Applied Digital Corporation (NASDAQ:APLD) Q4 2023 Earnings Call Transcript

Applied Digital Corporation (NASDAQ:APLD) Q4 2023 Earnings Call Transcript July 24, 2023

Applied Digital Corporation misses on earnings expectations. Reported EPS is $-0.06 EPS, expectations were $-0.04.

Operator: Good morning and welcome to Applied Digital’s Fiscal Fourth Quarter and Full Year 2023 Conference Call. My name is Donna, and I’ll be your operator today. Before this call, Applied Digital issued its financial results for the fiscal fourth quarter and full year ended May 31, 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 in 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 proceed.

Alex Kovtun: Great. Thank you, operator. Good morning, everyone, and welcome to Applied Digital’s fiscal fourth quarter and full year 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 also 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 our fiscal fourth quarter and full year 2023 conference call. I want to start by thanking our employees for their ongoing hard work and service in advancing our mission. 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 recent developments across our business. I will also share why we remain confident about the future and our ability to deliver long-term growth. Over the last year, we’ve been working toward providing digital infrastructure solutions that provide differentiated services from traditional data centers. Demand for our services from both traditional customers and emerging HPC applications remains robust and we’re excited about the year ahead.

As we enter fiscal 2024, we’re focused on three key strategic goals. First, we aim to have all three of our crypto hosting facilities fully online with high reliability and performance for our customers. Our 100-megawatt Jamestown facility continues to perform as expected and operated at full capacity with improved uptime throughout the quarter. We announced the initial energization of our 180-megawatt facility in Ellendale, North Dakota in March and today it’s fully energized. This brings 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. The high-voltage interconnection work began last week at our Garden City site and is expected to finish this week.

Energization is expected after completion and approval of the facilities extension agreement which is M&A. We expect these facilities to generate approximately $300 million in revenue and $100 million of EBITDA on an annualized basis. Having three facilities online with high uptime will provide us with a steady cash flow. This will aid in the capital needed to fund the build-out of our HPC datacenters, as well as the purchase of GPUs to service our AI cloud customers. The second goal is to expand our AI cloud service business to support the next wave of AI-powered applications. With the launch of this service, we can expand our offerings and capitalize on the unprecedented demand we’re seeing from customers. We initially provide this service from our 9-megawatt HPC Jamestown facility along with third-party co-location space as we continue to execute on the development of our dedicated next-gen HPC datacenters.

We continue to see extraordinary demand for our new Cloud Service offering. We recently announced two AI customers solidifying our position as a key player in the new Cloud Service provider landscape. During the quarter we announced the signing and successful onboarding of our first customer Character A.I., with an agreement worth up to $180 million over 24 months. This includes the activation of the first compute cluster. We anticipate the service to be fully ramped by the end of 2023. This customer has already executed their options for the full $180 million agreement and made a significant pre-payment. We’ve also signed an option agreement for an additional $180 million, which would bring the total value of the contract to $360 million if executed.

We also secured our second AI cloud agreement in June, which is worth up to $460 million over 36 months. To help support these contracts and our go-forward capabilities, we have ordered over 26,000 GPUs and have secured the capacity to bring these online between now and April of next year. The GPUs will be financed through customer prepayments, vendor financing options, and other financing options that have been structured specifically for this market. To ensure seamless service delivery, we’ve collaborated with industry-leading OEMs such as Supermicro and Hewlett Packard Enterprise to leverage their HPC expertise and support the execution of our Cloud Service for AI-powered applications. Our services are made available to customers through two distinct models; reserve capacity and on-demand capacity.

Under the reserve capacity model, customers pay a predetermined amount for the entire contracted duration of the GPU usage. This option provides stability and allows customers to reserve capacity in advance at a discount to on-demand capacity. For on-demand capacity, customers have more flexibility in terms of usage but pay higher rates. The typical customers for our AI Cloud Service or private VC-backed companies that have raised significant funding and will likely raise additional funding to help scale their AI applications. We tailor our agreements to these customers so that as they raise money they can exercise options embedded in the contract to deploy GPUs and to ramp up hosting capacity over time. Customers will typically make a pre-payment on the contract, which helps fund a significant portion of the purchase price of the GPUs. Pipeline of business opportunities for AI Cloud Service remains robust and we have significant opportunity in front of us.

