Applied Digital Corp (APLD) 2022 Q3 法說會逐字稿

Good morning, and welcome to Applied Blockchain's fiscal third-quarter 2022 conference call. My name is Doug, and I'll be your operator today.

Before this call, Applied Blockchain issued a financial result for their fiscal third quarter ended February 28, 2022, 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 you on today's call are Applied Blockchain's Chairman and CEO, Wes Cummins; and CFO, David Rench. Following their remarks, we will open the call for questions.

Before we begin, Jeff Grampp from Gateway Group will make a brief introductory statement. Mr. Grampp, please proceed.

Thank you. Good morning, everyone, and welcome.

Before management begins their formal remarks, we need to remind everyone that some statements we're making today may be considered forward-looking statements under securities law 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 in our IPO prospectus. You may get Applied Blockchain'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 Blockchain's website.

Now, I would like to turn the call over to Applied Blockchain's Chairman and CEO, Wes Cummins. Sir, please proceed.

Thanks, Jeff, and good morning, everyone. Thank you for joining us for our inaugural earnings call after completing our IPO last month. I'd like to welcome our new and existing shareholders as we're appreciative of your support.

Since many of you are newer to our company, I thought it'd be beneficial to first start with an overview and history of our business. In early 2021, we began building a business focused on crypto assets, starting initially in Ethereum mining. We quickly got traction by partnering with brand names in the crypto industries such as Bitmain, SparkPool, and GMR to assist in the operation and development of our mining business.

In the middle of 2021, we saw a massive opportunity in data center hosting business and refocused our business and resources on this opportunity. As some of you may recall, China had just instituted a permanent ban on cryptocurrency mining. At the time, China was the world's leader in cryptocurrency mining. And we saw an opportunity to establish Applied as a leading data center provider to the massive amount of mining capacity that we need to find new homes for low-cost reliable power.

Concurrent with this development, we also -- was also the significant increase in capital being raised by North American crypto miners, who would also need to find low-cost reliable power. We're now building Applied Blockchain to be a leading provider of next-gen data centers that are designed to provide massive computing power. With these next-gen data centers, we provide a colocation hosting business model where our customers place their hardware in our facilities, and we provide full operational and maintenance services for a fixed recurring fee.

We currently have long-term contracts, mostly five years, with our customers. But we plan to have a mix of long-term contracts of three to five years with larger blue-chip counterparties and short-term contracts of 18 to 36 months for smaller customers at future facilities to maximize margin while maintaining stability.

We expect our hosting business model to provide secure long-term predictable recurring revenue and cash flow, given the contractual structures of both our revenue and costs. This unique model and structure will provide investors with differentiated exposure to the crypto industry, as our results are not directly correlated to the price of any cryptocurrency, yet we can participate in the expected massive growth of power demand required by these industry participants.

The next-generation data centers we're developing are optimized for large computing power and require more power than traditional data centers that are optimized for data retention and retrieval. Next-gen data centers have very different layouts, internet connection requirements, and cooling designs to accommodate different power demands and customer requirements. So we believe we've developed a core competency with our team that will be difficult to replicate, especially for traditional data center operators.

We believe the traditional operators will be more challenged to move into our business since they cannot easily convert to next-gen data center facilities like ours. And they are generally geographically disadvantaged because they are usually found in high-cost areas with high-density populations.

Initially, our data centers will primarily host Bitcoin miners. But we also expect to host hardware for other applications, such as image processing, graphics rendering, artificial intelligence, machine learning, and other Blockchain networks in the future. We also aim to provide white-glove service for our customers and see margin expansion opportunities over time by providing value-added services.

We also expect access to low-cost power to be one of the primary differentiators in our business, as power capacity availability for cryptocurrency mining at scalable sites over 100 megawatts of capacity is scarce. The scarcity allows us to realize attractive hosting rates, given our ability to provide long-term hosting contracts that can span up to five years. Since the crypto industry is still in its nascent stages, the talent pool is naturally not particularly deep.

Fortunately, we have assembled a strong team of dedicated power infrastructure experts with proficiency in design, building, and operating next-gen data centers. I will put our team up against anyone in the industry.

