Cipher Mining Inc. (NASDAQ:CIFR) Q4 2023 Earnings Call Transcript
Cipher Mining Inc. (NASDAQ:CIFR) Q4 2023 Earnings Call Transcript March 5, 2024
Cipher Mining Inc. beats earnings expectations. Reported EPS is $0.05, expectations were $-0.07. Cipher Mining 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 and thank you for standing by. Welcome to Cipher Mining Inc. Fourth Quarter and Full Year 2023 Business Update Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Josh Kane, Head of Investor Relations. Josh, please go ahead.
Josh Kane: Good morning and thank you for joining us on this conference call to discuss Cipher Mining's Fourth Quarter and Full Year End 2023 Business Update. Joining me on the call today are Tyler Page, Chief Executive Officer, and Ed Farrell, Chief Financial Officer. Please note that you may also review our press release and presentation which can be found on the Investor relations section of the company's website. Please note that this call will also be simultaneously webcast on the Investor Relations section of the company's website. This conference call is the property of Cipher Mining and any taping or other reproduction is expressly prohibited without prior consent. Before we start, I'd like to remind you that the following discussion as well as our press release and presentation contain forward-looking statements, including, but not limited to, Cipher's financial outlook, business plans and objectives and other future events and developments, including statements about the market potential of our business operations, potential competition and our goals and strategies.
The forward-looking statements and risks in this conference call, including responses to your questions are based on current expectations as of today, and Cipher assumes no obligation to update or revise them, whether as a result of new developments or otherwise, except as required by law. Additionally, the following discussion may contain non-GAAP financial measures. We may use non-GAAP measures to describe the way in which we manage and operate our business. We reconcile non-GAAP measures to the most directly comparable GAAP measures and you are encouraged to examine those reconciliations, which are found at the end of our earnings release issued earlier this morning. I will now turn the call over to Tyler Page. Tyler?
Tyler Page: Thanks Josh. Hi, this is Tyler Page, CEO of Cipher Mining. Thank you very much for joining our Fourth Quarter 2023 Business Update call. Let me begin the call with a few summary financial statistics from our outstanding fourth quarter of 2023. Ed will give a full breakdown of our numbers during his portion of the call, but I wanted to highlight our performance during the fourth quarter of 2023 upfront because it was the first quarter we have had since going public that featured completed operations at our original four data centers for the full quarter. In this sense, it provides the most accurate view of the progress we have made toward our vision of Cipher's full capabilities as a low cost producer of bitcoin. Our progress has been immense.
By mining 1,327 bitcoin in the quarter, a production increase of 252% year-over-year, we produced revenues of $43 million and GAAP net earnings of $11 million. We early adopted the new accounting standard in 2023, and these numbers include mark to market gains on our bitcoin inventory. But I think it is important to highlight that even under the previous accounting treatment for bitcoin, Cipher also would have produced positive GAAP net earnings for the quarter. This is not something most of our competitors can say. Our adjusted earnings were even stronger. We produced adjusted earnings of $28 million for the quarter, which represents massive progress and an improvement of over $50 million year-over-year. We are very proud of these milestones as they demonstrate our relative strength and outperformance versus competitors.
And with the upcoming halving on the horizon, we believe that the relative advantages of being a low cost producer of bitcoin will only increase going forward. As of the end of February, Cipher held 1,433 bitcoin in inventory and $69 million of cash, while our total self-mining hash rate has grown to 7.4 exahash per second. For those that follow the bitcoin mining space, you already know that the halving is nearly upon us. We have spoken repeatedly about how Cipher is built to thrive throughout market cycles. While the cut in new bitcoin supply from the halving is painful for the industry, it can reward thoughtful miners while exposing those miners who have not been disciplined in their strategic decision-making. Cipher has been very disciplined while planning for the halving for years.
We are built to succeed with approximately 96% of our portfolio energized through fixed price power at an industry low cost of electricity of roughly $0.027 per kilowatt hour. As a reminder, electricity represents the large majority of our operating costs and our low price is a key driver of our best-in-class unit economics. Furthermore, as we complete our expansions at Bear and Chief and complete the full Black Pearl site, our overall rig fleet efficiency will improve from 29.9 joules per terahash currently to 22 joules per terahash. Turning to our growth plans, we expect to complete 30 megawatt expansions at each of our Bear and Chief Joint Venture Data Centers in the second quarter of this year. And for those expansions to add 1.25 exahash per second of self-mining capacity to our production.
