CleanSpark, Inc. (NASDAQ:CLSK) Q1 2024 Earnings Call Transcript

CleanSpark, Inc. (NASDAQ:CLSK) Q1 2024 Earnings Call Transcript February 8, 2024

CleanSpark, Inc. misses on earnings expectations. Reported EPS is $-0.63 EPS, expectations were $-0.28. CLSK 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 afternoon. My name is Greg, and I will be your conference operator today. At this time, I would like to welcome everyone to CleanSpark’s First Quarter Fiscal Year Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions] And at this time, I would like to turn the floor over to Isaac Holyoak, Chief Communications Officer. You may begin.

Isaac Holyoak: Hey, thanks Greg and thank you for joining us today for our first quarter Fiscal Year Financial Results Call, covering the period October 1 through December 31, 2023. Our press release was issued about 30 minutes ago and is available on our website at cleanspark.com. Today’s call is also being webcast, and a replay and transcript will be available on our website. On the call with me today is Zach Bradford, our Chief Executive Officer; and Gary Vecchiarelli, our Chief Financial Officer. Keep in mind that some of the statements we make today are forward-looking and based on our best view of the world and our businesses, as we see them today. The statements and information provided remains subject to the risk factors disclosed in our most recently filed Annual Report.

We will also discuss certain non-GAAP financial measures, concerning our performance during today’s call. You can find the reconciliation of non-GAAP financial measures in our press release, which is available on our website. And with that, it is my pleasure to turn the call over to Zach.

Zachary Bradford: Thank you, for joining us this afternoon as we discuss our business and financial results from the first quarter of our fiscal year. I’m looking forward to walking you through an exceptional quarter. Today we will highlight our key achievements, focusing on our outstanding quarterly revenue performance, strategic machine acquisitions, and our roadmap to achieving 20 exahash per second in mining capacity during the first half of this year, and our pathway to 50 exahash per second. I’m also looking forward to providing additional details about the ongoing Sandersville energization and our just announced move into Mississippi. Our financial performance this quarter has been exceptional. We achieved the highest revenue in our company’s history, a testament to our team’s hard work and the strategic decisions we’ve made over the past few months.

Our revenue soared to $74 million, a 90% increase from our year ago first quarter revenue. For perspective, our annual revenue for fiscal year 2023 was $168 million. In a single quarter, we have covered nearly half the distance to reach our total revenue from last year. This achievement is not just a number. It’s a reflection of our growing efficiency, our strategic acquisitions, and our deep commitment to smart growth. It underscores our position as leaders in the bitcoin mining industry and fortifies the trust that you, our investors, place in us. What’s more, our quarter ended with a net income of $26 million and our adjusted EBITDA, an essential measure of our operational efficiency and financial health, also saw remarkable growth, reaching $69 million for the quarter.

This figure represents not just profitability, but our ability to generate significant cash flow while investing in future growth. In addition to our financial metrics, our operational achievements this quarter have continued to build on our track record of success. We finished our infrastructure for our Sandersville expansion and as of this moment, machines have already started hashing. On the 6th, our first day of energization we set a record, racking over 7000 machines in 24 hours, and then successfully started hashing with over 8900 miners, which produced approximately 1.25 exahash per second. We are now on our third day of energization and we have exceeded three exahash. This is an additional three exahash per second under 72 hours. We expect to have the full 4.2 exahash per second of additional hash rate live within the coming days.

This is a testament to our strategies and the teams behind them coming together at the optimal time. While maintaining our operational effectiveness during high growth is challenging, it’s a challenge we’ve embraced. We have excelled at hitting all the marks we set out to reach. We’ve also worked hard to optimize our energy consumption through strategic machine purchases that position us well for the future and by deploying the best software on the market. Each of these steps have been carefully aligned with our long-term vision, ensuring that we continue to deliver value to our shareholders while leading the way in what a strategic, community focused and transparent bitcoin mining company looks like. This quarter has been a period of significant achievement for CleanSpark.

Our record breaking revenue, alongside substantial improvements in efficiency and profitability have laid a solid foundation for our future growth.

Bitmain: The first part of the agreement includes an initial purchase of 60,000 units at $16.10 per terrahash, which will begin delivery in April of 24. The second part of the agreement is an option to buy an additional 100,000 units at $16 per terrahash. We’ve already paid 10% down for this option as a demonstration of our commitment to our growth prospects. To put this in plain language, you see a lot of bluster in press release headlines when a bull market is on the horizon, and I want to be clear that we aren’t being rhetorical. With that in mind, we paid $32 million to secure 100,000 units at an even lower price than the initial units we acquired. This move is intended to provide us with maximum flexibility as we position the company for expansion in anticipation of a bull market.

