to 150 million is held by what I would deem insiders. So, with 47 million shares short, I mean you’re talking about 25%-plus of the actual float that’s out there on the stock. And I can actually see — I can’t see by name because the short reports don’t say that.

But I can see that, for example, one fund is short close to 70% of that 47 million. And so, I can tell you, I think that’s a crazy position because like I said, I think we’re about to change the guard in the space where I think profitability and valuation based on profitability will really matter as opposed to previously, these companies have been valued on revenue and exahash, which just doesn’t make any sense to me. I mean I’ve seen that in the ’90s in telecom and in the 2000s in power, and none of that ended well. So, I think it’s something we’re focused on. A lot of that short interest or the remaining, call it, around, I don’t know, 10 million, 15 million shares is actually, I think, part of our lender group and that will unwind itself in the first quarter because they own warrants in the company.

Some of them have sort of taken that market risk out by shorting the stock. And when we deliver in those warrant shares, that cover will — that short interest will be covered and go away. So look, I think we’re excited about that because I think there’s a real potential short squeeze opportunity as we continue to put up good numbers.

Mike Grondahl: Got it. And then maybe just a quick follow-up. On the 300 megawatts in the land and the water, have you attempted to put a rough valuation on that? What you think that’s worth in today’s market?

Patrick Fleury: So, not yet, Mike. But look, I think we’re going to — this stuff takes time. I think what I will do quickly is just lay out for you the space really is characterized by a barbell approach right now. And so, what I mean by that is on the right hand, you have stocks like the Magnificent 7 that are in effectively an arms race to secure capacity and those deals look very different. Those can be 5-, 10-, 15-, 20-year type deals where you’re building according to their specs and that is very financeable, right, because you’ve got a long-term contract and less capital intensive because we’re building the infrastructure and they’re bringing the gut. So, they’re owning the GPUs. And so, the other end of that spectrum, the other end of the barbell is a lot of newly-formed AI, HPC companies that are funded by venture capitalists or otherwise that are very legitimate but have sort of $50 million on balance sheet and want to enter into anywhere from six months to two-year deals, and then they’re relying on you to fund the infrastructure and the gut, so buy the GPU.