We also expect to add an incremental 0.62 exahash per second of self-mining capacity via hardware and software optimization of our existing fleet that we expect to be fully online by the end of the third quarter. Lastly, we are most excited about the enormous potential of Black Pearl, our 300 megawatt site in West Texas. We recently commenced construction activity and aim to energize the site in the second quarter of 2025. Slide 5 is a high level overview of a bitcoin mining business that we like to include each quarter to remind everyone how our business model works. We operate the box in the middle of the drawing that says mining equipment which represents our data centers and mining rigs. As I discussed earlier, the majority of our operating expenses is electricity, which our data centers convert into computing output.
Unlike traditional data centers which operate a similar model and sell their computing output to enterprise clients for dollars, Cipher sells its computing output, called hashrate to the bitcoin network for bitcoins. To make this model operate profitably, a bitcoin mining company needs to control both its electricity costs and the capital it spends to build new data centers, including mining equipment. Controlling these costs enables a miner to be a lower cost producer, and our focus at Cipher has always been on controlling these specific costs to produce the best possible unit economics. That illustration hopefully gives you a good sense of a straightforward bitcoin mining business. Cipher, however, does have an additional element to our business that is incredibly valuable.
We have the ability to sell power back to the grid at our Odessa facility. Our power purchase agreement gives us a combination of downside risk protection as well as upside optionality to our revenue streams that doesn't exist for most bitcoin miners. Let's now turn to page six and look at some recent bitcoin market events. Since our last business update, we've seen many positive headlines impacting bitcoin miners. The SEC's approval of the bitcoin ETFs in January has dominated the headlines, and the price of bitcoin has positively reacted to the better than expected early inflows into the products. We believe this is a massively positive development for the space, as it will pull additional investment dollars into the ecosystem. In addition to the new US ETFs, in the past few months, we have also seen elevated periods of transaction fees paid to miners, as well as a new accounting standard that provides investors transparency into the mark to market value of bitcoin held on balance sheet.
While both of these good developments have provided additional tailwinds to the sector, we have also seen a counterbalancing steady climb to an all-time high in overall bitcoin network hashrate, which suppresses minor economics. Perhaps most noteworthy for Cipher shareholders and prospective investors, on February 26th, our majority shareholder Bitfury announced plans to distribute the majority of its Cipher shares and break up its concentrated position on our cap table. We believe greatly reducing our largest investors' ownership concentration increases our free float and creates a positive liquidity environment for our shares overall as we move forward. As we head toward the having next month, Cipher is focused on executing the expansion and build-out of data centers, optimizing the production from our current fleet, and selectively looking for new growth opportunities.
We have reviewed many acquisition opportunities over the past several months and expect the opportunities to improve as we go through the having. We will evaluate these opportunities with the same disciplined approach as always, and hopefully find expansion options at cyclically low prices. On Slide 7, we give a portfolio overview of our existing data centers and a timeline for expected expansion in our self-mining hash rate. In 2023, we paid an average all-in electricity cost of $8,626 per bitcoin produced at our data centers. We are very proud of this number, and it drives our best-in-class unit economics. Please note that when some of our competitors talk about these costs, they only include electricity and not transmission and other charges.
In contrast, when we talk about all-in electricity costs, we mean the total cost to deliver electricity to our mining rigs, so our numbers include all transmission and other charges and our low numbers dramatically demonstrate our competitive advantage. On the left side of the slide, you have a snapshot of our four current data centers along with our all-in electricity cost per bitcoin at the respective sites for the year 2023. The chart on the right of the slide gives you a graphic illustration of the current Cipher hash rate as well as the additional growth opportunities in the coming year and a half. At this point, we will turn to production by site. On Slide 8, you can see a picture of our fully operational Odessa facility. Odessa is the most significant part of our portfolio as it represents approximately 90% of our bitcoin production.
Odessa is a wholly-owned facility with a five-year fixed price power purchase agreement and some of the lowest cost power in the industry. In the third quarter of 2022, we began reporting a third-party independent valuation to give investors a sense of how much value is represented in the power contract alone. As always, Ed will talk more about it in his remarks. We currently generate approximately 6.4 exahash per second at the site utilizing approximately 207 megawatts. We have mined roughly 635 bitcoin at the site through February 29th, and had a recent maximum daily mining capacity of approximately 10.8 bitcoin per day On Slide 9, we show a picture and highlights from our Alborz data center, which we believe is a truly unique site. Alborz is 100% powered by wind, and is a joint venture that we share with our energy provider.
It currently has a total operating capacity of 40 megawatts when the wind blows. That 40 megawatts powers roughly 1.3 exahash per second of rigs. Alborz can mine a maximum of roughly 2.2 bitcoin per day, and year to date the site has mined approximately 88 bitcoin through February 29th. Roughly half of that total capacity and site production belong to Cipher. We are working to supplement the wind production at Alborz with a grid connection which would allow us to increase our uptime and generate more bitcoin with the existing equipment at the site, and we remain confident that we will have that arrangement in place later this year. Slide 10 shows operational highlights from our Bear and Chief data centers. Combined, the sites operate 20 megawatts which can generate approximately 0.7 exahash per second, and can generate roughly 1.1 bitcoin per day in current market conditions.