Crucially, it provides cost certainty and allows us to be strategic about our growth timing. Our approach, focused on the certainty of cost and expectations for robust growth, positions us uniquely in the market. The S21 is the most efficient miner and it aligns well with our focus on energy efficiency and high uptime. But to be useful, of course, machines need to be plugged in, so allow me to spend some time discussing how we expect to make good on our plans. The first step is our robust milestone to reach 20 exahash per second in the first half of 2024. We have previously guided a 16 exahash per second with the expansion of Sandersville, so the 20 exahash per second is a 25% increase in hash rate, over 16 and 100% increase from where we started 2024.

This ambitious growth is propelled by several key expansions and acquisitions that we recently announced. Energization, as I mentioned, commenced earlier this week in Sandersville. This development is a significant milestone in our growth journey and I want to pause a moment to thank the City, the County, the various trades, and our teams at CleanSpark that have executed on this remarkable build. This massive site, capable of hashing at over 8 exahash per second, is one of the largest bitcoin mining sites in the United States. As I stated earlier, as of this week, a majority of the site has been energized and we expect about 4.6 exahash per second of operating hash rate to come online in the next few days. As you’re aware, we have guided to 6 exahash per second for the full expansion, and thus there’s a small gap of 1.4 exahash per second.

We have learned that a utility substation transformer has not passed its most recent inspection, and we are eagerly awaiting a timeline to it coming online. We’ll provide an update as soon as possible, and although we don’t have a specific timeline, we are still planning for the remaining power to be delivered within the first half of 2024. Even then, we are positioned to continue our growth without missing a beat because of our newly announced Mississippi acquisition and Dalton acquisition. These facilities are slated to get us over 17 exahash per second by April of 2024. These, along with the expansion of our existing Dalton facilities and the final megawatts from Sandersville, are expected to propel us over 20 exahash per second, again, in the first half of this calendar year.

We have begun the permitting process to expand our existing Dalton campus. Currently at 0.8 exahash per second, the campus will double to 1.6 exahash per second once complete. We are calling this campus Dalton 1 to distinguish it from our newly announced acquisition of a second Dalton campus, which we’ll refer to as Dalton 2 during the construction process. Dalton two is an investment in our future in Dalton, Georgia. While not a large site, it is expected to deliver about 0.8 exahash per second and will contribute to a cluster of sites in Georgia that are now supplying a critical need for the community that goes beyond bitcoin mining. We have a unique relationship with the city of Dalton, which owns and operates its own utility. We are currently the City’s only interruptible load customer, meaning we have signed an agreement that in the case of a grid emergency, we will shut off making the power we use available to other grid users.

We earn a fixed power credit for performing the service which supports the grid and its stability. We view this as a best-in-class partnership and as an example of some of the creative ways that bitcoin miners are working with utilities to improve grid performance even in regulated markets like Georgia. We expect the Dalton 2 site to start hashing this coming April. In addition to the Dalton expansion, we are marking a significant milestone by venturing into new territory with the acquisition of three sites in Mississippi. Mississippi is a logical place for us to expand given our familiarity with the energy landscape in the Southern United States. The expansion not only diversifies our operational footprint, but also enhances our resiliency and capacity for innovation.

Meridian: All the acquired sites come with a favorable fixed five-year power purchase agreements at an all in power cost in the $0.05 range. We expect to formally close the purchase before the end of February. We will immediately begin racking our own machines, which will start hashing just as soon as they are plugged in. The combined hash rate in Mississippi will be about 2.4 exahash per second, or just over 10% of our operations once we reach our 20 exahash per second milestone.

CleanSpark: Looking ahead, the next time we discuss our financial results with you will be May. The halving event will have passed. We view the halving event as an important moment and I’d like to take a moment to discuss how we believe it will impact our operations. The most obvious impact is that the blocked award will be cut in half. Our margins are in an excellent place to navigate this halving as last quarter we mined at greater than 60% margins. Our cost of mine are industry leading and we are prepared for this momentary drop. I say momentary because it is not exactly true that our production will be cut in half. What is true, the block rewards are halved. We also anticipate a 15% to 30% drop in the overall hash rate, which means our share of global hash rate will grow without any additional cost on our part.

This is a naturally accretive moment for a miner of our scale. As we approach the bitcoin halving event, we anticipate a significant shift in the mining landscape. The halving will naturally phase out less efficient miners, allowing CleanSpark to increase its share of the global hash rate. This organic growth in market share means we can capture a larger portion of bitcoin rewards without additional infrastructure investments, leading to enhanced returns for our shareholders. This strategic advantage highlights our commitment to efficiency and positions us favorably for sustained growth in a post halving environment. This scenario is only possible because of our obsession with preparation. Our focus on efficiency will continue to drive down our production cost, especially when paired with our best-in-class power rates.

Furthermore, this halving is not just a challenge, but a catalyst for positive price action in bitcoin.

