Applied Digital Corp (APLD) 2024 Q2 法說會逐字稿

Good morning, and welcome to Applied Digital's fiscal second quarter 2024 conference call.

My name is Sherry, and I will be your operator today.

Before this call, Applied Digital issued a financial result for the fiscal second quarter ended November 30, 2023, in the press release, a copy of which will be furnished in a report on a 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.

Thank you, operator.

Good morning, everyone, and welcome to Applied Digital's Fiscal second quarter 2024 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 any 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 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 quarterly report on Form 10-Q.

You may get Applied Digital 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?

Thanks, Alex, and good morning, everyone.

Thank you for joining our fiscal second quarter 2024 conference call.

I want to start by thanking our employees for their ongoing hard work and service and supporting our mission of providing digital infrastructure solutions to the rapidly growing high-performance computing industry.

Before turning the call over to our CFO, David Rench, for a detailed review of our financial results, I'd like to discuss some recent developments across our business.

Let's start with our data center hosting operations.

Our 100-megawatt Jamestown facility continues to perform as expected and operated at full capacity with consistent uptime throughout the quarter.

This marks the fifth consecutive quarter in which the Jamestown facility has operated at full capacity.

Our180 megawatt Ellendale facility in North Dakota also operated at full capacity with consistent uptime during the quarter, bringing our total hosting capacity to 280 megawatts across our North Dakota facilities.

Both facilities are contracted out to customers on multi-year terms.

During the quarter, we announced the initial energization of our 200-megawatt Garden City facility in Texas.

This is a significant milestone in Applied Digital's ongoing efforts to meet the growing demand for low-cost, scalable digital infrastructure.

The Garden City facility had a small contribution to our results this quarter and is currently operating at approximately 132 megawatts with the remainder of the capacity expected to come online in the next several months.

As we brought on the facility, we realized there were additional infrastructure improvements needed for the grid.

We expect these improvements to be made no later than April.

Our customers continue to send miners to the facility, and we are actively installing them.

With the increase in the cost of Bitcoin, we are seeing demand increased significantly for hosting services.

As a reminder, our Garden City facility is fully contracted with fixed prices, so we are not exposed to volatility in the crypto markets heading into the halving event this year.

Once our Garden City facility becomes fully energized, we will have approximately 500 megawatts of hosting capacity across our three data center hosting facilities.

We expect our three sites to deliver up to $300 million in revenue and $100 million of adjusted EBITDA on an annualized basis.

Operating cash flow from data center hosting services will ramp up significantly in March as the majority of our prepayments burn off in February.

Let's move on to cloud services, which provide high-performance computing power for primarily AI applications.

It continues to grow quickly as we progress further in supporting our existing contracts and pursue additional opportunities in our pipeline.

Since our last earnings announcement, we have added an additional cloud customer, which brings our total annual contract value of cloud service contracts at full capacity to approximately $398 million.

We tailor our agreements to our customers so that they -- as they raise money, we can exercise options embedded in the contract to deploy GPUs and ramp up hosting capacity over time.

While the typical customers for our cloud service has been private VC-backed companies, we are now also seeing strong demand from the enterprise market for large amounts of GPU compute capacity.

We are excited to see demand increasing from this important segment of the market and have plans to hire sales talent to enhance our outreach efforts.

We continue to secure access to GPUs.

However, there have been some delays in installations attributable to pending deliveries of networking components.

We believe it's prudent to receive GPU deliveries only when all associated equipment is on-site and ready for installation, which is how we structure our client deposits.

Additionally, we continue to actively explore vendor financing and other tailored financing options to support the capital requirements for the 34,200 GPUs we have on order to support our current customer demand.

To date, we have four 1,024 clusters installed and are planning to ship an additional four in the next two weeks.

These clusters, as they're currently configured, put us in an elite class of next-generation supercomputers in terms of raw compute power or petaflops for the most demanding AI applications.

We expect to reach a minimum of 10 before the end of the fiscal year, with the Jamestown cluster representing the opportunity to put us in the top-10 supercomputers for AI workloads.

The fully commission clusters are expected to generate over $200 million of annualized revenue.

