Good afternoon, and welcome to Applied Digital's Fiscal Fourth Quarter 2024 Conference Call. My name is Shamali, and I will be your operator today. Before this call Applied Digital issued its financial results for the fiscal fourth quarter ended May 31, 2024 in our 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, Matt Glover from Gateway Group will make a brief introductory statement. Mr. Glover, please proceed.

Great. Thank you, Shamali. Good afternoon, everyone, and welcome to Applied Digital's Fourth Quarter 2024 Conference Call. Before management begins their formal remarks, we would like to remind everyone that some statements we are making today may be considered forward-looking 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 to differ materially from those described in the forward-looking statements. For more detailed risks, uncertainties, assumptions relating to our forward-looking 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 except as required by law. We will also discuss non-GAAP financial metrics and encourage you to read our disclosures in the reconciliation tables, the applicable GAAP measures in our earnings release, which can be found on the Investor Relations section of our website carefully as you consider these metrics. We refer you to our filings with the SEC for detailed disclosures and descriptions for 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 Annual Report on Form 10-K, 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 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'd like to turn the call over to Applied Digital's Chairman and CEO, Wes Cummins. Wes?

Thanks, Matt and good afternoon everyone. Thank you for joining our fiscal fourth quarter 2024 conference call. I want to start by expressing gratitude to our employees for their ongoing hard work and service in supporting our mission of providing purpose-built infrastructure 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 would like to share some recent developments across our business. During the quarter, we faced several challenges that impacted our financial performance due to the facility power outages in our data center hosting business. Despite these short-term setbacks, the company has made significant progress with our key growth initiatives, including the development of our cloud services business and the construction of our purpose-built 100 megawatt HPC data center in Ellendale. As previously announced, we executed a letter of intent with a US-based hyperscaler for 400 megawatts at our Ellendale campus, inclusive of our current 100 megawatt facility and two forthcoming buildings. Now I will provide an update on each of our business units. Let us begin by discussing our data center hosting business. Our 106-megawatt Jamestown facility has consistently met expectations, operating at full capacity with uninterrupted uptime throughout the quarter. This achievement marks the seventh consecutive quarter of full capacity operation for this facility. While we are pleased with Jamestown's performance, we encounter challenges at other facilities. As previously disclosed, our 180-megawatt Ellendale facility in North Dakota experienced a power outage starting in January, which we determined was caused by transformer failures. By the end of the fourth quarter, we had successfully replaced the transformers and related components with equipment from industry-leading North American manufacturers. As a result of the transformers being replaced, we now have 286 megawatts of data center hosting capacity for our blockchain clients across our two fully contracted locations in North Dakota. Let's move on to our cloud services business which provides high-performance computing power for AI applications. This segment continues to experience growth, as we advance in fulfilling our existing contracts and exploring new opportunities in our pipeline. As of the end of the fourth quarter, we had four clusters online, and we brought another two clusters online in the first quarter of 2025. Lastly, let me provide an update on our HPC data centers. We currently have 400 megawatts of capacity under development across North Dakota. This is in addition to the 7.5 megawatts of IT capacity at our HPC facility in Jamestown which, due to its proximity to Ellendale, should allow for a low latency interconnected extended campus in North Dakota. During the quarter, we continued to make significant strides in the construction of our first proprietary 100-megawatt high-performance computing facility in Ellendale, North Dakota. This state-of-the-art facility will feature cost-effective, highly efficient liquid-cooled infrastructure, specifically designed for the most demanding HPC applications. We’ve made substantial progress in the construction of the 369,000 square foot facility. I encourage you to visit our new website for some recent images of the facility. As previously mentioned, we have entered into exclusivity and executed a letter of intent with a US-based hyperscaler for a 400-megawatt capacity lease. We believe the hyperscaler has completed their technical and site due diligence on the location and are now working to finalize the details of the lease. This will be followed by finalizing the project-level financing for this investment-grade tenant. We are focused on finalizing the lease and project financing for Ellendale campus and we have started marketing three additional campuses totaling 1.4 gigawatts. All of these campuses have power available in 2026. In summary, we’re encouraged by the positive trends we are witnessing across our business and remain confident in our growth trajectory. We are excited about the numerous potential catalysts on the horizon and are committed to strategically allocating our capital to achieve the highest risk-adjusted returns and maximize shareholder value. With that, I will now turn the call over to our CFO, David Rench to walk you through our financials and provide an update on guidance.