We believe another competitive advantage for our company is the strength of our partnerships. Bitmain, the leading Bitcoin mining manufacturer, and GMR both have invested in our company and our hosting customers. These partners also provide us with various additional resources including hardware access and data center design, and build out advisory services, operational expertise, and maintenance and repair training.

With this backdrop now said, I'm pleased to report that we have been quickly executing on our business goals. After pivoting the business to hosting in the middle of 2021, we purchased our first property in August of 2021 located in North Dakota, which we've referred to as our Jamestown site. We then began construction on our first cohosting facility here in September 2021 with a plant capacity of 100 megawatts.

We signed an energy services agreement with a local utility to power this facility. And this agreement has provided us with visibility into our cost structure, as we have stable energy costs. Five-year hosting agreements prefilled 100 megawatts of plant capacity before groundbreaking, and we found quick validation in our business model. The first 55 megawatts at Jamestown began to come online in early February, with the remaining brought online over the next few weeks. Today, we stand at just over 80 megawatts being operational.

Lastly, and perhaps most importantly, in January of 2022, we and Antpool, an affiliate of Bitmain, entered into a joint venture to develop, operate, and own next-generation data centers with up to 1.5 gigawatts of capacity for hosting Blockchain infrastructure. The JV is owned 80% by Applied, while Antpool will directly own 20% of the assets within the JV in the near term. They have an option to convert that ownership into Applied common equity at a premium for our current share price.

We believe having an affiliate of Bitmain aligned with our goals and having skin in the game is a tremendous asset for Applied. We look forward to working with them and leveraging their expertise to scale and grow our business.

Now I'll turn this over to CFO David Rench to walk you through our financials before providing my closing remarks. David?

Thank you, Wes, and good morning, everyone.

My comments will be relatively brief as our fiscal third-quarter results, which ended February 28, 2022, reflect only modest contribution from our Jamestown facility that began ramping up operations towards the end of the quarter. We also did not have operations in the year-ago comparable period. So we'll not be providing any year-over-year comparisons.

Revenues in the fiscal third quarter were $1 million attributable entirely to our hosting operations. Hosting revenue excludes (sic - see press release, "includes") upfront payments, which are recorded as deferred revenue. All of our revenues during the quarter were generated from our Jamestown, North Dakota, facility. It is important to keep in mind that Jamestown started operations in February, thereby contributing to revenue for less than a full month during the quarter.

Cost of revenue in the fiscal third quarter were $2.1 million, consisting primarily of electricity costs, including costs for Jamestown prior to the facility becoming operational. Other costs include personnel costs for employees directly working at the hosting facility and depreciation expense for the equipment and service of the hosting facility.

Total operating expenses for the fiscal third quarter were $1.4 million, almost all of which were attributable to selling, general and administrative costs.

Adjusted net loss from continuing operations for the fiscal third quarter was a loss of $2 million or a loss of $0.04 per diluted share, based on a weighted average fully diluted share count during the quarter of 53.4 million.

We incurred a $4 million loss on discontinued operations in the fiscal third quarter. We realized $1.6 million in proceeds from the sale of equipment and expect to recognize a loss of $2.9 million on the sale. We classified our legacy Ethereum mining business as discontinued operations as we began selling our equipment. On March 9, 2022, we seized all crypto mining operations and completed the sale of all crypto mining equipment in service.

Net loss for the first quarter was $6.4 million or a loss of $0.12 per diluted share based on a weighted average fully diluted share count during the quarter of 53.4 million.

Adjusted EBITDA, a non-GAAP measure, for the fiscal third quarter was a loss of $1.7 million.

Lastly, on our balance sheet, we ended the fiscal third quarter 2022 with $12 million in cash and equivalents and no debt. Subsequent to the fiscal third quarter, we completed our IPO. We issued 8 million shares of common stock at $5 per share, generating net proceeds of approximately $36 million. Concurrent with this offering, we completed a one-for-six reverse stock split and uplisted our shares in Nasdaq stock exchange.

