Earnings Call Transcript - APLD Q1 2025

Operator, Operator

Good afternoon and welcome to Applied Digital's Fiscal First Quarter 2025 Conference Call. My name is Julian and I'll be your operator for today. Before this call, Applied Digital issued its financial results for the fiscal first quarter ended August 31, 2024, in a press release, a copy of which will be provided in a report on Form 8-K filed with the SEC and 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, 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.

Matt Glover, Introductory Speaker

For our 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 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 statement. For more detailed risks, uncertainties, and assumptions relating to our forward-looking statements, please see the disclosures in our earnings release and public filings made with the Securities and Exchange Commission. We disclaim any obligation or undertaking to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made, except as required by law. We also discuss non-GAAP financial metrics and encourage you to read our disclosures, reconciliation tables, and the applicable GAAP measures in our earnings release carefully as you consider these metrics. We refer you to our filings with the SEC 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 Annual Report on Form 10-K and 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. Lastly, I'd 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 us for our fiscal first quarter 2025 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. After the close of the quarter, our balance sheet significantly improved due to the strategic investments from a group of institutional and accredited investors, NVIDIA and related companies. We sincerely appreciate the vote of confidence from our investors and look forward to deploying this capital in high return projects in the digital infrastructure sector. Next, I will give an update on our progress of our Ellendale HPC campus. Building continues on schedule. We are finalizing the lease with a US-based hyperscaler. Additionally, we are progressing with our site-level debt financing, which is expected to close shortly after the lease is executed. We see this initial 100-megawatt building as just the beginning for Applied Digital as we have currently designed two additional buildings at this location and we’ll expand our capacity to 400 megawatts. Simultaneously, we are exploring opportunities to accelerate the monetization of our over 1.4 gigawatt pipeline. Now I'll provide an update on each of our business units, starting with our data center hosting business. We currently have 286 megawatts of data center hosting capacity for our cryptocurrency clients across two fully contracted locations in North Dakota which are operating at full capacity. Next, let us 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 first quarter, we had six clusters online. We have made significant progress on amending the lease financing for our GPUs which we expect to complete in the current quarter. The amendment as contemplated will allow us to amortize the value of the GPUs over the expected useful life versus the life of the lease which will significantly improve our reported results and more accurately reflect the economics of this business. Our recent investment round has significantly increased visibility in the market for our cloud business, and we expect to deploy additional clusters starting in the second half of our fiscal year 2025, which begins December 1. In summary, we’re encouraged by the positive trends across our business and remain confident in our growth trajectory. With that, I'll now turn the call over to our CFO, David Rench to walk you through our financials and provide an update on guidance.

David Rench, CFO

Thanks, Wes. Let me begin by highlighting our revenue growth which increased by 67% to $60.7 million this quarter. This growth was primarily driven by contributions from cloud services contracts, specifically our data center hosting segment generated $34.8 million in revenue, while our cloud services segment contributed $25.9 million. While we did see an increase in cost, this was largely due to higher depreciation and amortization expenses. For the quarter, depreciation and amortization totaled $34.4 million up from $8 million in the same period last year. It's also important to note that we're currently incurring significant expenses related to data center leases for our cloud business as we have not yet deployed GPU clusters in those locations. As a result, the company incurred $4.1 million in expenses this quarter for facilities that are not yet generating revenue. Our plan is to utilize these data centers in the future which will help offset these costs. Our adjusted EBITDA for the quarter increased significantly to $20 million. Our adjusted net loss for the quarter was $21.6 million or $0.15 per basic and diluted share based on a weighted average share count of 149 million shares. Turning to the balance sheet. We ended the fiscal first quarter with $86.6 million in cash, cash equivalents and restricted cash alongside $143.6 million in debt. Lastly, shareholders' equity was $241.8 million, which has nearly doubled over the past three months, driven by a recent cash infusion from large investors. Now I'll turn the call back to Wes for closing remarks.