Thanks, Wes, and good afternoon, everyone. Let me begin by addressing the complexity of this quarter's financial reporting. We reported an adjusted EBITDA of approximately $4.8 million. However, several one-time items significantly impacted our financial performance and comparability to prior quarters. Notably, a large portion of the power was out in our data center hosting facility in Ellendale, North Dakota, which then largely came online right at the end of the quarter. Additionally, we incurred many one-time professional service expenses primarily related to our capital-raising initiatives, financial analysis for data center financing and strategic transactions. We continue to pursue all available remedies to recoup lost revenues and additional costs incurred from the transformer outages. Let us delve into the results of the quarter. Revenues for the fiscal fourth quarter of 2024 were $43.7 million compared to $22 million for the same period in 2023. The increase was primarily driven by expanded capacity across our data center hosting facilities and revenue contributions from the cloud service contracts. Specifically, our data center hosting segment generated $26.9 million in revenue, while our Cloud Services segment contributed $16.8 million. Turning to cost of revenue for the fiscal fourth quarter of 2024, it amounted to $46.3 million, up from $15.9 million in the same quarter of 2023. This increase can be attributed to higher energy costs resulting from the increased number of megawatts used to generate hosting revenues. Additionally, depreciation and amortization expenses, along with personnel costs rose due to the growth of the business as more facilities came online. Selling and general administrative expenses for the fiscal fourth quarter of 2024 were $31.3 million compared to $12.3 million in the prior year's comparable period. The increase was primarily due to start-up costs, as we ramped up the cloud service business. This included higher depreciation, amortization and lease costs on assets not yet supporting revenue, as well as personnel costs to support the overall growth of the business. The net loss for the fiscal fourth quarter of 2024 was $64.8 million or $0.52 per basic and diluted share. This calculation is based on a weighted average share count during the quarter of approximately $124.7 million. In comparison, the net loss for the fiscal fourth quarter of 2023 was $6.5 million or $0.07 per basic and diluted share based on a weighted average share count during the quarter of approximately $94.1 million. Adjusted net loss, a non-GAAP measure for the fiscal fourth quarter of 2024 was $45.3 million, or adjusted net loss per basic and diluted share of $0.36 based on a weighted average share count during the quarter of approximately $124.7 million. This compares to an adjusted net loss of less than $0.01 per basic and diluted share for the fourth quarter of 2023, based on a weighted average share count of approximately $94.1 million during the quarter. Adjusted EBITDA, another non-GAAP measure for the fiscal fourth quarter of 2024 was $4.8 million compared to adjusted EBITDA for the fiscal fourth quarter of 2023, which stood at $3.4 million. The significant difference between our adjusted earnings and our adjusted EBITDA is largely driven by our accelerated depreciation schedule of our GPU hardware. Moving to our balance sheet. We ended the fiscal fourth quarter with $31.7 million in cash, cash equivalents and restricted cash, along with $125.4 million in debt. Subsequent to the fiscal year-end, we secured over $150 million in funding from various sources and the settlement of the Garden City contingency. We continue to explore additional financing for the cloud service business, which will better align the economics of that business with the life of the assets by extending the depreciation from two years to six years of the industry norm. I would like to reiterate that we are focused on project-level financing for the Ellendale HPC campus, which we expect to fund shortly after the finalization of a lease agreement with the US-based hyperscaler. Now I'll turn the call over to Wes for closing remarks.