Reflecting these changes and the conversion of all our previously outstanding preferred stock into common stock, our current share count is now approximately 99.2 million.

On March 11, 2022, we entered into a term loan agreement with Vantage Bank Texas for a $7.5 million five-year loan at 5% interest. Proceeds from the loan will be used to fund operations at Jamestown site.

Now turning to our fiscal fourth-quarter guidance. We expect revenue in the range of $5.7 million to $6.2 million or $5.95 million as the midpoint. We expect to generate an adjusted EBITDA loss of $4 million to $4.6 million or $4.3 million midpoint. That completes my financial summary.

Now I turn the call over to Wes for closing remarks.

Thank you, David.

I want to close our prepared remarks by covering our growth strategy and milestones to look out for over the remainder of calendar 2022 and beyond.

We have broken ground on our next facility to be co-located with a wind farm in West Texas. This location will have a total of 200 megawatts when fully operational. We plan to break down on another Texas wind site in a few months, which will also be 200 megawatts when fully ramped. In addition to the Texas sites, we expect to be in construction on up to three other sites in three other states including North Dakota, with a total combined capacity of over 600 megawatts before the end of this calendar year.

We've developed a robust pipeline of potential power sources, and our experience at our first facility has provided us a blueprint for repeatable strategy to significantly scale our operations. We plan to continue scaling our business further with the goal of being at 800 megawatts by May of 2023 to 1.8 gigawatts by May of 2024 and ultimately, 5 gigawatts over the next five years. We expect this to translate into our company generating $40 million of EBITDA in fiscal 2023, which ends in May, and exiting calendar 2023 at an over $200 million EBITDA run rate.

As I mentioned previously, we see almost insatiable demand for hosting capacity for cryptocurrency miners, who lack reliable sources of low-cost power. Our internal estimate is that between 5,000 and 6,000 megawatts of hosting capacity needs to come online over the next 12 months to meet the publicly stated goal of the publicly traded mining companies in North America plus the private companies that we have close relationships with. In my opinion, hosting capacity is the bottleneck in the industry, and I think this is going to remain the case for the foreseeable future.

Regarding our site selection criteria, you should expect us to focus on states that have low and stable power costs, with favorable laws and regulations for the crypto mining industry, while maintaining geographic diversity to reduce risks in a particular region. We also are conscious of our environmental footprint. So we'll be focused on power-generating assets with a higher portion of low-carbon renewables.

We believe our next-generation data centers represent a unique power load. And our demand for renewable energy can increase and accelerate the build-out of renewable energy infrastructure.

Lastly, as our co-hosting operations expand, we believe our business model will become conducive to a real estate investment trust or REIT structure. At scale, we expect to have steady and recurring high-margin cash flow streams with relatively low-maintenance CapEx needs that can provide a high-level of distributable cash flow, similar to several publicly traded traditional data center REITs. We're investigating converting to a REIT structure, which we believe may be more applicable as we transition from a consumer of capital to a positive free cash flow entity over the coming years.

We're now happy to take your questions. Operator?

(Operator Instructions) Lucas Pipes, B. Riley.

Thank you very much, and good morning, everyone. And also, congratulations on the Nasdaq listing.

Wes, I wanted to try to peel the onion on 2023 a bit. You provided two very helpful data points -- fiscal 2023, EBITDA $40 million; and then, end of 2023, a calendar run rate of $200 million. I'd assume that the fiscal $40 million is backend weighted.

So if I say that's -- the $40 million is generated in the first five months of the calendar year, that's about $8 million a month. And if I say that $200 million end of 2023 run rate is -- if I divide that by 12, that's $16 million, $17 million of monthly EBITDA. So if I average that out, gets about $12 million of monthly EBITDA, and then times 12, that's about $148 million calendar 2023 EBITDA.

So I wondered if that's a reasonable way to go about it. We'd really much appreciate your color on calendar 2023 EBITDA just because, of course, investors look to compare valuations across this space. Thank you very much.

Yeah, thanks, Lucas. And thank you for the question. So the way that I think about and the way I think you should think about the ramp of our business and the EBITDA is the lower end -- if you think about per 100 megawatts, the lower end of the economics for EBITDA per 100 megawatts that we're targeting is about $18 million.