Wes Cummins, CEO

Thank you, David. As many of you know, we were among the first in the industry to recognize substantial power demands necessary to support the compute requirements for running advanced AI workloads at scale in large-scale, high-density data centers. In response, we began construction late last year on a state-of-the-art 369,000 square foot facility specifically designed for HPC applications. We believe our proprietary data center design and architecture redefines what's possible for advanced HPC by supporting advanced cooling, extreme power density, security, interconnectivity, compliance, and control requirements in a purpose-built facility. This significant early investment in the industry positioned us to now be in advanced contract and site-level financing discussions regarding a lease for our North Dakota campus with a US-based hyperscaler. In addition, we believe we are witnessing rising demand for our proprietary and purpose-built HPC data centers among top-tier industry players. We believe this trend together with higher lease rates and attractive site-level debt financing for our facilities positions us to be an early thought leader in this high-growth market segment. Recent announcements from leading hyperscalers underscore the need for thousands of these facilities and reaffirms the strategic direction we are pursuing. In the past five weeks, we have seen a substantial increase in interest and demand from other top-tier hyperscalers for 2025 and 2026 capacity which is in extremely short supply. The fact that we are building and can deliver significant capacity for 2025 and have assembled a highly experienced team, is allowing us to break into this high-growth market segment as a full-stack developer for hyperscalers. We believe this will allow us to monetize our other campuses that will have power available in 2026. Furthermore, we believe the strategic investments from prominent investors strongly affirm that we're on the right path. We believe this growing recognition not only strengthens our market position but also highlights the immense potential for our strategic plan. Our vision is to become a platform capable of building and operating multiple HPC data centers at scale. We are excited about the potential catalysts ahead, and we'll continue to allocate our capital strategically to achieve optimal risk-adjusted returns and maximize shareholder value. As we continue to navigate our expansion and growth, we are making some moves among our executive team that are intended to better position us. David Rench will assume the role of Chief Administrative Officer; and Saidal Mohmand will assume the role of Chief Financial Officer, with these changes to be effective Monday, October 14. At this time, we welcome your questions.

Operator, Operator

Thank you. We’ll now be conducting a question-and-answer session. Our first question comes from Lucas Pipes at B. Riley Securities. Please proceed with your question.

Lucas Pipes, Analyst

Thank you very much, operator. Wes and team, congratulations on the recent investment round and the progress. Wes, my first question is about the lease negotiation. I had understood that you extended the exclusivity period under the letter of intent. Has that exclusivity period expired, been renewed, or are we still operating under that exclusivity? Thank you very much for any clarification.

Wes Cummins, CEO

Sure. Hi, Lucas, how are you? So the exclusivity period has officially expired. We chose not to renew exclusivity. We're just pursuing the finalization of the natural lease document then I think neither party saw any reason to extend the exclusivity just to complete the document.

Operator, Operator

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

Darren Aftahi, Analyst

Hi, guys. Thanks for taking my question and congrats to Saidal and David on their appointments. Could you clarify something first in the PR? It talks about the finalization of the lease with the hyperscaler for 100 megawatts. So I just want to be clear, is the lease just for 100 megawatts? Or does that hyperscaler have options on additional capacity in the campus?

Wes Cummins, CEO

Yes. Darren, thanks. So what you should expect, and I think we've always talked about this, is the initial lease will be 100 and then the other 300 will be in a different form. But the expectation is that the lease will include reservation on the other 300 megawatts. I think we talked in the script we are already designing those facilities or largely designed those facilities. We've started some earth work on those, some early work to get moving. I feel like we've ran through this several times about the winters in North Dakota. So we've already started making progress on those, but the expectation is that, that single tenant will take the entire campus, but it will come in two leases.

Operator, Operator

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

Rob Brown, Analyst

Hi, good afternoon. Maybe moving to the GPU business, you talked about additional clusters, and I guess you're running at pretty strong demand there at full capacity. What's your thoughts on additional clusters and how do you see the timing on that?

