Earnings Call Transcript - APLD Q2 2025

Operator, Operator

Good afternoon, and welcome to Applied Digital's Fiscal Second Quarter 2025 Conference Call. My name is Julian, and I'll be your operator for today. For this call, Applied Digital issued its financial results for the fiscal second quarter ended November 30, 2024, and a 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 today are Applied Digital's Chairman and CEO, Wes Cummins; and CFO, Saidal Mohmand. 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, you may begin.

Matt Glover, Introductory Speaker

Thank you, Julian. Good afternoon, everyone, and welcome to Applied Digital's fiscal second quarter 2025 conference call. Before management begins 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 a number of factors, many of which are beyond our control, 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 or SEC. We disclaim any obligation or any undertaking to update forward-looking statements to reflect circumstances or events that occur after the date of the forward-looking statements are made, except as required by law. We also discuss non-GAAP financial metrics and encourage you to carefully read our disclosures and the reconciliation tables to the applicable GAAP measures in our earnings release as you consider these metrics. We refer you to our filings with the SEC for detailed disclosures and descriptions of our business, 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 and our Quarterly Report on Form 10 Q. You may get Applied Digital's SEC 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 link 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?

Wes Cummins, CEO

Thanks, Matt, and good afternoon, everyone. Thank you for joining our fiscal second quarter 2025 conference call. I want to start by expressing gratitude to our employees for their continued 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, Saidal Mohmand, for a detailed review of our financial results, I'd like to share some recent developments across our businesses. Starting with our data center hosting business, we currently have 286 megawatts of data center capacity for our cryptocurrency clients across two fully contracted locations in North Dakota, which are operating at full capacity. As many of you know, Bitcoin recently hit $100,000 and the demand for our services in this sector remains robust. Next, let's discuss our cloud services business, which provides high-performance computing power for AI applications. This segment continues to experience growth as we fulfill our existing contracts and explore new opportunities in our pipeline. As of the end of the second quarter, we had six clusters online. We're currently evaluating numerous opportunities in this area as we see how next-generation GPUs come to market. In our HPC hosting segment, we continue construction of our 400-megawatt campus in Ellendale, North Dakota. In December, we reached a major milestone with the successful energization of the main substation transformer. Additionally, I'm very pleased to announce that we won the DCD Community Impact Award for our Ellendale Community and Economic Development Initiative; through the R-WISH program, we are addressing housing shortages and supporting workforce growth in Ellendale, North Dakota. This is a significant accomplishment for an emerging firm like ours in the data center space, as we were finalists alongside established companies from around the globe, such as Google, NTT DATA from India, and Telehouse Europe based in London. Let’s now turn to the topic that everyone is thinking about: the lease of our campus in Ellendale, North Dakota. Over the past year, we've learned that the hyperscaler contract process is extremely thorough. While we cannot control their speed, we are focusing on what we can control: completing the construction of a 100-megawatt data center on time and within budget. I strongly believe that our Ellendale campus is a valuable asset with 100 megawatts of critical IT load available in 2025. We believe it is in our shareholders' best interest to continue managing what we can and avoid speculating on an exact date. While the process has been long, one of the major benefits of undergoing such a significant diligence process is that we have been engaged with some of the largest finance and investment partners in the world. Today, I'm excited to share we've agreed to form a strategic partnership with Macquarie Asset Management. Macquarie Asset Management, the asset management division of Macquarie Group, is a global financial services organization operating in 34 markets with over 20,000 employees. They have been recognized as one of the largest infrastructure investors in the world for the past 12 years, raising over $80 billion in capital last year alone. Macquarie brings extensive experience in infrastructure investments in data centers. We will leverage their infrastructure investing and development expertise along with their growing digital ecosystem capabilities to complement Applied Digital's expertise in delivering and servicing data center infrastructure solutions for enterprise and hyperscale companies. The partnership will include a $5 billion perpetual preferred equity financing facility. This facility will allocate up to $900 million to the company's Ellendale high-performance computing data center campus and give Macquarie the right of first refusal to invest up to an additional $4.1 billion across Applied Digital's future HPC data center pipeline. The investment will take the form of perpetual preferred and 15% common equity interest in Applied Digital's HPC business segment. The Macquarie investment, in conjunction with future project financing, will be used to repay project-level debt and allow the company to recover over an estimated $300 million of its equity investment in the Ellendale HPC campus. We believe this expanded relationship with Macquarie positions Applied Digital for significant growth in the industry, establishing Applied Digital as one of the fastest-growing HPC data center owners, operators, and developers in the United States. At today's build cost, we have a significant portion of the equity needed to construct over 2 gigawatts of HPC data center capacity, including our Ellendale HPC campus. With an 85% ownership stake in both existing and future HPC assets and a project-level preferred equity financing facility sufficient to fund our HPC project pipeline, we believe we are positioned for transformative progress. We're excited to have Macquarie's support as we establish ourselves as a leader in the Tier 3 data center infrastructure sector, while continuing to develop and operate large-scale state-of-the-art data centers for world-class customers at the forefront of the AI revolution. In summary, we're encouraged by the positive trends we're witnessing across our business and remain confident in our growth trajectory. With that, I will now turn the call over to our CFO, Saidal Mohmand, to walk you through our financials and provide an update on guidance.