And so per 100 megawatts, you should think about $1.5 million a month of EBITDA. And I walked through in the prepared remarks the $400 million that we're kicking -- 400 megawatts that we're kicking off. And those should be starting to come online in the fall and then get fully ramped, either at the end of this calendar year or early next calendar year.

And so I think the assumption you should get, as those coming online and so with those -- that 400 online, you're running at about $72 million a year of EBITDA. And then we continue to bring more online in the first half of that calendar year. And so for the calendar year of 2018, the way -- or I'm sorry, calendar year of 2023, we're thinking about -- we should be averaging a little around 800 megawatts for the full year.

And we can walk through individually, if you want to, how that stage or how we're thinking about where that comes online, what our schedule is. But I think the average for the full year ends up at around that 800 -- $18 million per 100 megawatts. Does that make sense?

Yeah. That's super helpful. That's super helpful. Thank you very much. Thank you very much for that. Yeah. So that's maybe an easier way to get to the same number as what I outlined earlier.

But switching topics, the Vantage Bank term loan, great to see access to that sort of capital. And I wondered if you could elaborate on how scalable this sort of financing might be and if there's a specific loan-to-value target you'd have at the asset level. Thank you very much. (multiple speakers) color on that.

Yes, absolutely. So that was our first one. And if you -- just to put this in context, right, this was our first facility, no operating history. And so we end up with a loan-to-value of about 25% from Vantage, which I was happy with -- at a really attractive interest rate. For next 100 megawatts -- and in fact, on the 100 there, we're looking at expansion of that. So the first 100 and our next 100, we've already seen term sheets that are 50% loan-to-value and really attractive interest rates, depending on which state you're in.

So if we're in Texas, for example, seeing kind of the 5%, 5.5% kind of rates. And then in North Dakota, you get a subsidized rate with a little bit of help from the bank in North Dakota, that we would look at like a 1% for the first 18 months and then 5% to 5.5% after that. But, Lucas, it's looking more around 50% for the next site. But our goal is to get that to 60% to 70% LTVs.

But I'm really happy with what our finance team has done. They've really done a good job of going out to a lot of banks and priming the pump. We're seeing rates that I don't think you're seeing anywhere in the crypto industry in general.

Now that's terrific. Good work on that. And then I'll squeeze in one final one from me.

So could you remind us -- I may have missed it in the prepared remarks -- where you stand on hosting agreements, call it leases, as of today? And then what's the -- what would you say is the timing for additional sign-ups? Thank you very much for that color.

Yeah. So as of today, we stand a little under 200 megawatts for hosting agreements. And -- but I think you'll see another 200 to 300 in the next few weeks, as we finalize the plans on our sites. And then we sign those concurrently with the -- however you want to say it -- the PPA or the ESA. But I would expect you should see in the next couple of weeks some of those coming through.

Great. All right. Well, thank you very much for all the detail, and best of luck.

Right. Thanks, Lucas.

John Todaro, Needham.

Great. Congrats, everyone, on the quarter here. And thanks for taking my question. I have two here -- one on the demand side, and then one on the supply side.

On the demand side. When we're thinking about some of these hosting agreements in your customer makeup, is it fair to say still most of this -- is that Chinese migration, or has there been some integration from sales pipeline with the current private and public companies in the US? Any commentary there?

Yeah, I would say most of it is still that migration.

Okay. Okay, great. Thanks. Okay, that's clear.

And then on the supply side -- it is still a little bit of a capital-intensive business. And the last question, we got into it a little bit. But just broadly speaking -- outside of the crypto markets, if we do start to see a little bit of a slowdown here economically speaking, is there anything you guys have been starting to think about on that side and just kind of capital markets fundraising activity moving forward if we do just see a little bit more of a broader slowdown in the global economy here?