Wes Cummins, CEO

So Rob, as we talked about in the script, we expect to start deploying additional clusters. We have capacity that we're holding data center capacity at very attractive prices. I would add for the deployment of those additional clusters, we see the demand in the market. The thing that's going on in the market right now is do customers want to deploy Hopper? Do you want to wait and move to Blackwell when you're really in the later part of the first half of next calendar year? So we are having those discussions, and that's really what we're looking at. But we expect in the second half of our fiscal year, which as you know, starts December 1 to begin deploying additional clusters again. We've done a lot of work to make sure that we are doing the right type of financing. So again the P&L that I talked about with the rework of the leases that we have that we recognize the depreciation appropriately that the payment schedule pushes out to three years versus two years, so that it matches better the business model. So we've done a lot of work over the past nine months to make sure that we have the appropriate financing to push that forward. We have a lot of interest. We've got a really good boost from the investment back in September, and a lot more visibility on us. So you should expect that we start deploying additional clusters under a different financing structure in the second half.

Operator, Operator

Thank you. Our next question comes from Mike Grondahl, Northland Securities. Thank you. You may please proceed with your question.

Mike Grondahl, Analyst

Yeah, guys. Hi Wes, just talking about the demand environment and after the 400 megawatts are leased up. Have you already started talking to potential customer Number #2 or Number #3? And any ideas on where that data center might be located?

Wes Cummins, CEO

Yes. So thanks for the question. So I alluded to a little bit in my prepared remarks, since our last call, so in late August, the last week of August through the month of September, we saw a significant increase in activity. We are one data point, so I don't want to make a market call on that. But we saw a significant amount of inbound interest from three additional hyperscalers, have talked about the hyperscalers we typically target in the past, but three of those additional to the one we're working with in North Dakota are pushing aggressively for 2025 and 2026 capacity. We are marketing the sites that we have to those customers. From our perspective, we've seen a significant step up in the demand for especially '25 and '26 capacity. 2025 is basically done at this point. There is no additional '25 capacity out there that we'll have the 100 megawatts in Ellendale for '25 that a lot of people have started moving to the first half and even the second half of 2026. But we're seeing a significant amount of demand and working to get into another LOI at a different location, likely to be in the Dakotas. So I wouldn't say North Dakota, but likely to be in the Dakotas for us for that second site. But we are seeing a significant amount of demand for what we have.

Mike Grondahl, Analyst

And would you think you have an LOI in calendar '24 or early '25, any rough guess as to when that LOI is possible?

Wes Cummins, CEO

Yes, based on the activity we're observing, it's possible we could secure another site by the end of 2024. This market is very dynamic for us, and we've seen many positive developments this quarter, including significant progress in our supply chain. There are industry trends resulting in project delays due to extended power timelines. For instance, over 400 megawatts of backup generators have become available from projects that pushed their timelines back several years, which we are now able to resell. We're positioning ourselves to take advantage of these changes, as they will benefit our supply chain and expedite the development of Buildings 2 and 3 in Ellendale, as well as any new sites. There's a lot happening right now.

George Sutton, Analyst

Did you call on me by chance, George Sutton?

Operator, Operator

I can hear you George, so it must be you.

George Sutton, Analyst

I'm wondering if you could provide more details on the finalization of the lease. My assumption has been that you're trying to determine a delivery date based partly on the connections to the facility and partly on the backup. Is that still the current status regarding the lease?