Saidal Mohmand, CFO

Thanks, Wes, and good afternoon, everyone. It has been an active few months for our finance and accounting teams, and I'm delighted to lead the department as a new CFO. Let me begin by highlighting some of our recent financial announcements followed by sharing the overview of the quarter. In November, we completed a $450 million, 2.75% convertible senior note offering due 2030, which included $84 million allocated for share repurchases. In December, we announced a $150 million senior secured debt financing facility with Macquarie Equipment Capital and simultaneously repaid our senior credit facility with CIM Group. This allowed us to remove encumbrances on assets as well as the parent guarantee. Today, we announced the strategic partnership with Macquarie Asset Management for a $5 billion perpetual preferred equity financing facility. Now let's turn to the quarter. Revenues for the fiscal second quarter of 2025 were $63.9 million, up 51% over the prior comparable period. This increase was primarily driven by the continued growth of our cloud services business due to the deployment of additional GPU clusters. In total, our Data Center Hosting segment generated $36.2 million in revenue, while our Cloud Services segment contributed $27.7 million. Cost of revenues increased by $22.6 million to $52.4 million from the prior comparable period, primarily driven by the growth in the business as more facilities were energized and additional services were provided to customers. SG&A expense increased by $9.5 million to $29.8 million, also driven by growth in the business as more facilities were energized and additional services were provided. This quarter, our depreciation and amortization expense increased to $26.4 million compared to $13.4 million in the same period of 2024. Of this amount, $21.7 million is attributable to depreciation and amortization in our Cloud segment. This segment's depreciation and amortization was primarily driven by the amortization of our GPU leases over a two-year period, which we've discussed in previous earnings calls. During the quarter, we renegotiated our GPU lease terms, which allowed us to extend the amortization period for GPU leases to a more industry-standard timeline of five years. This adjustment reduced segment depreciation and amortization expense by $8.5 million for this quarter. Looking ahead, we expect this change to further lower depreciation and amortization expenses by about $7 million per quarter on a GAAP reported basis. All in, going forward, we expect to recognize around $15 million per quarter in the cloud segment for the depreciation and amortization. Moving on to interest expense. Interest expense increased by $4.9 million to $7.5 million, primarily driven by an increase in finance leases and interest-bearing loans between periods. Net loss attributable to our common stockholders was $138.7 million or $0.66 on a basic and diluted share. I want to note that this quarter was impacted by the loss and conversion of debt of $25.4 million as convertible debt issued to YA Fund was converted during the period. We also recognized a loss on change in the fair value of debt of $87.2 million due to adjustments to the fair value of the 2.75% convertible senior notes during the two-week period in which the conversion option was recorded as a derivative. This was prior to us receiving shareholder approval at the annual meeting on November 20th, 2024, to increase our authorized share count. The adjusted net loss was $12.6 million or $0.06 per share. The EBITDA increased 93% to $21.4 million as well. Moving to our balance sheet, we ended the fiscal second quarter with $314.6 million of cash, cash equivalents, and restricted cash, along with $479.6 million in debt. With that, I'll turn over the call to Wes for closing remarks.

