Applied Blockchain, Inc. (NASDAQ:APLD) Q3 2023 Earnings Call Transcript
Applied Blockchain, Inc. (NASDAQ:APLD) Q3 2023 Earnings Call Transcript April 6, 2023
Operator: Good morning, and welcome to Applied Digital's Third Quarter Third Fiscal Quarter 2023 Conference Call. My name is Melissa and I will be your operator today. Before the call, Applied Digital issued its financial results for the third quarter of fiscal 2023 ended February 28, 2023 in a press release, a copy of which will be furnished in a report on Form 8-K filed with the SEC and will be available on 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 go ahead.
Alex Kovtun: Thank you, operator. Good morning, everyone, and welcome to Applied Digital's fiscal third quarter 2023 conference call. Before management begins their 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 a 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 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 to 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 and our annual report on Form 10-K. You may get Applied Digital's Securities and Exchange Commission filings for free by visiting the SEC website at www.sec.gov.
I would 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 us for our fiscal third quarter 2023 conference call. I want to start by thanking our employees for their ongoing hard work including our construction and operations team for getting through the winter and keeping our facilities operational and construction timeline reasonable. Before turning the call over to our CFO, David Rench for a detailed review of our financial results, I'd like to touch on some updates from our business over the last quarter and why we remain excited about the future and in our ability to deliver long-term high margin sustainable cash flow. Let's start with an update on our two newest facilities, Ellendale and Garden City. We successfully completed energization of our 180 megawatt facility in Ellendale, North Dakota in early March.
This marks the second facility that we energized within North Dakota following the successful 100 megawatt facility in Jamestown that was energized in 2022. Recall that we broke ground on Ellendale in September, 22 and are now powering and operating the new site only six months after initial work began. This is a tremendous accomplishment given the harsh winter weather we experienced in North Dakota over the last several months along with some construction delays. We continue to ramp up our capacity and anticipate this first half of capacity will be turned on by the end of April and the rest to be turned on by the end of June. The facility is fully contracted by Marathon for five years with a flat rate agreement and our agreement begins upon energization.
Once fully energized, this location will bring Applied Digital to 280 megawatts of hosting capacity across all our facilities in North Dakota, all of which are contracted out to customers on multi-year terms. In addition to Ellendale, we're making great progress on our 200 megawatt Garden City facility in Texas. The construction of Garden City is complete and over 130 megawatts of miners are installed and ready to turn on. Our customers are continuing to send miners to the facility and we're actively installing them. Given the unique behind the meter aspect of this facility, we're awaiting final approval on some final technical details and expect to resolve these issues in the coming weeks to begin energizing the facility. Once we energize our Garden City facility, we anticipated ramping faster than our Ellendale facility due to the amount of miners already installed.
As a reminder, both our Ellendale and Garden City facilities are fully contracted with fixed prices and we are not exposed any volatility in the cryptocurrency markets. Our 100 megawatt Jamestown facility continues to perform as expected and operated at full capacity throughout the quarter as we delivered revenue of $14.1 million in the quarter exceeding the $12 million steady-state capabilities of the facility that we previously discussed. As mentioned on our last call, we successfully retrofitted a small portion of our existing facility in Jamestown to accommodate HPC requirements to support a web three application with a non-crypto customer. We have decided rather than to use the GPU capacity for the web three application, it would be better used for machine learning and AI applications and have onboarded multiple customers and recognized our first HPC revenue in the quarter.
We also broke ground on a 5-megawatt standalone facility adjacent or Jamestown site in December that will host several hundred graphics processing units for machine learning application with a new customer. Our first GPUs in the new facility are expected to be operational later this month or early May. The build-out will be completed in two additional stages with the first scheduled to come online this summer, and the second later in the year. When finalized, we expect to have over 7,000 NVIDIA A100 class GPUs in the building, making it one of the largest GPU clusters of its kind in the world. Importantly, it's worth noting that demand for hosting capacity across our facilities has not been impacted during the last several months and we're exploring numerous opportunities.
Now let's discuss the HPC opportunity in front of us and why we're excited about the year ahead. While we continue to see robust demand from cryptocurrency miners, we aim to diversify our customer base and exposure to the growing segments of the HPC market, as we believe that will be the highest return of capital in the long-term for our shareholders. Our goal remains to get at least 10% of our revenue from HPC by the end of this calendar year and ultimately diversify our revenue to a 50/50 split by 2025. We remain optimistic about the growth opportunities in HPC, while which is expected to reach 900 billion globally by 2030 and remain well positioned to capitalize on this opportunity. As data continues to grow at an exponential rate, more data sources will required - will be required to store the data and we believe our next-generation facilities are ideal hosting sites for HPC applications as they can accommodate the unique demands for this growing industry.