Lastly, let me provide an update on our purpose-built HPC data centers.

During the quarter, we broke ground on our first 100 megawatt high performance compute facility in Ellendale, North Dakota.

This facility will offer low-cost, high-efficiency liquid cooled infrastructure designed for HPC applications.

Construction is proceeding as expected.

Our unique proprietary architecture and design implementation, together with the strategic placement of the Ellendale facility near sources of abundant and renewable power will offer scalable infrastructure for these workloads.

It will offer a significant cost reduction to our customers and deliver best-in-class performance that maximizes high-power density compute.

We believe that this advantage is sustainable in this emerging market for data centers specialized in running AI workloads.

Our contracted power and adjoining land at our facilities will become valuable assets over the next 18 months.

We believe there will be a significant supply constraints for power in the data center market.

We have already seen the robust demand for our data centers, which driven by the burgeoning a landscape has exceeded our initial expectations.

We believe we'll be in a strong competitive position to support this demand.

As a reminder, we have 400 megawatts of capacity in development across North Dakota and Utah.

This does not include the current 9 megawatts of capacity we have at our stand-alone facility in Jamestown to support cloud service customers.

As we enter the second half of fiscal 2024, we're well positioned to capitalize on the demand we're seeing across both our cloud service and HPC data center business, and we will continue to allocate our capital appropriately to the highest risk-adjusted returns to maximize shareholder value.

With that, I now turn the call over to our CFO, David Rench, to walk you through our financials and provide an update on guidance.

David?

Thanks, Wes, and good morning, everyone.

Revenues for the fiscal second quarter of 2024 were $42.2 million compared to $12.3 million for the fiscal second quarter of 2023.

The increase was driven primarily by the full quarter of revenue generation from the L&L facility.

The Garden City facility beginning revenue generation during the fiscal second quarter of fiscal year 2024, and additional revenue from the Jamestown facility due to increased uptime.

In addition, the company recognized a full quarter of revenue from the first cloud service contract during the fiscal second quarter of 2024.

Cost of revenues for the fiscal second quarter of 2024 was $29.2 million compared to $11.8 million for the fiscal second quarter of 2023.

The increase in cost of revenues was attributable to higher energy costs used to generate hosting revenues, depreciation, and amortization expense and additional personnel expenses driven by the growth of the business as more facilities were energized.

Selling, general and administrative expenses for the fiscal second quarter of 2024 were $21.1 million compared to $27.2 million in the prior year comparable period.

The decrease was primarily due to lower stock-based compensation expense and was partially offset by increases and depreciation, amortization, and personnel cost.

Net loss for the fiscal second quarter of 2024 was $10.5 million or a loss of $0.10 per basic and diluted share based on a weighted average share count during the quarter of approximately $109.7 million.

This compares to a net loss of $26.8 million or a loss of $0.28 per basic and diluted share.

In the fiscal second quarter of 2023, based on a weighted average share count during the quarter were approximately $93.4 million.

Adjusted net loss, a non-GAAP measure for the fiscal second quarter of 2024 was $5.2 million or adjusted net loss per basic and diluted share of $0.05 based on a weighted average share count during the quarter of approximately $109.7 million.

This compares to an adjusted net loss of $3.8 million, or $0.04 per basic and diluted share for the fiscal second quarter of 2023 based on a weighted average share count of approximately $93.4 million during the quarter.

The significant headwind we faced during the fiscal second quarter of 2024 was amortization and occupancy charges for leases of computing equipment and data center space that have been assessed access by the company but are not yet supporting revenue, but lease expense for the colocation sites nights not supporting revenue, totaled $1.5 million and were not added back to into adjusted EBITDA or adjusted earnings.

Amortization of GPUs not supporting revenue was $3.7 million and was not added back to adjusted earnings.

We expect this impact to decrease in the future quarters as we resolve supply chain delays and are able to stand up full computing clusters that support revenue.

Adjusted EBITDA, a non-GAAP measure for the fiscal second quarter of 2024 was $10.6 million compared to an adjusted EBITDA loss for the fiscal second quarter of 2023 of $2.2 million.