Thank you, David. We understand the past year has seen challenges as the company has faced a multi-month outage at our Ellendale hosting facility and the financial burden of funding a $1 billion data center while funding our cloud business. Nevertheless, we've made substantial progress towards securing a greater than a decade-long lease agreement with a Fortune 50 company for our Ellendale campus. Finalizing this lease will solidify our position as a leader in the HPC data center market and have a cascading effect on our ability to secure asset-level financing and to develop additional sites. Throughout this process, we've diligently worked to secure project level debt for our facility with multiple interested parties. Upon execution of the lease with the hyperscaler, we anticipate our financing partner, SemGroup will release additional capital to support ongoing construction while we continue to work toward project-level finance. In summary, despite significant challenges this quarter, largely due to external factors, we remain fully committed to delivering strong long-term shareholder value. Our vision is to become a development platform capable of building and operating multiple HPC data centers. This starts with our Ellendale campus and continues with three additional campuses we are actively marketing today totaling 1.4 gigawatts. To support this vision, we have added several industry veterans to our team, and we are already working on the design of our next two buildings, which will provide 300 megawatts of capacity. We are incredibly proud of the progress made this quarter and look forward to providing further updates as we move into fiscal 2025. Looking ahead, we believe Q4 marked the bottom for our revenues and anticipate sequential improvements in the top line as we enter the first quarter. We now welcome your questions.

Thank you. We will now begin the question-and-answer session. Our first question comes from Lucas Pipes with B. Riley Securities. Please go ahead with your question.

Thank you very much operator. Good afternoon everyone. Wes, to you my first question is on the Ellendale HPC campus. And I wondered if you could speak to the percentage completion on the first 100 megawatts and the remaining capital requirements from here? Thank you very much.

Sure, Lucas. We currently have just over $200 million invested in the facility. The building is fully enclosed, and we are making progress with the mechanical, electrical, and plumbing work. The final fit-out will take place later this year and early next year. This facility is expected to cost a little over $1 billion for the first 100 megawatts, which aligns with typical Tier 3 data center capacity. With the $200 million already invested, we are collaborating with banks that usually provide project-level financing in this sector. We have received term sheets and have selected a bank to move forward with. We anticipate they will cover the remaining costs, as we've received loan-to-cost quotations in the range of 80% to 90%. We just need to finalize the lease, and the project-level financing process is already underway. We hope to conclude that soon.

Thank you very much for the detail. Wes, did I hear it right that you said kind of fit-out early next year? And would that include completion? Or how would you frame that up in terms of that timeline? Thank you.

So Lucas, there are a couple of different timelines that we work through here as we've gone through the process. There is our build timeline, and then there's when our customer wants the facility ready for service. That is not completely locked in at this point. But our schedule from the build perspective is what we've talked about in the past being ready late this year or early next year.

Thank you very much for this. I would like to switch topics quickly. Regarding the cloud services business, can you discuss the ramp-up in your first fiscal quarter? How many clusters did you have online? Additionally, how would you compare the revenue opportunity in the first fiscal quarter to the fourth fiscal quarter that you just reported? Thank you.

Sure, Lucas. In Q1, we had six clusters operational, although they weren't all online for the entire quarter since they went live in June. With these six clusters, we are looking at an annual revenue run rate of approximately $110 million. We are concentrating on the enterprise market, having begun with AI labs and start-ups, and we have been addressing this segment for about seven or eight months. Recently, we hired a new Chief Revenue Officer from IBM who is focused on this market, and we are seeing increased demand that we will continue to cultivate. Additionally, we are working on financing solutions to make the deployment of our equipment more beneficial for our income statement, especially compared to our current capital lease structure, which affects our financials due to accelerated depreciation over two years instead of the industry standard of five or six years. We anticipate significant growth in demand, particularly from the enterprise market.

Wes, I appreciate your details, you and team best of luck.

Thanks Lucas.

Thank you. Our next question comes from the line of Rob Brown with Lake Street Capital. Please proceed.

Good afternoon. Just following up on the AI cloud business, I think the six clusters, what's sort of the range of clusters, do you think you can grow that business into? And how do you think about that versus the data center business in terms of capital investments?