Wes Cummins, CEO

Thank you, Saidal. The rapid expansion of hyperscale data centers driven by growing demand for AI capabilities is presenting significant challenges to the electricity availability in the U.S. According to a recent Morgan Stanley report, there could be a shortfall of approximately 36 gigawatts in power available for U.S. data centers by 2028. Addressing this issue is not straightforward as adding new capacity requires lengthy planning, regulatory approvals, and the development of new generation and transmission infrastructure processes that can span years or even decades. Based on these dynamics, we believe that much of the U.S. is currently available excess power could be under contract within the next few years. Applied Digital was one of the first companies to recognize this growing demand for power in data centers. Anticipating these needs, we began construction of our facilities before the market fully grasped the shifting demand landscape. As a result, we believe we're well positioned to capitalize on these trends. Our strategy has been further validated over the past year by securing strategic investments from CIM Group, NVIDIA, and now Macquarie Asset Management. These investments not only validate our vision and approach, but also lower our cost of capital and accelerate the development of our pipeline, transforming it into a highly valuable asset for our shareholders. Our vision is to establish a platform for building and operating multiple HPC data centers. We're proud of the significant progress achieved this quarter and look forward to sharing further updates as the year unfolds. We welcome your questions at this time.

Operator, Operator

Our first question comes from Nick Giles at B. Riley Securities.

Nick Giles, Analyst

Wes and team, congratulations on today's announcement. In the release, you noted late-stage discussions with multiple hyperscalers. And I was wondering, can you provide any color on where due diligence processes stand with the other potential hyperscalers at this point? My next question is, would there come a point where you would reenter exclusivity with any of these counterparties?

Wes Cummins, CEO

Nick, thanks for the question. So I think we disclosed in either October or November that we had the exclusivity with the first potential customer expire. We opened up the site for additional customers to look. Those are in varying stages of progress, but once we have everything prepared for easy access regarding the diligence around technical aspects, design, fiber, power, and all those things, we should see much more accelerated progression. Does that answer your question?

Nick Giles, Analyst

That does. That's very helpful. Maybe just a follow-up on the Macquarie investment. How long have you been looking at similar deals? And to what extent did terms improve over that timeline?

Wes Cummins, CEO

So, we started this process last year. It's been approximately seven months. We looked at multiple proposals. As the market developed and we made progress at our site, I believe we signed on the best terms, and I'm very happy with the outcome of this structure with Macquarie. We did conduct a full process to ensure we were getting the best partner and terms.

Operator, Operator

And our next question comes from Rob Brown, Lake Street Capital.

Rob Brown, Analyst

Good afternoon. Just a little further on the hyperscaler discussions, I know you can't exactly predict, but are they moving forward? Are you looking through final details? Are there roadblocks that you've run into? Just some sense of where it's at and what's left to go.

Wes Cummins, CEO

Hey, Rob. Thanks. I think the best way to frame this is based on the experience we've had thus far. It's been a very thorough process. We've made great progress on the design, technical perspective, fiber, and the work we've done at the site specifically in Ellendale regarding power. With the announcement today, we're hitting really one of the last pieces of the puzzle for us, which I think I’ve communicated previously. While we have this, I think the demand for this capacity, again, I don't know of anything of this scale available in 2025, is going to allow us to break into full-stack development and operations in the hyperscale market. The last piece here is that we're a new entrant, a first-time supplier to any of these hyperscalers, and the financial backing from a very well-known partner with significant capital is really helpful in checking the final hurdle we need to get over. I'm really optimistic about finalizing a lease on that facility and moving on to the next level.

Rob Brown, Analyst

Okay, got it. And then with this funding, are there next facilities and funding backing for an additional $4 billion plus? How does that open up the marketplace? How does that accelerate some of these other discussions you're having?