Lastly, on our balance sheet, we ended the fiscal second quarter with $34.6 million in cash equivalents, cash, cash equivalents, and restricted cash of $42.8 million in debt.

During the first two quarters of 2024 received $81.8 million in customer payments due to the structure of our commercial arrangements with our customers that incorporate upfront deposits and prepayments.

In certain contracts, the prepayments are credited back to the customers over the term of the contract.

This has no impact on revenue recognition, but the upfront cash flow is a major benefit for the company as it helps with our CapEx funding as we build out our data centers.

Since the quarter closed, we have received an additional $11.1 million in customer prepayments and $23.1 million in net proceeds from the ATM offering.

The ATM offering is now complete.

Now turning to guidance.

Due to the delayed delivery of certain networking components for our GPU clusters.

We now expect our revenue and EBITDA to be below the low end of our previously guided range.

For the fiscal year 2024 network component deliveries improved in recent weeks, but did have a significant impact on the timing of commissioning clusters and our revenue and EBITDA.

We now expect to exit the fiscal year 2024 at an annual revenue run rate of approximately $500 million and an annualized adjusted EBITDA run rate of $250 million.

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

Thank you, David.

We're well positioned to capitalize on the growing opportunities across our business and look forward to continuing our momentum in the second half of the year.

I'd like to thank all of our team members for their dedication in making applied what it is today and our shareholders for your continued trust, our mission and execution, we are now happy to take questions.

Operator?

(Operator Instructions) Lucas Pipes, B. Riley Securities.

Thank you very much, operator.

Good morning, everyone.

My first question is on the HPC hosting side and the conditional agreement that you announced and of the few ones.

First, in terms of the total value you cite there, should we kind of think of $220 million of revenue per year?

And then are your margin expectations for the segment still around 40% and on the capital cost side?

I've been working with a $5 million per megawatt assumption, wondered if that's still a good number to use think.

Thank you very much for your details.

Yeah, good morning.

Lucas, thank you.

So there's not a lot more detail that I can give versus what we announced, but let's talk about the costs, I think, we've talked about in our shareholder -- in the Analyst Day in the Shareholder Day that cost moving towards $6 million to $7 million per megawatt versus the $5 million, as we've worked through the new designs for the $5 million was more for the previous design, and this is the three-story design that we're working for.

So that's what we're looking at.

But as far as economics -- this fits in the economics that we've talked about previously, right, which is about the $2 million per megawatt in revenue and $1 million of EBITDA per megawatt.

Got it.

That's very helpful.

Thank you for that.

And turning to guidance for a moment.

In terms of the components that have been delayed, what exactly has been the bottleneck?

Could you add little bit more color on that?

And then I think previously you provided some color on GPUs online and the average in fiscal Q3 and Q4.

I think you mentioned it in your prepared remarks, but I was trying to take notes and couldn't quite keep up.

So if you have maybe expectation around kind of Q3, Q4 GPUs would appreciate color around all of this.

Thank you.

Sure.

So the components that are the issue for delivery, it's not the GPUs themselves, it's specific networking components related to the InfiniBand networking piece of the cluster.

And it was -- I've talked about this several times already and this has been the bottleneck, I would say, for the last kind of three or four months.

We are getting delivery of those.

It's a matter of making sure you get delivery of every component because you need all of the components to stand up the cluster, commission it and get it operating for customers.

So we're seeing improvement in the delivery of InfiniBand and it's been specifically on the transceiver side of the InfiniBand deployments.

So we had one cluster up and running last quarter.

We have four deployed now, as I said in my prepared remarks, we expect to receive another four.

And on the cluster, just as a reminder, Lucas, this cluster for us, I know it can be a little bit confusing, but it's 1,024 GPUs per cluster is how we refer to it.

And so we'll receive another four in the next two weeks is our expectation.

And so also, think of where pricing has gone for us on these clusters, you should think about $20 million of annual revenue per cluster deployed.

So the difficulty we have is just a few weeks, because right now if they were running about eight weeks behind our original expectation, ;But when you think about the revenue ramp and the revenue generation on a week by week basis, we go from one clusters.