ETFs: Our cost of mine remains amongst the industry’s lowest, providing a stark contrast to our competitors, especially when compared to the cost to acquire bitcoin directly versus ETFs, which must purchase the bitcoin at spot market prices. As I’ve said numerous times before, bitcoin is critical technology for our digital age. It is both a powerful commodity and a transformation in the history of money. This fact can sometimes get lost. But we believe the true value of bitcoin, the reason for its adoption by millions of people, and the reason for its consistent price appreciation, lies in bitcoin’s fundamentals. It is digital money for a digital age, which the history books will one day show is only just beginning. I want to take a moment to thank our shareholders for their continued support.

I would like to thank our incredible team, especially our teams in Sandersville. The work accomplished this quarter has set new standards for the industry and it’s all thanks to our dedicated employees. Your hard work and commitment have not gone unnoticed. Now I’ll hand it over to Gary to delve deeper into our financials and provide a detailed outlook for the coming quarters.

Gary Vecchiarelli: Thank you, Zach. As Zach mentioned, our first fiscal quarter was record setting for CleanSpark. Let’s dive directly into the numbers, which I’m excited to share with you. Diving right into the numbers, our revenues for the quarter were $73.8 million, an increase of $46 million or 165% over the same quarter last year. This increase was primarily driven by the increase in our bitcoin production and an overall increase in average bitcoin price. This quarter we produced 32% more bitcoin compared to the same quarter last year. It is also important to note that this quarter the average bitcoin price was a little over $36,000, whereas last year the average bitcoin price was approximately $18,000 or less than half.

Looking at the immediate preceding fiscal fourth quarter, our revenues increased $21.3 million or 40% between the periods. While our hash rate was relatively consistent during the first quarter, the average bitcoin price increased almost 30% from $28,000 in the fourth quarter to $36,000 in the first quarter. The increases in bitcoin prices and our consistent high uptime percentage of greater than 98% translated to higher gross profit margins as well. As you can see on the right hand side of this slide, our margins increased $37.5 million year-over-year with a profit margin of 61%. It is important to note that of the $46 million increase in revenue, $37.5 million or 82% was recognized as margin. This demonstrates our efficiency at scale. Comparing the first quarter versus the prior quarter, you see an increase of $22.8 million.

This was primarily attributed to lower power costs in the first quarter of $4.04 per kilowatt hour compared to $5.02 per kilowatt hour in the preceding quarter paired with our higher revenues, again pointing to the benefits of scale. This quarter we recognized net income of $25.9 million, which is a significant improvement from prior periods. This represents $0.35 of every dollar of revenue dropping to the bottom line. This is an exciting time. We are amongst the first to adopt the new accounting fair value measurement rules. This now allows us to show the actual fair value of the bitcoin held on our balance sheet and better represents the value we are delivering to our shareholders. In our opinion, this new accounting standard repairs the prior broken rules and provides better clarity to investors and readers of our financial statements.

Turning our attention to adjusted EBITDA, management uses this non-GAAP metric to evaluate the performance of its mining operations. The theme continues with $69.1 million of positive adjusted EBITDA this quarter. I want to highlight that this quarter our efforts to optimize costs directly contributed to our professional fees decreasing 24% and our G&A expenses decreasing 35% compared to our fourth quarter as well. This again is attributable to the benefit of operating at our scale. I want to take a moment to discuss our power costs for the quarter in a little more detail. Our cost of power for the first quarter was $4.04 a kilowatt hour, which was lower than both the same quarter last year and the immediately preceding fourth quarter. We recognize that reporting on components of power costs are not consistent within the industry, so we like to provide this breakdown to not only show what our wholesale electricity cost is, but also the contributions our business makes to the community through vitally important taxes and profit margins to the cities and communities we operate in.

I also want to point your attention to our cost to mine bitcoin, which includes direct power costs. As Zach has stated before, we believe we are the best operator in the space and the cost of mine at our wholly owned facilities is a testament to that. Our cost at our wholly owned facilities is almost half of what it is at our colocation partner. This is due to several reasons, including the fact that having control over our own machines results in greater uptime, efficiency and control over the technology stack. On a final note, I want to talk about our balance sheet and our liquidity position. As of today, we have $229 million of liquidity, which includes $62.5 million of cash and over 3700 bitcoin representing approximately $167 million of bitcoin value.

Additionally, as of the end of the quarter we had over $860 million of assets and just $14.5 million of total debt. Our balance sheet is one of the strongest in the industry and provides us great flexibility going into the halving. We expect to remain prudent in our operations and capital strategy while maintaining sufficient liquidity to take advantage of the opportunities that will present themselves post halving. Until the halving, we remain laser focused on execution and look forward to bringing Sandersville fully online, ramping up our new locations in Dalton, Georgia and throughout Mississippi as we move towards exceeding 20 exahashes per second and beyond. With that, I’ll turn the call back over to Isaac to open the floor for questions.