I guess, maybe to be more specific, do you mean, how do we fund the build-out? Do we slow down our build-outs if there's not demand? I mean, I'm just trying to drill down exactly what --

Yeah, exactly. So almost on both sides -- one, where do you get that insatiable demand now? Is it continuing moving forward? If we do see Bitcoin prices -- $24,000, $20,000 -- it sounds like a lot of breakeven still around $10,000. So you'd think there'd still be some healthy margins there. But any commentary on that? And then just your -- yeah -- your capital fundraising plans moving forward, if there is -- even outside of crypto -- if there's just some more a general market slowdown?

Yeah. So for us, the -- I mean, it's a very pertinent question, obviously, with what's going on over the last week. But you're right on the numbers that you're talking about. We think as far as people continuing to operate machines they've already purchased at our site, you're looking at probably around a $9,000 Bitcoin price before you -- I think, there would even be a thought of shutting those down.

But the other question is, where does it not make sense to buy new machines? And I think that's probably in the 2022 to 2024 range. Obviously, these things always adjust. You could see network cash rate adjustment, or generally, you'll also see equipment pricing adjustment lags a week or so. But it actually happens pretty quickly. That probably takes those numbers down a little bit.

So for us, I think the things that we think about are -- one, we're not doing a site unless we're fully contracted already. So we won't build the site unless we have the long-term contracts in place that are effectively take-or-pay contracts. So that would be the first one for us. If we -- if people stopped signing up those types of contracts, then we would pause what we were doing.

And then, on secondly, as far as outside capital markets, I think for us, we're pretty focused on the bank debt -- these project-level bank debt financings that seem to be just fine at the moment. If that -- if there started to be an issue with that, then we would -- we already have the whole team here spending a lot of time building out our full finance process so that -- to give us additional options. But those are the primary items, I guess.

I don't know if that answers your question. I'm happy to -- if there -- if not, a follow-up is fine.

No, that was actually perfect. That answered it pretty clearly. So that was great. Thanks for that. Yeah, so those are my main questions. Appreciate your answers on those.

Sure. Thanks.

Mike Grondahl, Northland Securities.

Hey, thanks, guys. Could you maybe share with us one or two of the biggest learnings you've had so far from the North Dakota facility that you can apply to the Texas and other state projects just -- as you pull up that learning curve? Just -- what's one of the -- one or two big takeaways you've had?

Hey, Mike, thanks for the question. It's been a steep, steep learning curve for North Dakota. So I think there's a lot of things for us to apply. But the thing that I would like to walk through on what we did there versus what we're doing now is, really, how well developed our team is now.

When we started that project in North Dakota, there was really five to seven of us employed here. And we were all doing everything, and now we have a really well-developed team for these sites. We brought on Jeff who runs the -- really, the design and development and the procurement. And he was consulting us at first, but we brought him on a full time. But we've really developed that team so that we can do multiple of these at the same time. So there's one.

And then, two, the supply chain side of it, right? We figured out who delivers and who doesn't. And then we've also expanded that, again, with our team as well, so that the procurement of mostly like transformers and switchgear.

And then, lastly, I think, will be the ramp-up of operations. That was -- it was fairly, I mean, I would say, chaotic is a good word to use when we started in February, and you're racking all of these miners. And we did use a lot of the people locally because you need this real big burst of labor, really, to put all of these things up and plug them in. But you only need it for a few weeks.

But finding that -- it's going to be different by geography. But I will tell you finding part-time workers in February in North Dakota and buildings that really are insulated wasn't really super easy. But I think that part and the ramp-up and the networking -- so those are big learning curves for us that I think are going to make things a lot easier going forward.

Also, one of the things that we were doing is we're doing a lot of this stuff on site. We thought we would do all level -- site-level management. But we've changed that. We've hired and built a network operation center here in Dallas that I think will be much more efficient. So it'll be more centralized for a lot of those networking, monitoring functions. They will be centralized and watch all of these locations around the country.

Great. And just one more. Bitmain is a really nice partner to have here. And I think you've pointed out one of the advantages is, Bitmain can refer their customers to you for your hosting in colocation. Demand seems like it's been so strong. How are -- you're using Bitmain, their customers. How are the customers finding you? Could you walk us through that a little bit?