We're generating $20 million of revenue per year for that cluster to our business goes to four clusters, which is $80 million of revenue per year, and then our units in a few weeks, our business goes to eight clusters, which is $160 million of revenue per year.

So when we look at our guidance rate, -- excuse me -- we are assuming 10 clusters deployed by the end of our fiscal year, which is May, about 4.5 months away.

So that 10 clusters-plus are blockchain postings solutions that gets us to that $500 million run rate.

I think we can do better than that.

But that's the number that, I think, is a very conservative number for us to hit by the end of the year.

That's very helpful.

Thank you, Wes, for all the color.

One quick one, the $45.8 million in property equipment. the assets that have been purchased year to date, are you able to provide a breakdown between HPC and GPUs in that number?

I'm sorry, Lucas, which number was that?

The purchase year to them?

Yes, that's the number of property and equipment that's been purchased to date, year to date.

So of that, the majority of that goes into HPC.

So when you look on our balance sheet -- so as you look at our balance sheet, the where the GPUs are showing up because of how we're financing the GPUs is the lease asset, the right to use assets.

Okay.

And then we'll have a -- and then on the on the liability side, you'll see a capital lease.

One of the things I would call out with this is on the leases we deploy the GPUs, the entire right to use asset goes into long-term assets, whereas on the lease liability, it's split about half and half between long-term liability and short-term liabilities.

So when you look through the balance sheet, the leases right now -- because we're doing what I always refer to as equipment finance.

These are the capital leases, that's how we're financing GPUs.

So when you look through CapEx, the vast majority of what you'll see is CapEx on equipment is the HPC facility, the data center.

And then on the lease rate to use in the capital leases and those liabilities is where you'll see the GPUs.

That is very helpful.

Thank you, Wes, for all the color and best of luck.

Thanks, Lucas.

George Sutton, Craig-Hallum Capital Group.

Thank you.

It's great to see the conditional agreement.

I just wondered if you could walk us through the project level financing side of this, and sort of how do these ultimately come together in your mind?

Is it a combination of construction loan financing and project financing?

And any sense of the market dynamics there that we should know about?

Yes, thanks, George.

So I have talked about this publicly before.

So the way these agreements we've been marketing this since mid September.

Then when you think about this -- you should think about marketing people do, our potential customers do a lot of due diligence on the site.

You answer a significant number of questions, site visits, all of those things that you would expect in the due diligence.

And then you will typically go into a role for a period, right of use period where someone gets exclusivity that you won't sell it outside of anyone.

And I'm not talking about our specific agreement now, I'm just talking about the way that we've experienced this working.

And then you work to get to a contract.

And then post the contract, you go to project-level finance.

We are engaged with multiple parties on the project level finance side.

We have been for a while.

We haven't -- we're not waiting -- We weren't waiting for an agreement to go to project-level finance.

But on the project level finance side, you'll get in the neighborhood of 65% to 80% loan to cost at the project level.

So this won't go at the corporate level that goes down at the site level, just like we've done with all of our Bitcoin sites.

And then there's what we call the equity component, which I always look at, as we work through, is more than what people would refer to in our industry as like mez debt.

So you have the construction finance, you know that debt runs kind of in the 7.5% to 8% type cost range.

And then you have the mez piece, the equity piece, and then you have our contribution to it.

And our contribution, we can have continued construction.

We broke ground continued construction on the site in Ellendale, and we've put a significant amount of money into that already.

So I think we're close to where we need to be on the equity portion of that loan, and the remainder will come in from project level finance and this mez debt piece where typically someone will get.

It is in kind of a high mid to high teens return on their capital.

And it's generally first money out, and then maybe retains a small piece of ownership from, call it

[4%, 5%].

It's [3%, 5%] in the site itself.

And so that's the process there right now.

So I wondered if you could walk through the 400 megawatts that you're ultimately marketing, obviously, 100 megawatts now effectively spoken for.

Just it's very clear to us that the demand side of the equation here is going to be pretty significant.

I'm just curious what you're seeing as you're going to market with the other 300 megawatts of opportunity?