On both of these businesses, Rob, we think about these businesses in the same way. These are asset-heavy businesses, capital-intensive businesses. We need to have the right mechanisms in place to do asset level financing for both of them. And so we've talked about that on the data center side. We are almost there. We talked about it pretty extensively on the GPU side. I think we're almost there as well. And so when we have the correct asset-level financing mechanisms in place, I think we will be able to grow significantly on both sides of that business. On the AI cloud portion of the business with the data center capacity that we have in place today and what's available to us as we go through 2025, we can generate significant growth in that business, and we see the demand for it, but we need to get the right capital base in that business to grow it aggressively. Right now, we are kind of feeding both of them, and we need to move that financing down to an asset level from a company level.

Thank you. Regarding your hyperscaler contract, can you provide an update on the timeline? I assume that the long lead items involve due diligence on the site and the technical aspects. What percentage of completion are you currently at in moving the contract through its process?

It's hard to handicap that, but I would say we're north of 90% of the way there.

Okay, great. Thank you, I will turn it over.

Thank you. Our next question comes from the line of Darren Aftahi with ROTH Capital Partners, LLC. Please proceed with your question.

Thanks for the follow-up on the lease. From a broader perspective, how much of this involves minor details being resolved versus a larger framework? Additionally, how much is the law firm’s backlog impacting this process? Thank you.

That's a good question, Darren. Regarding the details, there are significant items and minor ones, and at times, minor items can take just as long as the major ones. There is a detailed process involved with fiber connectivity, power, reliable power, and power redundancy that required considerable time to complete, and there are many small details involved. I would say it is a combination of both, and interestingly, some smaller details can take longer. As for the backlog with the law firm, there are only a few that handle most of these contracts. There is definitely a backlog, but I can't specifically determine how much of the slowdown is attributable to that. This is the first time we are going through this, so it's the only environment we have experienced.

Got it. And just one more on your pipeline of other campuses. I guess one, where are you in the marketing process? And then two, what's your propensity to diversify your customer base with those other campuses versus, say, if the existing US hyperscaler that you have the LOI will have more interest in capacity if they wanted to take that down, just if you kind of compare and contrast those thoughts.

Sure. So we've just recently kicked that process off; there are people we send out tear sheets and binders for these sites. And we have a more refined process, I would say, at this point than we did for the Ellendale campus, but we're still pretty focused on hyperscalers for these sites. We're focusing on sites that are at least 200-plus megawatts of critical IT capacity. So that is going to equate to depending on what part of the country you are in, somewhere between 250 to 300 megawatts of utility power. So those are the types of sites and customers that we are focused on. There are other customers in the market, but we have a pretty narrow focus of how we go to market with these new sites.

Great. Thank you.

Thank you. Our next question comes from the line of Mike Grondahl with Northland Securities. Please proceed with your questions.

Hi, thanks guys. Wes, could you repeat what you said, the six clusters are driving an annualized run rate of how much revenue? I heard $100 million, but it kind of came through a little garbled.

Yes, it's about $100 million to $110 million, Mike.

Okay. $100 million to $110 million. And I think what you were saying is, hey, there is a lot of demand for that business, but you are kind of going to stay at about six clusters until you get a better financing structure in place, and then you would expect to see more growth. Is that a fair summary?

Yes, that's a good summary as we are working on a better financing structure because you can see where our adjusted EBITDA is compared to our earnings, which is largely impacted by the accelerated depreciation schedule on our GPUs. Therefore, we need financing that meets our cost requirements and allows us to depreciate these assets over their useful life rather than during the financing period.

Sure, sure. And in the press release, you kind of referred to this development platform on the HPC side with the potential to go from 400 megawatts to 1.4 gigawatts, do you think that first hyperscaler customer is interested in more than the existing 400 you're talking to them about? Could you end up being a one-stop shop for them for another big project or two?