Yeah. I mean, that's a big part of the people that are finding us has been that route, right? And when I think about marketing for our services, having the company that is the dominant maker and seller of the hardware, us being one of their preferred hosting providers, and then directing customers to us, I mean, I don't know that I could build a better marketing arm than that.

But people are also finding us just on a daily or weekly basis. There've been a lot of promises made by a lot of participants in the industry. And they haven't been able to follow through on building out new capacity and plugging machines in. And I think there's -- you guys follow this. So there's a lot of machines, I think, sitting in warehouses right now. And so it's fairly easy to find customers. It's really about trying to deliver.

We spend a lot more time trying to talk about when we can realistically deliver for a new customer versus going out and proactively marketing and trying to find them because we just don't have the capacity to sell right now.

Good. Okay. Hey, thank you.

Thank you.

Rob Brown, Lake Street Capital.

Hi, good morning, and [there's] progress in last few months. Just wanted to get an update on the pricing environment with the demand relative to the supply so strong. How's the pricing environment right now? And has it changed more recently with the market changes?

So pricing -- and I think we've talked about this -- we don't give specific numbers. But our pricing increased fairly significantly from our first site, the first Jamestown site, to what we're doing now. And we don't see that changing. We haven't -- obviously, there's been a lot of volatility in the crypto markets in the last week. But we haven't seen any change to that yet, and I don't expect there to be really any change to that.

Like I said, I think there's -- even if there are no new machines purchased for the next six months, I think there's still many sitting on the sideline and so much capacity that's still required that you're going to want to get these plugged in even all the way down, as I mentioned earlier, to Bitcoin at $10,000. So we've seen pricing go up from our first facility pretty significantly. And we haven't seen any softness in it, just given the volatility in the last week.

Okay, great to hear. And then on the Texas wind facility, could you give us a sense of -- I think you said by the end of the year -- but how is that developing? What are the key milestones in getting that open? And how's the supply chain at this point in terms of getting the materials you need?

Yes. So that's a great question. So we've broken ground there. When we were in North Dakota, I was watching them take out basically a cornfield, and then we're putting a site up. And this one is cotton mostly, I think, and now we're building the site there. So the dirt work is being done.

In our experience, it'll take a few months to get the buildings up. Last time, it took us three months to get the buildings up. And then the last time and still to this point of -- in North Dakota, it was transformers. And I think you'll hear that across the board and the industry's transformers and maybe some switchgear on the electronic side.

We were a little more ahead of the game on this one. And so we actually have the transformers. Some being delivered to that site next week and then all the way through the summer. So it'll be -- I think we're in really good shape to bringing that one online in the early fall time frame and it'll be the --shortly, thereafter, the other Texas wind facility. But the supply chains still for transformers and switchgear are probably the biggest bottleneck. But we're out ahead of that.

Thank you. I'll turn it over.

Chris Brendler, D.A. Davidson.

Hi, thanks. Good morning. Just a quick follow-up on the hosting and pricing environment. I heard from one of your competitors last night that -- taking down their projections not sure about hosting demand or at least not sure about the ability for hosts to fund both rigs or even fund power infrastructure.

So just wanted to ask like -- it sounds like you're really fully committed for the first 200. You'll cross that bridge, I guess, to get to -- in fiscal 2023. But has there been a significant fee change, just given the difficulty of financing this? Or is there still a lot of backup demand because things were so tight for so long, given the rise in Bitcoin last year?

Yeah. Right now, for us on the demand side, we have like plenty of demand for these -- at least these 400. But I think we have significantly more than that that we're in discussions with. And then the ones that we're talking to for these, specifically, I know, have -- the machines are already purchased, and most of them are sitting in the US.

So it's not like they're -- they need to pay their contract, or they're going to buy new machines to go and do this. It's mostly machines that are being moved. And I know there's other -- even some of the publicly traded miners have machines that they're trying to put online as well. But I think that demand is still there.

And as far as the financing -- so that's the customers financing those -- the equipment that's going to go into the facilities. And then as far as us financing that, when we have the 400 with our -- with the IPO proceeds and the debt financing, we think we're in a really good position to fund the infrastructure build-out ourselves for that.