Wes Cummins, CEO

Again, I think just the backing in general matters. There's a full amount of due diligence. There's a reason why we both wanted to enter into this partnership. We have a solid pipeline with a great data center development team and operations team. Once we finalize this first deal, we have a significant amount of 2026 power available. This really provides us, I think this is really important, the ability to move financing and funding down to the asset level, which is crucial in this asset-heavy, CapEx-heavy business. This is a huge step forward, creating a very clear roadmap for financing, so every time we start a new campus or get a new contract, there's no question mark about where to get the equity and how much dilution comes from the public company. It lays out a clear path between the equity commitment and then project finance on the debt side, allowing us to build over 2 gigawatts of our project pipeline in the near term, specifically for '25, '26, and '27.

Operator, Operator

Our next question comes from Darren Aftahi, ROTH Capital Partners.

Darren Aftahi, Analyst

If I may, just on the Macquarie announcement this morning, is there anything strategic in terms of the process and timing as it relates to the lease? And then I know you guys already hit this with the multiple hyperscalers in the press release. Is there a scenario where that 400 megawatts in Ellendale could be a split amongst two? Or are you kind of down the path of one entity taking all the capacity?

Wes Cummins, CEO

Thanks, Darren. On the first question, it's really about getting to the right terms, and I'm not going to get into if there's anything else regarding the timing around that. On the second question, it could split, but I strongly believe it’s going to be a single customer for the entire campus.

Operator, Operator

Our next question comes from Mike Grondahl, Northland Securities.

Mike Grondahl, Analyst

Could you remind us exactly how much money you had invested in Ellendale, HPC, and how much you'll be able to pull out with this Macquarie financing?

Wes Cummins, CEO

Yes, I’ll let Saidal answer that.

Saidal Mohmand, CFO

Mike, so as we disclosed in the 8-K, we have roughly over $700 million invested in the Ellendale campus, and assuming project financing terms, we expect in excess of $300 million of cash proceeds that we can take back up to the parent.

Wes Cummins, CEO

But Mike, I think it's important just as a reminder, we have the Macquarie Capital facility there. There's some extra debt that is going to be paid back as well. So when you're trying to do the math between the $700 million and then when we pull out, there is that debt repayment.

Saidal Mohmand, CFO

Effectively for the Ellendale campus, view it as the Applied requirement, on a megawatt basis of $1 million per megawatt from Applied, and that we will increase to $750,000 going forward outside the Ellendale campus.

Mike Grondahl, Analyst

Right. So on the $700 million or over $700 million you have invested in Ellendale, you'll end up with a net $400 million with that $180 million of debt paid off, and then you'll pull out some other capital. So your net investment is about $400 million?

Wes Cummins, CEO

There's also, it's also a moving target too. Just think about it right. We're spending, we're putting dollars into the ground every month in the project as well. Yes, a moving target as far as what we'll be able to pull back out. The cash comes back out of what is now the HPC subsidiary and goes back to the public parent company.

Mike Grondahl, Analyst

Okay. And then two more questions. One, Wes, if you could maybe define your pipeline right now. It looks like Macquarie can fund two gigawatts. Do you know after the $400 million how much more do you have or can you get your hands on? And then secondly, if you could, I don't know, maybe just demand sounds pretty good with all these hyperscalers, but what's the pricing environment look like?

Wes Cummins, CEO

So I'll answer the second one first. The pricing environment is reflective of the demand environment. I think there are plenty of data points just in the last few weeks about data center spend from some of the hyperscalers showing strong indicators of where demand in the market remains. On to the pipeline, we've previously discussed this. We have other campuses, I think the total is 1.6 gigawatts, which are the two outside of Ellendale, 1.6 gigawatts of campuses for 2026 power and 2027 power. Those are the ones that in some cases we've already been marketing.

Mike Grondahl, Analyst

So outside of Ellendale 1.6, and you can have that available ‘26 or ‘27? Okay.

Wes Cummins, CEO

Yes. This is like building all of that. You actually can't build it all for ‘27, but first power will be available in ‘26. At this point, that's what really matters. If you haven't started building now, you won't have 2025 power. This is really looking at ‘26 for the other campuses.

Operator, Operator

And our next question comes from George Sutton, Craig-Hallum.

George Sutton, Analyst

Thank you and congratulations on the Macquarie deal today. So, I'm curious, Wes, I understand timing is challenging to predict, but in the facility, it looks like there is a February 15, 2025 lease signing date that is necessary for this. Can you just address that specific date?