I definitely believe we can, but there is also demand in the market from similar customers. There is a considerable need for this capacity, particularly for near-term power. The 2025 power is set unless we secure it for Ellendale. Our focus is currently on the 2026 and 2027 power. Near-term power is crucial, and it's important to have the right type of power supply. This was one of the reasons we decided to sell our Texas facility; we don't think it suits HPC, at least not in the way we intend to develop it. So our main focus is on near-term power. To clarify, the 1.4 gigawatts refers only to the additional three sites and does not include Ellendale. Our attention is on that market. I think there is significant demand for near-term power from potential customers and others like them.

Got it. Great, hi thanks a lot.

Thank you. Our next question comes from the line of George Sutton with Craig-Hallum. Please proceed with your question.

Thank you. Wes, nothing on the call has surprised me except for one statement. You mentioned it's not clear when the customer might want to go live with the lease. Can you just clarify that statement? My assumption has been we want to get this up and running as fast as humanly possible, and that's why you're building out as rapidly as you are.

Yes. So that's correct, George, a correct way to look at it. But there are different stages for this as far as when you're doing fit-out, what we are adding in for the fit-out. So there are a lot of moving parts there. I mean it is fairly buttoned down, but we'll save the details of that for when this is finished and we can share that publicly.

Okay. And relative to the GPU financing structure, our understanding knowing that market pretty well is it's gotten a lot better. It's gotten a lot more financeable, can you just talk about the level of interest you've had from folks in putting a structure together there, kind of where does that stand?

Yes, we began this process some time ago, and you are right that the interest level has increased and the cost of capital has decreased. It really depends on the type of off-taker, similar to the situation with data centers. Financing costs vary significantly based on the off-taker. AI labs and start-ups will face the highest costs, while enterprises will typically see much lower costs. Additionally, working with a hyperscaler will reduce costs even further. We are noticing a considerable influx of new players in that market, and there is a lot of interest, so I believe we will be successful in establishing that structure for ourselves.

So just to clarify on that, the financiers are saying we are happy to put them together. We want to see the customer names. And once you provide a high-quality enough name, we would want to fund this. Is that chicken-and-egg to some extent.

It kind of is, George, what you should think of is a facility that gets put in place, and it is a drawdown facility as you buy equipment and you do show customer contracts. And typically, the kind of the structures that we see in this is you'll be form like a bankruptcy remote SPV and then the loans go into that, the GPUs go into that and the customer contracts go into that, and in some cases, the colocation contracts go into that as well. And so it's kind of a self-contained financing solution.

Got it. Okay, thank you.

Thank you. Our next question comes from the line of John Todaro with Needham & Company. Please proceed with your question.

Hi, Wes, thanks for taking my questions. Two for you. First, just trying to do diligence as much as possible, kind of the timeline for that lease agreement. So you had mentioned they finalized their technical requirements, is that kind of you think about the first stage and how many stages would you say there are? Or is it really now just kind of down to some final details? And then second question, you had mentioned the Garden City site that you didn't think it was suitable for HPC. Obviously, a lot of the Bitcoin miners out there are kind of trying to go down that West Texas route. It hasn't been done yet. Just curious why did you think that that site and maybe that region wouldn't really be possible for HPC.

Hi John. I wouldn’t say it’s all separate; when considering whether this is the first step of the process with the lease side, everything is interconnected. I would describe it as us finalizing the last details. From our experience in this process and what we’ve observed previously, I don’t think having a large flexible load in the ERCOT market will suit the types of customers we are targeting in that business. While I can’t predict future changes, I know there are proposed legislative changes in Texas that may complicate serving the customer types we are focusing on with a large flexible load structure. Therefore, we are currently not pursuing anything in Texas, although that may change in the future. We prioritize firm power and power redundancy—not just redundancy with what we have onsite, like UPS systems or backup generators, but also redundancy in having multiple power lines or feeds from different directions into the substation or switching station we draw power from. We have learned significant lessons through this process, and those are the types of sites we are securing and marketing. However, I am not overly optimistic about specifically pursuing large flexible load in Texas.