Yes.

So yeah, demand was robust.

We had two parties very deep in diligence last year.

As of -- the thing that we have seen, which has been interesting in that in January, we kicked the year off, we've had several more parties show up there, three more in the last week.

It feels almost like kind of panic-looking for capacity, just in the last couple of weeks.

So we're seeing a lot of interest and the parties that are involved would easily take more than the capacity that we have.

So it's nice to get to the first one close to over the finish line on it, but the expectation for me is that over the next month or two months, we're going to have the full 400 booked out.

And as a reminder, I think when we think about this the biggest issue that we face, which is a high quality issue, is how much do we carve out for ourselves?

Because we want to carve some of this out for ourselves for our own cloud solution.

And I think that's really the question mark, what's the highest and best value for these -- for our assets, because we want to carve them out for ourselves, but we have a massive amount of demand for the capacity that we have.

And George, the reason we have that demand is the 400 megawatts that we have is 400 megawatts that could come online over the next 18 months.

The power's available, the land is there permitting.

We're in a really good position in a market that is already short capacity, and I think it's going to get worse over the next few months.

Last question for me on the site computing side, obviously we understand the supply chain challenge.

Looking past that, I'm just curious on the demand side.

So you mentioned you've got another four clusters that could ship here soon.

Is there any demand challenge that you're seeing or has anything changed there?

Or is it really just a limitation on the supply chain side?

So on the demand side, the only thing that has changed on the demand side is that we're seeing a new group come into the market, as I mentioned in my prepared remarks.

So the demand remains extremely robust on the kind of the VC-backed startup companies.

But what we're seeing in the market is what we're referring to as enterprise customers.

So these -- and just so I can define enterprise customers, these are companies that generally are very large companies, typically publicly traded, typically north of $50 billion type of market cap.

They have a business.

They already have their own business.

To me, what it feels like is they have been working on their AI strategy, they have landed on what they plan to do in AI, and now they're looking for significant amounts of GPU capacity.

So that's a new element for us on.

We have we have one of those customers that we've been working with for about two months now.

And they've moved into what we call a -- we'll call it proof of concept, which is basically a test drive of our infrastructure.

Then I think we could get that customer into contracting here in the next two to three weeks.

But that's been the only change, which is in increased demand, but from a different segment of the market.

The way I looked at this market is a bit of a barbell rate.

It's -- on one side, you have the hyperscalers.

So this was last year, you have the hyperscalers on one side and then you have the VC startups on the other side, and then kind of there was nothing in the middle.

And now we're seeing that piece in the middle start to show up.

Perfect.

Thanks for the details.

Absolutely.

Thanks, George.

Darren Aftahi, Roth MKM.

Good morning.

Thanks for taking my questions.

Just two, if I may, if I heard you correctly pricing's kind of gone up on the GPU side.

I think Wes, maybe you said on an annualized basis with the [10,000] to be over $200 million.

I'm just kind of curious, I think at the Analyst Day, which is not too long ago, you talked about a $1.5 monthly run rate.

I guess what's changed?

And then on the GPU side, I know you are targeting 10,000 by the end of your fiscal year.

I guess, given there are some uncontrollables on components.

What's your level of confidence in that 10,000 number?

Sure.

So yes, Darren, you're right.

The pricing has gone up some.

So we're seeing the number I gave before is with our one of our largest customers, and we were pricing that at around two bucks an hour on the GPU capacity and reserve contract.

What we're seeing now is for most of our customers, we're signing contracts.

And what it looks like in marketplace is kind of in the [220, 225] range for two year reserve contracts and somewhere between 20% and 30% prepayments on the contracts.

So that's the color on the kind of the update on pricing.

And then on the 10,000, that's the number we took that down from the

[26].

So the original for us was 26.

We had a colocation capacity for 26.

And where we are now is just with the slowness on the component side for InfiniBand, the 10,000 is a number that we feel really comfortable with hitting.

We feel really comfortable in multiple ways, both on delivery the GPUs, but also on the financing of the GPUs without going outside to do a larger deal debts that has been done by some of the players in the market.