Wes Cummins, CEO

Yes. So, thanks, George. The February 15 date is not a lease signing date. I have to go back and look, but I think that outside date is maybe in June. But the February 15 is for the completion of some other items, but it's not for the lease signature.

George Sutton, Analyst

And just so we can define this for everybody, my belief is, and correct me if I'm wrong, this is effectively the infrastructure equity components going forward. So, you would go get a traditional construction loan financing for a large percentage. Underneath that would be the infrastructure equity that is a fairly significant portion of the rest of that. That's what this represents, correct?

Wes Cummins, CEO

That's exactly it. It’s important to delineate here between the equity components, which is what this deal is for, and then the debt component, which is project finance that would later transition into an ABS or another debt instrument. Therefore, when you consider total capital available by matching equity with debt, there’s a significant multiplier effect.

George Sutton, Analyst

Understand. And then lastly, if I could just understand the 15% ownership that Macquarie takes on in the HPC business, what investment are they making for that? Is that the initial $200 million? Or is there a requirement for them to fund a specific portion of the $5 billion in total?

Saidal Mohmand, CFO

So, George, the way to think about it is that it’s basically lease by lease. Each asset that goes into what we deem the box, the HPC company, APLDH, will have them owning 15% of it. Assuming that goes on, they will accept the lease and the investment will be funded through that entity.

Wes Cummins, CEO

Yes. So any asset that they fund gets incorporated into the entity. It's asset by asset that drops in.

Operator, Operator

And our last question comes from Brett Knoblauch, Cantor Fitzgerald.

Brett Knoblauch, Analyst

On the right of first refusal, is that just for the perpetual preferreds or would you have to use that before, say you wanted to raise traditional equity through a secondary? Or would you have to use the preferred before going down that route?

Wes Cummins, CEO

So think of it at two different levels. We want to finance everything at the asset level with the preferred equity. As for the top company, if you're talking about public equity, there's nothing on that. If that’s not what you meant, please correct me.

Brett Knoblauch, Analyst

I think that answers it. Another question on kind of how Macquarie will receive preferred and common equity. I guess how many shares of common are they getting? And how does that mechanism work?

Wes Cummins, CEO

So it’s just 15% of the HPC subsidiary.

Brett Knoblauch, Analyst

So not common of the parent?

Wes Cummins, CEO

Not common of the parent. 15% in the HPC subsidiary.

Brett Knoblauch, Analyst

Understood. Perfect.

Wes Cummins, CEO

And just maybe on the terms, 12.75% on dividend, I guess you guys talked about lease terms ranging in the yield on cost range of, call it, low to mid-teens, which is more or less the cost of capital here on the preferred equity side. Have you seen terms improve to a level where you get a yield on cost above the cost of the preferred? Yes. Just remember, the preferred represents a small portion of our capital. The bulk of the capital consists of our equity in the site and project-level finance, which is based on SOFR plus 250 or 225. When considering the blended cost, we definitely expect the return to exceed our cost of capital.

Operator, Operator

And we do have one more question from Brian Biden, Needham & Co.

Unidentified Analyst, Analyst

You mentioned there's been some learnings on the delivery approach hyperscalers take. What's one of those learnings you can apply to the next set of negotiations, some of which may be ongoing?

Wes Cummins, CEO

Yes. Just the preparation of everything that we need to provide through the process, as I said, it was much more accelerated with anyone else because we have the understanding of what is being looked for and potential future changes regarding things like design. One of the biggest things is just, I’ll call it being stamped; getting through the process and signing a lease with one of these customers confirms that we have the ability to execute all of these requirements. I think that's going to help accelerate future negotiations. One learning we've noted is that being a first-time supplier always takes longer than if you're already an established supplier for that company, and that shouldn't be a surprise, but the differences between being an existing supplier and a first-time supplier are larger than we anticipated.

Operator, Operator

Thank you. There are no further questions at this time. I would like to pass it back to Wes Cummins for closing remarks.

Wes Cummins, CEO

Thank you. Thanks, everyone, for joining our Q2 fiscal 2025 conference call. I look forward to speaking with everyone in April.

Operator, Operator

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.