Wes Cummins, CEO

That's not really the issue with the lease, but let me clarify that. There was some confusion during the last call. I was discussing when lease revenue actually starts, and it's somewhat dependent on the tenant. To clarify, the facility will be ready in the first half of '25 for single feed, by mid-'25 for dual feed, and in the second half of '25 with dual feed and backup generators. Technically, the client could begin power if they choose to go with single feed and just UPS redundancy, so they might not want to wait for dual feed. From a safety perspective, the second half will have full backup generators and dual-feed for complete redundancy on-site. There was some misunderstanding, and I want to clear that up. There's very little left on the lease. I have tried to estimate timelines before and have been wrong in my past attempts. We are confident that this lease will be finalized soon. It could take a few days or as long as six weeks, with a slim chance of eight weeks. There's nothing specifically stalling the lease; it's just the process which we don't control. We are advocating for it as much as we can, and we feel strongly about getting it done. We've also done extensive work on the site-level financing, and we have the bank group ready to fund as soon as the lease is signed, possibly as early as the end of this month. All the pieces are in place for this to be finalized, and we'll announce it once it happens, followed by the funding shortly after. I wish I could provide more specific details, but we cannot control the process. To offer more context, as a first-time supplier, this is a significant contract for us, and I understand that typically it can take 12 to 18 months for a first-time supplier to a customer this size. We’re currently about six months in, so things have progressed rapidly, and we believe we're at the final stages. I want to provide the best information I can, but we've missed a few deadlines in our expectations. However, our work with them continues to advance significantly each week, and based on all available information, we are confident this will be signed—it’s just hard to predict when that will occur.

George Sutton, Analyst

I'm going to assume not as soon as the next hurricane but hopefully before the one after that. So if we look at Building 2, you mentioned that you're starting to move dirt. I know you don't want to do this on your balance sheet. Can you give us a sense of how you're beginning to structure Buildings 2 and 3 kind of where all that sits?

Wes Cummins, CEO

The earthwork related to the building cost is quite minimal, making it straightforward to proceed. We have been making progress on the design, and there will be some design changes as we aim for continuous improvement. Currently, we expect the building to have a 150 megawatt IT load instead of 100, so there are adjustments in that regard. We are working towards completing this building in the second half of 2026, with the third building anticipated in the second half of 2027. A considerable amount of work has already been completed, which, while not costly, is significant in ensuring we meet these timelines.

Operator, Operator

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

John Todaro, Analyst

Hi, Wes and team, I guess short of two here, both related to the lease. You had mentioned that there's going to be two leases, 100 megawatts and then the additional 300 megawatts. Do we think economics is going to be kind of the same for each? Or should we think kind of better economics maybe for the first 100 and then they negotiate a little bit harder on the other 300? Any kind of color there? And then just second point, at least as it relates to the first lease, are all the key items we should think about negotiated and now it really is almost just kind of a clerical part that could take up to six weeks to eight weeks here?

Wes Cummins, CEO

Yes, thanks, John. I don’t want to imply that it could take a certain amount of time, as it's somewhat uncertain. However, you are accurately describing the second part. Regarding the first part, there are two leases with different structures, but economically they will appear very similar.

John Todaro, Analyst

Okay. So kind of the previous economics on revenue and EBITDA, we should still be kind of thinking about it as we model it. Okay.

Wes Cummins, CEO

Yes. One of the leases is expected to be kind of a Colo-style lease where you lease on $1 per kilowatt per month. And the remainder, a yield on cost model that's more traditional for hyperscalers. But economically, they'll look very similar.

John Todaro, Analyst

Got it. Understood. And just a second point, just to clarify you would kind of characterize it as mostly in a clerical phase at this point, I guess.

Wes Cummins, CEO

Yes.

Operator, Operator

Thank you. Our next question comes from Kevin Dede of H.C. Wainwright. Kevin, please proceed.

Michael Davin, Analyst

Hi Wes and David, this is Michael Davin, calling in on behalf of Kevin. For Cloud Services, can you discuss what you're seeing with customer turnover? And how has pricing changed with demand?