So we feel really comfortable on both sides of that some, but that's the reason we gave that guidance.

However, what I would say about that is I think there's more we can do on the GPU side.

So we'll have the 4,000-plus 4,000 shortly.

So you know, call it mid-February were 8,000 of those clusters of the 10,000 that we're guiding for.

So I think that leaves us plenty of room between there and the end of May.

Well, if I could squeeze one more in.

On Garden City, just looks like it is, obviously, going to ramp as fast as everyone expected.

With the grid components, can you just maybe talk a little bit about maybe what is needed, how quickly those can get here?

And then I'm just kind of curious, your propensity to continue to do business maybe with the next site in somewhere like Texas, like, how would you kind of grade that in terms of wanting to do business in a place like Texas?

Thanks

Yes.

I mean, I live in Texas.

I love it there.

So I don't want to say anything bad about Texas, so we'll leave that.

But the sites we're doing in the future right now are North Dakota and Utah.

So those are the two areas working on.

I think we've talked about this in the past, we were out looking for more capacity because the demand we see in the market.

We have a pipeline of additional capacity that sits north of a gigawatt, so we're working through that.

And then specific to the Texas site, there's some improvements.

I'm going to butcher this a little bit, but I think we need a little resiliency, which is a capacitor bank put in it, not specifically in our location, but a substation that's in the area to get fully up to the

[200].

There's two ways to go there.

There's a getting approved for wind plus grid is one route.

And the other is I think it's a capacitor bank that needs to be installed and not a huge expense on that by the way on.

But the -- we've been working on that since late November or December.

And the guidance that we gave is the what we view as the worst-case scenario, which would be the April timeframe for the remainder of that to come on.

So we're going to we're basically waiting for the last 65 megawatts to come on there.

Great.

Thank you.

Rob Brown, Lake Street Capital Markets.

Hi, good morning.

Good Morning, Rob.

Just following up on the new anchor customer, could you give us a sense of sort of what vertical that customer is in?

I think you mentioned, I guess, enterprise or VC-backed side, what sort of group is that?

So we can't do that.

But what I can tell you is the customer set that we are seeing of all the people that are looking at the site, there's not a lot of companies that exist in the world are that are going to take down a 100 megawatts or 200 megawatts or 300 themselves.

And so it's a very small group.

And all of the companies that that are in the mix for us in North Dakota are names that everyone would easily recognize.

They're looking for high-power density -- hosting high-power density data center capacity on, but it's all companies that you would recognize them instantly.

Okay.

Thank you.

And then just wanted to follow up on the GPU a discussion around, I guess, do you still have commitments to buy the 26,000 GPUs and deploy them after May, or is that still to be determined that contract activity?

Those orders are still valid even up to the 34,000.

And so we just expect to continue.

By the way, Rob, just to clarify on those orders, it's 34,000 right now for H100.

We can still change those orders, whether it's for H200 or the GH200, right?

These are fluid for us.

So as the market evolves, we're able to react to that.

But we still have those in queue.

And the ability to bring those when all of the components are available.

So the issue in the quarter we had just now, as David mentioned in his prepared remarks, just to give clarity on that.

So we took delivery of the second cluster during the quarter.

We were paying for that cluster.

Those were the expenses in total were just under $4 million.

So paying for that cluster without that cluster generating revenue, because we didn't have the InfiniBand components to fully commission that cluster and turn it over to our customer.

So we basically paused the GPU deliveries ourselves, because we don't want to be paying for the GPUs while we can't offer them to our customers and generate revenue for them.

So that's really what's happened for us.

But we still have all those orders in place and expect to deploy those.

We just need to be more careful, I guess, about when we expect those to be deployed.

Got it.

Great.

Thank you for the color.

I'll turn it.

John Taranto, Needham & Company.

Great.

Thanks for taking my question, a couple ones here.

One, so you called out before, I think you're supposed to be 20,000 GPUs by end of December '23.

On the last call or the Analyst Day, maybe you did talk about them some possible delays in the InfiniBand.

I'm just kind of curious, did that situation get worse than you expected?