Bear and Chief are also structured as joint ventures and feature shared economics similar to Alborz. Unlike our other sites which have Behind the Meter power arrangements, Bear and Chief are set up in front of the meter at a location in Texas that typically features attractive market prices. Finally, I will close with a few pictures of the expansion work underway at Cipher. We are very busy every day working to expand our mining capacity in the coming months, and we look forward to providing future updates on our progress. Now, I'll turn it over to our Chief Financial Officer, Ed Farrell.
Ed Farrell: Thank you, Tyler, and hello to everyone on the call. As a reminder for those following our webcast presentation, I'll be referring to our results for the three months and 12 months ending December 31st, 2023. I will discuss some of the key financial metrics for Q4. I'll provide some additional fourth quarter color as well as walk through our full year results. This quarter marked our first quarter of operations since inception with all four of our data centers being fully deployed, and it's a testament to the dedication of our entire team and the strength of our company that we were able to deliver positive GAAP earnings for the quarter, even before adopting a new accounting standard related to the fair value of bitcoin.
As observed across the industry, topline growth doesn't always translate into bottom line earnings. However, at Cipher, this quarter showcased strong topline growth that also positively impacts our bottom line. In the quarter, we mined 1,195 bitcoins, which resulted in revenues of $43.4 million, an achievement we all take great pride in. Yet, upon closer examination these numbers become even more impressive. While our revenues were up 43% sequentially, the cost of power to generate those revenues was only up 2%, underscoring the value we get from our fixed price PPA at Odessa. We will talk about it later, but the value of that PPA also increased by over $13 million in the quarter, again a testament to the capabilities of our power and origination team.
Despite substantial topline growth in Q4 at $22.5 million, G&A expenses were down 6% from the prior period. This emphasizes the significant potential for operational leverage within our business model. Looking ahead, we are excited about our prospects as we scale up operations significantly over the course of this year in 2025. We anticipate encountering industry headwinds such as the upcoming having and rising network hash rates, which are challenges that all of our competitors face. However, we firmly believe that Cipher is well positioned to navigate these obstacles and emerge as a leader through this next cycle. In our third quarter business update, we talked about the challenging operating environment. Transitioning to the fourth quarter, we experienced much more favorable conditions marked by a rally in bitcoin price and a significant increase in our production as we fully energize Odessa.
As a result, our fourth quarter was characterized by strong topline free cash flow. These conditions, combined with our ability to draw on our ATM, led to a substantial improvement in our liquidity position. I would also like to take a moment to talk about the new accounting standard, which requires entities that hold crypto assets to measure them at fair value. We believe this is an important step forward for the industry and positive development for institutions looking to invest in the space. In December, FASB released new rules mandating companies to adopt the new standard for the fiscal year after December 15th, 2024. Additionally, FASB provided companies the option to early adopt a choice we made for the 2023 fiscal year. We underwent a rigorous process to transition to this new standard and assess our realized and unrealized gains and losses, as well as the impact of previously reported bitcoin impairments.
The fair value adjustment for the fourth quarter compared to the prior accounting guidance resulted in net earnings impact of $3 million. Now, let's turn our attention to the full year consolidated balance sheet and statement of operations. As of December 31st, our total current assets stood at $155 million, up from $48 million at year-end 2022. Our accounts receivable were $622,000 versus $98,000 the previous year, and our prepaid expenses were $3.7 million versus $7.3 million in the prior year. I should note that those prepaid expenses are primarily due to corporate insurance, which is worth highlighting because we were able to reduce our D&O premium significantly this year. We recorded a bitcoin balance of $33 million representing the 780 bitcoin we had in treasury on December 31st.
That number is up from the 399 bitcoin we had at year-end 2022, which was then valued at $6.3 million net of impairment. As always, I'd like to dedicate a few minutes to the value of our Odessa PPA derivative asset. We have previously highlighted the significant competitive advantage provided by our power contract at Odessa. As a reminder, we began publishing a third-party mark for this agreement in the third quarter of 2022. That mark is represented as a derivative asset on our balance sheet that gets revalued each reporting period. Essentially, it reflects the in-the-money value of the contract relative to the current forward prices at our Odessa facility. As of December 31st, this asset was valued at $93.6 million, which represents an increase of $26.9 million year-over-year.