Our third priority is the development of our next-gen HPC datacenters. We are well-positioned for success in this space and believe our next-generation facilities are ideal hosting sites for HPC applications as they can accommodate the unique demands for this growing industry. Our datacenters offer a more purpose-built solution offering lower cost combined with high computing power compared to traditional datacenters that are typically focused on delivering low-latency applications. We have 300 megawatts of capacity and development, which represents an additional 100 megawatts of capacity to what we previously disclosed. This capacity pipeline does not include the current 9 megawatts of capacity we have at our standalone HPC facility in Jamestown, which was initially commissioned in May to begin supporting our AI Cloud Service customers.

This facility will be brought online in phases over the next few months. The 300 megawatts of capacity includes 200 megawatts of capacity available in North Dakota and the new facility we plan to build in Utah. We have a significant customer lined up for our new HPC facility in North Dakota and are currently planning to break ground in the coming months. We will continue to target states that have favorable laws and regulations for HPC application industries. We believe this further minimizes the associated risks with scaling our operations. To finance the build-out of these facilities we’re working with traditional datacenter lenders along with alternative funding options. I will now turn the call over to CFO, David Rench, to walk you through our financials and provide guidance for the upcoming 2024 fiscal year before providing my closing remarks.

David?

David Rench: Thanks, Wes, and good morning, everyone. Revenues for the fiscal fourth quarter of 2023 were $22 million compared to $7.5 million for the fiscal fourth quarter of 2022. The results this quarter were attributable to our hosting operations in Jamestown, North Dakota, along with the increase in energized megawatts capacity of the Ellendale, North Dakota facility. The Jamestown site operated at full capacity throughout the quarter. Cost of revenue for the fiscal fourth quarter of 2023 was $16 million compared to $7.4 million for the fiscal quarter of 2022. The increase in the cost was attributable to the higher energy cost used to generate hosting revenues, depreciation and amortization expense and personnel expenses for employees, directly working in – at our Jamestown in Ellendale hosting facilities.

Adjusted gross profit for the non-GAAP measure that excludes depreciation embedded in the cost of revenue and one-time electricity charges was $7.8 million or approximately 36% of revenue for the fiscal fourth quarter of 2023 which would compare to adjusted gross profit of $1.1 million or 15% of revenue for the fiscal fourth quarter of 2022. Operating expenses for the fiscal fourth quarter of 2023 were $12.3 million which included $5.2 million of stock-based compensation, $6.2 million in general and administrative costs, and $0.9 million of depreciation and amortization expenses. For the year ago comparable period, operating expenses were $4.4 million almost of all of which were attributable to general and administrative costs. Net loss attributable to Applied Digital for the fiscal fourth quarter of 2023 was a loss of $6.5 million or a loss of $0.07 per basic and diluted share based on a weighted average share count during the quarter of approximately $95.1 million.

This compares to a loss of $2.8 million, or loss of $0.04 per basic and diluted share in the fiscal fourth quarter of 2022, based on a weighted average share count during the quarter of approximately $76.6 million. Adjusted net loss attributable to Applied Digital, a non-GAAP measure for the fiscal fourth quarter of 2023 was a loss of approximately $300,000, or a loss of less than a penny per basic and diluted share based on a weighted average share count during the quarter of approximately $95.1 million. This compares to an adjusted net loss attributable to Applied Digital of $1.4 million or a loss of $0.02 per basic and diluted share for the fiscal fourth quarter of 2022 based on a weighted average share count during the quarter of approximately $76.6 million.

Adjusted EBITDA, a non-GAAP measure for the fiscal fourth quarter of 2023 was $2.9 million compared to an adjusted EBITDA loss of $3.1 million for the fiscal fourth quarter of 2022. Lastly, on the balance sheet, we ended the fiscal year with $29 million in unrestricted cash and cash equivalents in $79.4 million in debt. During the fiscal fourth quarter of 2023, we received approximately $1.1 million in net deferred revenue due to the structure of our commercial agreements with our customers that incorporate pre-payments In certain contracts, the pre-payments are amortized back to the customers over the first year of the contract with no impact to revenue recognition but the timing of the cash flow with the upfront cash to us. This is a major benefit to the company and that it helps with our CapEx funding as we build our datacenters.