Or were those delays kind of on your mind and you guys just miss analyzed it?

So John, specifically on those nodes, we're getting delivery of certain of the vast majority of the networking equipment that we needed.

There was one particular component, but you need that component to make it work.

So we are in an instance where we are in one of our clusters, right, we have a the entire InfiniBand set up besides the 28 transceivers, just as an example, but you can fully commission that cluster and generate revenue.

So it's been just squeezing in those transceivers is specifically what it is.

So like I said, we could have taken delivery of a lot more GPUs, but I see no point, and I think it's detrimental to us to take delivery and not be able to generate revenue and pay for the GPUs.

So we just held that off and made that decision in December.

We could have taken a significant number of GPUs in December.

But again, no reason to do that.

So as those come available I think that you could see us speed that up again significantly, and we've started to see that loosen up in the marketplace in late December and January.

But I'm not ready to say that we'll be able to speed that up to meet kind of the 20,000, and the 26,000, and 34,000 deployments.

Got it.

Okay.

And then that's helpful.

Another question I had, you had mentioned this this new customer contract in this high compute side, enterprise customer.

How are you could move your proof of concept and start delivering on that contract shortly.

Just curious with the delay, wouldn't the previously existing contracts come before this one or did anything change with those contracts?

No, nothing has changed with those contracts.

And just to clarify, John, we don't have a contract with the enterprise customers.

It s in proof of concept, and then we'd be moving to contracting, so I just want to be clear on that.

But nothing has changed with our previous customers, it's exciting to see an entire new group show up in the marketplace looking for a significant amount of GPU compute.

And these are established companies that make money and have a product, and it's just I'm just calling out that that's kind of a new area of the market that we've seen develop over the last -- it really started kind of in late November.

Okay.

Got it.

And just to clarify, though, so even with the delays though, the customers are still kind of lining up knocking on doors it sounds like.

Yeah, we have had no issue with that.

Okay.

Got it

--

I would say, and I said this earlier, John, but I would say we've seen with the entrance of the enterprise customer, I would say, that overall, we've seen demand increase from our last conference call.

We haven't seen anything slowdown, we've seen it increase.

Got it.

Thank you.

Appreciate it.

(Operator Instructions) Mike Grondahl, Northland Securities.

Hey, guys.

What is the rough estimate of Applied's contribution to complete financing of the construction, just the project side of it for the anchor tenant?

What do you guys have to pitch into that roughly, just a number?

And how should we

--

Yeah, good, good question, Mike.

So when you think about so if we say 7 million megawatts, let's go to the high end of that.

So it is 7 million megawatts, we're going to land anywhere from 65% to 85% -- sorry, 65% to 80% on construction finance, on project level finance.

And then what we expect to have and what in the industry would call an equity partner.

However, as I explained earlier, that generally looks more like mez debt.

And so at the end, when you're looking at us, our expectation is that will contribute somewhere between 5% and 10% of the project in cash for the equity portion of that.

And we've already spent north of $25 million on that currently for Ellendale.

And then, Mike, when we look at that to you, I think David mentioned this in his prepared remarks, is for us on the cash flow for the company, I think it's important to note that when we hit March 1, the cash flow from our Bitcoin data centers improves dramatically, right?

We burned through the vast majority of the prepayments at that point.

And so the cash flow from that portion of our business improves dramatically.

Got it.

Got it.

That's helpful.

I'm assuming that the anchor tenant will be supplying the GPUs, but could you clarify there?

Yeah.

So on the data center business, we are just providing space.

Think of this as an Equinix or DLR style business.

We're providing the space, they selected the equipment, and they buy the equipment, and then we're just hosting, very similar to what we do on the cloud side.

Got it.

Got it.

Roughly, when would you begin to recognize revenue with this anchor customer?

What is -- I'm not going to hold you to above, roughly as this plays out, when would you expect that revenue to start?

So right now the expectation is the revenue would be in the very early part of the second half of this calendar year.

Like July, August would be kind of

--

Yeah

Okay.

Yes, great.

And then just one last question on the bitcoin hosting business, any contract renewals or extensions have any updated kind of terms or is everything kind of locked down in that business?