This change is recorded as a gain on our income statement. It is important to note that this asset is in two components on the balance sheet. $31.9 million as a current asset and $61.7 million as a non-current asset. The change in fair value of this contract will affect our GAAP earnings, but we exclude it from our non-GAAP reporting. Our other significant assets include property and equipment of $243.8 million primarily attributed to our Odessa facility. This figure includes miners and related equipment of $163.5 million, as well as leasehold improvements valued at $139 million. These items are offset by $59.1 million of accumulated depreciation. In addition, we hold intangible assets of $8.1 million, which includes $7 million designated for the payment of Black Pearl site and its related ERCOT approval.
The remaining $1.1 million relates to capitalized software. At year-end, our equity investee interest in Alborz, Bear and Chief stands at $35.3 million. Our operating lease of $7.1 million is primarily related to real estate leases. Additionally, deposits of $23.9 million includes the previously reported Luminant security deposit of $12.5 million and a $6.3 million deposit to encore related to Black Pearl data center. I would like to report that our current liquidity position on February 29th is $158 million, comprised of $69 million in cash and $89 million worth of bitcoin assuming a $62,000 price per bitcoin. Now, let's look at our GAAP operating results. Before delving into our full year numbers, I'd like to provide more detail on the fourth quarter results, considering this marks our first full quarter of operations with all four of our data centers at full capacity.
In the fourth quarter, we mined 1,195 bitcoin, resulting in $43.4 million in mining revenues versus the prior quarter when we mined 1,078 bitcoins, producing $30.3 million in revenue. We are particularly proud that despite significantly higher operating revenue, our operating expenses, including G&A and depreciation & amortization remained relatively flat quarter over quarter. As I mentioned earlier, G&A totaled $22.5 million, a decrease of 6% from the previous quarter. Depreciation and amortization came in at $16.8 million, a slight increase from the $16.2 million in the previous quarter. The cost of revenue was $13.3 million, which includes our power and direct expenses relating to Odessa, a 2% increase over last quarter. Now, let me turn to our full year results, which we can see on slide 15.
For the full year 2023, we mined 4,350 bitcoin, resulting in a $126.8 million of revenues generated entirely from our Odessa facility. The cost of revenue for the year was $50.3 million versus $748,000 in the prior year. G&A expenses came in at $85.2 million in '23 versus $70.8 million in '22. The increase of $14.4 million was primarily driven by compensation and benefits as we invested in building out our team, increasing our headcount from 22 employees to 36 employees. Depreciation and amortization for the year was $59.1 million versus $4.4 million in the prior year. This increase was primarily due to miners and equipment and leasehold improvements at Odessa being in service for a full year compared to only two months in the previous year.
As we mentioned earlier, we recorded a positive change in the fair value of our derivative asset of $26.8 million year-over-year. Power sales amounted to $9.9 million in 2023 versus $500,000 in the previous year, reflecting the ramp up at Odessa over the course of 2023. For our JV sites, the line item titled Equity and Losses of Equity Investees was $2.5 million in 2023 compared to $37 million in 2022. It is worth noting that the losses in 2022 were primarily from the fair value contribution of miners to our JVs at the time when miner prices were much higher. Let's now turn to our slide on our non-GAAP measures used to reconcile our adjusted earnings. Allow me to remind everyone that adjusted earnings exclude the impact of depreciation of fixed assets, change to the fair value of our derivative asset, deferred income tax expense, the change in fair value of our warrant liability, stock compensation expense, and other non-recurring gains and losses.
These supplemental financial measures are not measurements of financial performance in accordance with US GAAP, and as such they may not be comparable to similarly titled measures of other companies. We believe that these non-GAAP measures may be useful to investors in comparing our performance across reporting periods on a consistent basis. Management uses these non-GAAP financial measures internally to help understand, manage and evaluate our business performance and to help make operating decisions. When we adjust our fourth quarter GAAP results to the GAAP net income of $10.6 million, we add $17.2 million for those items I just listed. That brings us to adjusted net income of $27.8 million for the quarter, compared to $2.3 million in the previous quarter.
For the full year, our adjusted GAAP results yields an adjusted earnings gain of $46.2 million versus an adjusted earnings loss of $64.9 million in the previous year. I will conclude my remarks by saying we are extremely pleased with our financial performance in Q4 and throughout the entirety of 2023. Our philosophy continues to be that to be a leader in the mining space, we need to focus relentlessly on having best-in-class unit economics. We firmly believe 2023 validated our ability to deliver on our stated objective by successfully bringing online our initial four data centers. We are excited about the next stage of growth that Tyler outlined. And with our current financial position, free cash flow generation, lack of debt and best-in-class unit economics, we believe we should be well positioned to be a leader through the next cycle.
We look forward to updating you in greater detail on our expansion plans when we report for the first quarter. I will pause now and Tyler and I are happy to answer your questions.
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