That’s helpful, Wes. I appreciate that. Thank you.

And our next question comes from the line of Kevin Dede with H.C. Wainwright. Please proceed with your question.

Thanks, hi Wes. I was wondering if you could take a little time just to characterize the overall environment. Understand you're targeting 1.4 gigawatts. What's the competitive environment like? And how are you confident that Applied wins versus your competitors.

Sure. There are two main aspects to consider. First, we see very strong demand for near-term power, particularly focused on power that can be operational by the end of 2027. Power is currently the primary bottleneck. The second bottleneck is the supply chain, which has several stretched components. We have extensive experience managing the supply chain. For our first data center build, we placed orders last year and secured our positions for essential components like switchgear transformers. These are the two critical areas. We believe we are well positioned in both of these competitive dynamics. The key for us is successfully completing this first lease, which will validate our company's efforts in North Dakota and demonstrate our capability to locate, develop, and bring these sites online for large and demanding clients. We face significant competition in the market, primarily from private data center companies that have been constructing facilities for hyperscalers for years, in some cases for over a decade. Many of these companies are building substantial power capacities, sometimes exceeding a gigawatt, for hyperscalers. This isn't a new market; it's simply a new type of data center.

Well, as you go up to bid for a site and you see these other private companies that have been doing this a little bit longer than Applied has, why would you win that contract? Why should we believe that you're going to have a foot up in that competition?

It's crucial to understand how companies traditionally operate in the data center market. When a company plans to expand, they typically choose a desired region, such as Dallas. They can use various tools to identify data center locations in the DFW area, focusing mainly on fiber maps. These tools help match the required fiber connectivity with available real estate, enabling the company to select a site, acquire it, and then request power from the utility. However, currently, power requests in many popular markets are facing significant delays, sometimes extending over five to ten years. This poses a major hurdle. In contrast, we take a different approach by first identifying locations with power availability and ensuring that this power is suitable for our developments, factoring in redundancy. We also check for fiber connectivity and have refined our process to consider latencies to various areas. This allows us to either start developing sites, as we did in Ellendale, or market other locations effectively. We believe we are one of the few companies implementing this method and progressing this far along in the process. Since we began this strategy in 2022, our knowledge base has significantly increased over the past six months. The availability of sufficient power and ideal connectivity at the right sites truly gives us a competitive advantage.

Would you think it's also fair to say that you are looking under rocks and perhaps more rural locations with less concern on latency?

So we are for sure, that's what I was mentioning earlier about how traditional data center companies go about it, and we go about it in a very different way. We've definitely tightened the bands on what we know about kind of the latency requirements. So we are not necessarily going to be looking at really far from locations, but we have a lot more knowledge base around the type of latency requirements in North America that we will need to meet for the site. So it has helped us with our site selection even more.

Can you provide an update on where Applied stands with its cloud AI business? How many sites are currently operational, and what is active? Additionally, once your structured financing is in place, how do you plan to leverage those resources in this fiscal year?

Yes. So we have a lot of the same locations, right? We have Minnesota. We have our site in Jamestown, we have colocation capacity in Denver and Salt Lake City. Those are the primary large ones. We have a smaller one in Las Vegas. So we have that capacity. There's open capacity, which is, I think a very big asset in the market. It is extremely difficult to find and ready for deployment. We have demand that's coming through on the enterprise side, and there still is strong demand in that market. When we get the right type of financing in place, we'll be able to re-accelerate the growth of that business.

So all told, can you give us a rough ballpark on the megawatts that you have access to?

We have megawatt capacity secured of just over 30 megawatts for immediate deployment. This is not for future use; it is ready now.

Yes, that was the nature of my question. I appreciate the color, Wes. Thank you very much.

Thank you very much. And we have reached the end of the question-and-answer session. Therefore, I'll turn the call back over to Wes Cummins for closing remarks.

Thanks, operator. Thanks, everyone, for joining the call and look forward to speaking to you next quarter.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.