Wes Cummins, CEO

Pricing has surprisingly remained fairly stable for almost the past year regarding Hopper's bare metal GPU rates, which have averaged around 220 per hour. Regarding customer turnover, we are continuing to expand with our largest customer, although there is some uncertainty surrounding another customer due to recent changes and payments; I only know what has been reported in the Wall Street Journal, which mentioned roughly 2.7 billion. There might be a possibility that we may replace that customer, but there remains a demand for those clusters to grow. As I’ve mentioned in previous calls, we are very focused on the enterprise market, which is developing and seeing increasing demand. The AI lab and start-up market have become more cautious, with businesses thinking more critically about their models compared to 15 or 18 months ago, when the emphasis was primarily on acquiring GPUs quickly. Now, stakeholders seem to feel more assured about those companies. We believe our largest customer and Together AI are thoughtful in their approach and have a diverse range of excellent clients. The market is still experiencing notable demand growth, with new customers entering both the enterprise sector and the AI labs and start-ups, while pricing has remained largely stable.

Michael Davin, Analyst

Okay, I appreciate that, Wes. Then for a more conceptual question. Are you guys trying to engineer any solutions for heat recirculation? And if so, are you thinking about obtaining customers to offset tower costs there?

Wes Cummins, CEO

Yes, you mean on heat capture for the data centers.

Michael Davin, Analyst

Exactly.

Wes Cummins, CEO

Yes. So we've been spending a fair amount of time on methods for that. So with our Bitcoin data centers, it's much harder. So you're doing air cool. It's much harder to capture the ambient heat you create for any use case. But with the HPC facility, the Ellendale 2 facility as we move to liquid cooling, it creates a much easier opportunity to capture that waste heat that's created in the facility and look for opportunities that we co-locate in the areas that we're in, we really need to look towards agricultural opportunities to offload that heat, and we're examining that and we expect to start deploying some of that in the calendar 2025 as that facility comes online. But you're really thinking about things like greenhouses or aquafarming or mushrooms or things that are agriculturally based in the areas. We are in North Dakota for that to try to make use of that waste heat from the facility.

Michael Davin, Analyst

Okay, great. Thank you, Wes.

Wes Cummins, CEO

Absolutely.

Operator, Operator

Thank you. Our next question comes from Jon Gruber from Gruber & McBaine. Please proceed with your question.

Jon Gruber, Analyst

Yes, the music on the call sounds great. Wes, in your last call we were at 90%. Are we now at 91% or have we reached 99.5%? Where do we currently stand regarding the rating you provided last time?

Wes Cummins, CEO

It's a great question, Jon. And I think if I remember correctly on the last call, 90% of the work complete. I think I had trouble handicapping what the timeline is on the last 10. But I would say that we're 98.5% or 99% there; it is mostly just like Jon asked you, clerical at this point for us. So like I said, I wish we had more control of the process, but we push where we can. But I think we are at the very end of this process. The team has done a great job getting there. Absolutely.

Operator, Operator

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

Darren Aftahi, Analyst

Hi, Wes. I wanted to follow up on your comments regarding the two leases. Specifically, when you mentioned yield on cost for the second lease, is there a target range you're aiming for? Additionally, concerning the second lease, are you considering building before securing a client? Are you looking to obtain some form of prepayment to help finance Buildings 2 and 3 in the future? Thanks.

Wes Cummins, CEO

So Darren, I'm not going to discuss the actual yields for lease rates at this point since I think it's too early for that. However, it still aligns with the economic model we've consistently referenced. Regarding the expectations for Buildings 2 and 3, also known as B&C internally, we are investing only a small amount of money without a significant capital expenditure. We anticipate having a lease signed and project financing secured before we start any spending on CapEx. I believe that to successfully enter this market, we need to operate as a full-stack developer to ensure speed to market, and I think this approach is proving beneficial for us. For Buildings 2 and 3, we expect to have everything finalized before initiating any capital spending. From a market perspective, particularly in September, we've observed offers emerging from hyperscalers that include capital for construction and upfront payments. We have already seen that for some of our other campuses, and it's indicative of the demand for 2025 and 2026 amid the scarcity in the market.

Darren Aftahi, Analyst

Thanks.

Operator, Operator

Thank you. There are no further questions at this time. I would like to turn the floor back to Chairman and CEO Wes Cummins for closing remarks.

Wes Cummins, CEO

Thanks everyone, for joining us on the call. I look forward to speaking with you in January.

Operator, Operator

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