Our data centers offer a more purpose-built solution offering, lower costs, combined with higher computing power compared to traditional data centers that are typically focused on delivering low latency and high computing power. We are well positioned for success in this space, given our expertise in hosting Bitcoin mining and realize the HPC applications require a different type of engineering that more resembles what you would see in an ASIC world at Bitcoin mining because of its dense power. The density of racks is a key point as each HPC applications require a different set up that provides sufficient power and cooling to handle those unique needs and properly scale efficiently. These applications don't require ultra-low latency and so we believe that the deciding factor on whether these applications will be hosted comes down to the cost of compute.
Our next-generation data centers are optimized for green computing, and we aim to be the lowest cost compute provider, which are access to renewable energy and air cooling. To close, we remain confident that Applied Digital will continue to be a leader in digital infrastructure with our next-generation data centers. Demand for our services from both traditional customers and emerging HPC applications remains robust, which validates our position as a financially strong and leading digital infrastructure provider to serve various hosting needs. With that update, I'll pass it over to our CFO, David Rench for a financial update.
Photo by Austin Distel on Unsplash
David Rench: Thanks, Wes, and good morning everyone. Before I begin my remarks, I would like to note that like last quarter's call, since we did not have operations in a year ago comparable period, we will not be providing any year-over-year comparisons. Revenues in the fiscal third quarter were $14.1 million, which were entirely attributable to our hosting operations. The Jamestown site operated at full capacity throughout Dakota. Cost of revenues in the fiscal third quarter were $10.5 million, consisting of $8.6 million of energy cost to generate our hosting revenues, $900,000 of depreciation and amortization expense and $1 million of personnel expense for employees directly working at our Jamestown hosting facility. Adjusted gross profit, a non-GAAP measure that excludes depreciation embedded in the cost of revenues and one-time, electricity charges was $4.4 million or 31% of revenue for the fiscal third quarter of 2023.
Operating expenses for the fiscal third quarter of 2023 were $10.5 million, which includes $4.5 million of stock-based compensation, $3.9 million in other selling general and administrative costs and $1.1 million in depreciation and amortization expenses. Net loss attributable to Applied Digital for the fiscal third quarter of 2023 was a loss of $7 million or a loss of $0.08 per basic and diluted share based on a weighted average share count during the quarter of approximately $94.1 million. Adjusted net loss attributable to Applied Digital for the fiscal third quarter of 2023 was a loss of $7 million or a loss of $0.08 per basic and diluted share, based on a weighted average share count during the quarter of approximately $94.1 million. Adjusted net loss attributable to Applied Digital, a non-GAAP measure for the fiscal third quarter of 2023 was a loss of $1.4 million, or a loss of $0.01 per basic and diluted share, based on a weighted average share count during the quarter of approximately $94.1 million.
Adjusted EBITDA, a non-GAAP measure for the fiscal third quarter of 2023 was $900,000. Lastly, on our balance sheet. We ended the fiscal third quarter of 2023 with $22.9 million in cash and cash, equivalents and $23.7 million in debt. During the third fiscal quarter of 2023, we received $11.7 million in net customer deposits and $32.3 million in net deferred revenue, which collectively amounted to a $44 million net cash inflow due to the structure of our commercial arrangements with our customers that incorporate upfront deposits and prepayments. In certain contracts, the prepayments were amortized back to the customers for the first year of their contract with no impact to revenue recognition, but the timing of cash flow with upfront cash to us is a major benefit for the company and that it helps with our CapEx funding needs as we build our data centers.
Our balance sheet remains strong and we have no exposure to Celsius Network, First Republic Bank, FTX, Signature Bank, Silicon Valley Bank, or Silver Gate Capital Corporation. Now turning to guidance. Similar to last quarter, we will not be providing explicit guidance for the fourth quarter, given the revenue materiality of our Garden City potentially coming online and the continued ramp of the Ellendale facility that should occur in the fiscal fourth quarter. Once those facilities are online, we will have nearly 500 megawatts of hosting capacity that we expect to put us in an annualized adjusted EBITDA run rate of approximately $100 million. That completes my financial summary. Now I'll turn the call over to Wes for closing remarks.
Wes Cummins: Thank you, David. I want to add a little more detail around our expectations for the current quarter. While we expect Garden City to energize during the quarter, if we exclude it completely and look at our expected ramp of Ellendale, we expect to generate approximately $24 million of revenue and approximately $4 million of EBITDA. Before we get to Q&A, I'd like to quickly go over some key goals and initiatives for our company as we look to the future of Applied Digital. We remain focused on operating our Jamestown facility of high, efficiency and look forward to energizing our Garden City facility and continuing to make progress at our Ellendale facility in the near term. We will also continue to build out our non-crypto use cases to demonstrate the broad capabilities of our next-generation data center assets for HPC applications.
So while the crypto industry remains volatile, we are well positioned to capitalize on strong demand for both crypto and non-crypto customers for our services. I remain optimistic about our future and what thank all of our team members for their dedication and service to Applied Digital. With that operator, let's open up the call for questions.
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