Isaac?

Isaac Holyoak: Thank you, Gary for that detailed financial overview. We will now open the floor to questions from our analysts. Operator, please provide instructions and manage the queue for the Q&A session.

Operator: Great. Thanks Isaac. [Operator Instructions] Our first question today comes from Mike Colonnese with H.C. Wainwright. Mike, please go ahead.

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Q&A Session

Michael Colonnese: Hey, good afternoon guys and congratulations on the Bitmain deal, the recent acquisitions and getting Sandersville energized here. Really exciting times for CleanSpark. Just a couple of questions from me. So you talk about receiving the 12 exahash of S21 call it through the first half of the year. So I was just curious how you guys are thinking about the additional infrastructure needed to support the new rigs that are going to be delivered in the coming months. Are you seeing other attractive acquisition opportunities out there in the market today or would you consider building out an entirely new facility, be it in Georgia or another market out there?

Zachary Bradford: Hey Mike, thanks for joining us. Yes, with that additional infrastructure, maybe the best example to give is, in December when we did our earnings call, I let everybody know that we were 72 megawatts short of what we needed to get to 20 based on what we had ordered the prior month and we sit here today, just 60 days later with the answers for how we filled that. So I would point to first our track record to show how confident we are in some of the statements we’re making, but really how we’re looking at this is there’s a lot of incredible opportunities out there. And so we are evaluating a queue of opportunities, many of which do include M&A opportunities. And I believe that’s likely where we’ll turn to first as the place where we would put the first 12 exahash of machines.

The following 20, there’s a lot of flexibility in that option and how we exercise it. And for some of that, we would certainly be building either adding onto existing facilities, expanding, or even building out new greenfield opportunities. So, we’re going to look at it from a total of the full option from both sides. But we really do think that there is plenty of opportunity out there, including things that we’re actively looking at that will create a nice home for the 12 exahash of additional growth that we plan to hit before the end of the calendar year.

Michael Colonnese: Very helpful. And just to follow up from me. If we look at the entire 160,000 deal with Bitmain for the S21s, what would need to happen for CleanSpark to really consider exercising that full option? If you could just speak to some of the specific factors or market conditions that would influence your decision and really be comfortable with transacting on the full 160,000?

Zachary Bradford: Yes, I don’t think that there’s any specific bitcoin price that we would be looking for or anything like that that I could point to. But instead it’s going to be how do the chips fall really on a post halving basis, because that’s when we’re going to be looking at it the closest. We’re going to be factoring in where did difficulty actually drop to? Where does it recover to? What is bitcoin’s price? It’s really going to be a measure of what’s the ROI. And we’re also going to keep an eye on anything else that’s going on in the market just in general. A key thing on that option is, we can wait to exercise it all the way to the very last day of the year and take some of those into 2025. So one thing I can say is, we feel highly confident that we will exercise the option as I said during the call, it’s really about when.

Another key component of that is, we can exercise it in parts. So if we get opportunities that warrants pulling down 10,000, 20,000, 30,000 of the 100,000 we can exercise that option earlier and we could hold the rest until later to the end of the year. That flexibility is really important when you consider the fact that as soon as options like this are exercised, that involves cash flow. So, we always want to minimize the timing of spending cash and plugging machines in. And so as it relates to that option, I think that we’ll kind of switch directions whereas right now we’ve looked to secure machines, get them coming, we’ve then looked to the infrastructure second on the option we’ll look to infrastructure first, machine second, because the certainty of price and timing will be known, and that’s the true value of the option.

Michael Colonnese: Great. Thank you for taking my questions, Zach.

Operator: Great. Thanks, Mike. And our next question comes from the line of Josh Siegler with Cantor Fitzgerald. Josh, please go ahead.

Josh Siegler: Yes. Hi, guys. Thanks for taking my call today. Congrats on the results. I’d like to dive a little bit deeper into the Mississippi acquisitions because this marks a clear change in strategy from how you’ve been positioning your vertically integrated sites in Georgia. Can you give us a little bit more detail on the rationale to really expand the geography and how you’re feeling about the new Mississippi move?

Zachary Bradford: Yes. Josh, thanks for joining the call. How we’re thinking about Mississippi is another Georgia. It’s a place that we’re seeing a lot of opportunities based on how we view and interact with the grids that are located in that part of the U.S. we feel very comfortable with those systems and grids, and we see this as our first foray into Mississippi. Anywhere that we go, we’re going to look to do similar things, where we’re going to be looking to expand our footprint, be a meaningful part of the communities, things like that. So this is an entry point for us in Mississippi, and we expect that there’s a lot of opportunity there. If you think of headlines about reading about any minor right now, Mississippi is not a place that you’re reading about.