It's locked down.

The things of note are our largest customer there we have some four years, maybe a little over four years on most of the capacity for our largest customer there on the contract.

The only thing of note is -- and this probably shouldn't surprise you, but we're getting a lot more calls about hosting capacity.

We are never out marketing because we don't have any to offer.

But we are getting a lot more calls about hosting capacity over the last, call it, six weeks, eight weeks as the price of bitcoin has went up significantly.

Got it.

Okay.

Hey, thank you.

Absolutely.

Kevin Dede, H.C. Wainwright.

Hi, Wes.

Thanks for taking my question.

Curious about the number of facilities that you're running are leasing to supply the power you need for your cloud service at the moment?

Sure.

So we are we have third-party facilities in Denver, in Minnesota, and in Salt Lake City.

And we have our own Jamestown facility in Jamestown, North Dakota.

Yes, Jamestown, you have maxed out at eight megawatts, if I understand correctly.

So Jamestown will hold 5,000 GPUs for us.

If I can do it on megawatts?

I can tell you on the GPU capacity, however you prefer.

Whatever you're used to is fine.

And I'm just -- I guess the real genesis of the question as in meeting cloud builds, right?

The amount of - given the market's really tight, how are you securing the power that you need to meet your customer demands on the cloud service side?

So we secured this power back in the summer of last year.

So middle of the year last year, we secured these power sites.

We saw the demand and we ran out and grab the capacity to be able to service it.

And so we secured that at that point.

And so we have the capacity both from third party and our own facilities for the 26,000 GPUs that we talked about.

As we go beyond that, our expectation is that it will go into our own facilities post that 26,000 as we continue to grow.

Right, so 26,000 to 34,000, that delta going into the Ellendale facility that's under construction now.

Yeah.

Okay.

I think I correctly heard you mentioned a marketing initiative, and I was wondering if you could be more specific about the direction that you're going to take that.

Do you think that goes towards that enterprise market that you're seeing starting to develop?

Yeah.

So it is specifically for the enterprise market.

So as a reminder, Kevin, I think we've talked about this before, but we've never had a single salesperson at our company, and we hired our first salesperson a few months ago.

And we're going to add more to that capability specifically to go after this enterprise market that we see developing now on.

So that's our expectation.

But previous to that, we've never had a salesperson. we've had no sales force whatsoever in the company.

Understood, and congrats on that.

I guess I'm just still a little shaky in how you see that market developing and I guess sort of your competitive positioning, and if demand is so strong, why would a marketing initiative be necessary at all?

So you know that we've hired a one salesperson, maybe we'll hire another one, but there's an idea about going out and making sure people know who we are and what we do, because we've never done that before in the history of the company.

So that's really the idea.

So I don't think you should be thinking that we're hiring 20 sales people.

But I do think it's prudent to get a few salespeople on onboard, develop that sales organization.

And the idea here is that we've discussed a lot internally used, we don't need it now, but we don't want to wait until we need it to build it.

It makes sense.

Okay.

Well, thanks for that.

Do need any are offensive kind of looking for clarification?

Thanks a lot.

No, no.

That's -- Kevin, we're discussing it on the call here, but we've debated a lot internally where there's a group of people saying why would we have salespeople?

We don't have anything to sell.

Another side because that thinks that we should develop this before we need it.

And I guess we ended in the latter camp, which is I think it's a good idea to develop the sales team before you actually need it.

I don't disagree.

Right marketing makes it happen.

Congrats again on the results, Wes.

Thank you very much for taking the questions.

Thanks, Kevin.

(Operator Instructions) And there are no further questions at this time.

I would like to hand the conference back over to Wes for some closing comments.

Thanks, and thanks, everyone, for joining.

And my last comment is just wanted to say thank you to the team in Ellendale is we're sitting here in January.

It's not the most pleasant climate for them to be continuing construction on our site.

So we really appreciate the team and everyone who makes it happen for us, and I look forward to speaking to you next quarter.

Thank you.

That will conclude today's conference.

You may disconnect your lines at this time.

And thank you for your participation.