I mean, obviously, this is an extremely volatile industry, and so things can change over time. But that's where we stand right now.

Yeah. And things can change real quick and, hopefully, can change for the better. A little bit positive today, it looks like.

How does Bitmain fit into this? I feel like -- I'm hearing sort of noise that, given the very tight market conditions, equities out of the question, debt becoming more difficult -- that could be temporary but at least for now -- there's a rising probability that some of these equipment orders from Bitmain will break, and they won't be able to be delivered. Is there any way for Bitmain and -- or Applied to take advantage of that, if there's excess rigs floating around the market?

Yeah, I think for us, if we find customers that want that, which we still have some customers that want that, that we can take advantage of that.

I think the other thing that we think about in the marketplace, if you get much more -- a much tighter capital market, which has obviously arrived, is maybe it'll bring opportunities for us for consolidation or as typical -- what you would see in the business model that we're running, doing, some -- maybe some type of sale-leaseback on facilities that are already running and running those for other people. But I think, for us, we're hopeful that there's going to be those kind of opportunities that are really born from a tighter capital markets environment.

Yeah. I guess my -- the point of the question was more, is Bitmain available to take advantage of that? Like, would they potentially take excess machines and put them in your facilities? Like how does -- what does a ramp-up of the Bitmain deal look like?

So I mean, I don't -- I can't speak for Bitmain, right? I don't know what they would do specifically, and I haven't talked to them about that. But generally, what you -- when we're hosting for Bitmain, it's for Bitmain's customers that buy their equipment. So I just said -- I don't want to try to answer anything as far as how Bitmain would take advantage of slack in the equipment environment.

Yeah, makes sense. Makes sense. I'm just trying to get a positive spin here.

A different question is -- anything from your perspective -- North Dakota versus Texas like -- why did you start in North Dakota? And what are the pros and cons of doing your next transaction in Texas for next build-out?

Yeah. Yeah. So North Dakota was great, or it's been great to us. The state's really good. We had a ribbon cutting there last week with the governor. And one of the primary reasons we went to North Dakota is we found a really good power partner that provided us -- our number one thing we're looking for which is low-cost power with a stable price with a long-term contract. And so we found that there.

And then also the climate, both the business climate, but actually, the actual climate where -- you want to run these in a colder climate. So it's really well built for an air-cooled facility.

And then in Texas, we're finding some really interesting opportunities with owners of renewable generation assets out in West Texas, where they're not -- they're being curtailed. They're not getting all of their power purchased, and so they can significantly enhance their return by co-locating us with them. And so those are just the opportunities that we're seeing. And also, Texas is very welcoming of our industry as well.

So I think you'll see us do more in both of those states. But there's other states that we're looking at as well. But Texas is interesting that it's massive as far as the power supply in Texas. One of the only issues you run into in North Dakota is just -- it's a great state. They have a big surplus of power. But even that big surplus of power, it's a low population, and it's just not a huge amount.

Yeah, great. Okay. One last one is, I think -- as I mentioned at the start of my questions, the market conditions can change pretty fast in this space. Suffice to say, it's better to be a host in this environment than it is to be a self-miner. Is your strategy shift already paying off?

Look, so as far as hosting, the way I think about our business is, we have security from our customers. We have these long-term take-or-pay contracts with security on the equipment. We sit at a much more, I guess, higher level, higher security level in the industry. We still get to generate great margins. We still get good returns on capital. But we also don't get the upside of Bitcoin, 65,000. So we give that up for more security and more stability.

So I think this is a much more attractive model in a volatile industry, overall, as far as the capital commitment for the return, as far as our security level, as far as the predictability and the stability of it. So I think this -- the recent volatility really highlights the benefits of this model versus the self-mining model.

Yeah, seeing the same thing. Congrats, Wes. Thanks.

Thanks.

(Operator Instructions) There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Great. Thanks, everyone, for joining our first earnings conference call, and I look forward to more in the future. Also, just want to thank all of our employees. It's been a really hard push to get our first facility online and these other facilities lined up, but everyone's done a great job here. So just want to say thanks. And we'll talk to you in a few months.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.