Now turning to guidance for the full fiscal year 2024, we expect revenue in the range of $385 million to $405 million and adjusted EBITDA in the range of $195 million to $205 million. That completes my financial summary. Now, I will turn the call over to Wes, for closing remarks.

Wes Cummins: Thank you, David. To add some detail around the guidance, we expect revenue to ramp significantly in every quarter with our fiscal fourth quarter approaching $150 million of revenue. We ended the fiscal year with significant momentum. We successfully energized our Ellendale facility and launched our AI Cloud Service to provide high-performance computing power for AI applications. We’ve been advancing our existing crypto hosting operations, while simultaneously expanding our offerings to further capitalize on the surging demand we’re seeing from customers for our services. As we look to the year ahead even amidst the dynamic and complex macro environment, it’s increasingly clear that the secular tailwinds of digital transformation remain strong and we’re well-positioned to capitalize on strong demand for both crypto and non-crypto customers for our services. We’re now happy to take questions. Operator?

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Q&A Session

Operator: [Operator Instructions] Today’s first question is coming from George Sutton of Craig-Hallum. Please go ahead.

George Sutton: Thank you, and congratulations on the great results and great outlook. So I’m curious if you could walk through what you mean by the pipeline being robust and just provide a little more detail relative to the 26,000 GPUs that you’ve discussed relative to NVIDIA. Can you just walk through sort of how those will lay out over the next couple of years?

David Rench: Yes. Hi, George. So the 26,000 GPUs, so we have – those on order, actually we’ve increased that order recently. But we have those on order and as we said, the expectation is those deploy through April. We’ve already secured both our own facilities and third-party colo facility to deploy that, and that’s kind of what we think the delivery schedule is from NVIDIA as well. So we have that locked in, and then from a customer standpoint, as we mentioned Character has doubled their option on their contract. So we think just with the metrics, they’re seeing, I’m really optimistic about the demand from that customer, and then our other customer our second customer starts to ramp up later this year, that will – those two combined, I think will take the majority of the 26,000 if that potentially more than that, but then we have, I think we shared back in June kind of the customer pipeline, which didn’t include either one of those that we still are working on some of those contracts that can close over the next couple of weeks.

George Sutton: As a follow-up on the competitive landscape, just so we better understand, when we’re talking about reserve capacity deals and large language model training, what other options do these new players have relative to your kind of low-cost power options?

Wes Cummins: So, you mean, the other type of cloud options?

George Sutton: So for customers three, four, five, six, seven, et cetera, who are looking to run these large language models.

Wes Cummins: Yes.

George Sutton: But don’t require ultra-low latency, what other options are there?

Wes Cummins: So there’s other companies that are doing this, that are doing what we’re doing. It’s kind of the – it’s kind of a new class of CSPs, that NVIDIA is invested in some of these, and so we – it’s a competitive process for us every time. That’s the primary competition for us.

George Sutton: Thanks, guys.

Operator: Thank you. The next question is coming from Lucas Pipes of B. Riley Securities. Please go ahead.

Lucas Pipes: Thank you very much, operator. Good morning, everyone. Wes, I wanted to follow-up on the other financing solutions that you mentioned in your prepared remarks, specifically for AI. I wondered if you could share some of the typical terms such as loan to value, amortization, schedules, borrowing costs, et cetera. Thank you very much for any color.

Wes Cummins: Sure. So the – it’s wide range. So you get typical vendor financing, right? So from the OEMs that are – we have terms from HPE, we’ve actually have terms from Dell and from Supermicro, so there’s typical vendor financing and then there is another company that does the same style of vendor financing. In those terms, with the one that we have used – will use already is kind of a 24-months term and it’s fairly reasonable rates, high single digits on those. Then there’s other options, the LPVs on that, Lucas, can be anywhere from 50% to, call it, 75%. And the GPUs, I think we’ve mentioned this previously on the purchase price of the GPU we recoup in the first 24 months of operating. So kind of the financing lining up with that, that number works fairly well.