Bit Digital, Inc Q1 FY2024 Earnings Call

Hello and welcome to the Bit Digital First Quarter 2024 Earnings Conference Call. Good morning, good afternoon and good evening depending on where you're joining us from. Thank you for being here. Also, as a reminder, today's conference is being recorded. I'll now hand the call over to your host Cameron Schnier, Head of Investor Relations at Bit Digital. Cameron, the floor is yours.

Thank you. Good morning. Welcome to the Bit Digital first quarter 2024 earnings call. Joining us on the call today are Sam Tabar, Chief Executive Officer; and Erke Huang, Chief Financial Officer. Before we begin, I would like to remind all participants that some of the statements we have been making today are forward-looking. These matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. And therefore refer you to our latest 20-F filing, yesterday's 6-K filings and our other SEC filings. Our comments today may also include non-GAAP financial measures, with additional details and reconciliations. The most directly comparable GAAP financial measures can be found in our 20-F filings and yesterday's 6-K filings which are on our website. After our prepared remarks, we'll open the call for questions. With that, I'll turn the call over to Sam.

Thank you, Cam. Ladies and gentlemen, thank you for joining us on the call today. In my prepared remarks, I'll discuss three things. First, our first quarter results. Secondly, an update on our strategic initiatives. And third, our thoughts on the outlook for the remainder of 2024. We started the year off strong and our first quarter results speak to the effort and execution by our team. Our Q1 revenue grew by over 250% from the prior year, and by over 85% sequentially. We generated $58 million of adjusted EBITDA and a fully diluted GAAP EPS of $0.43. The first quarter marks the first time that our two primary business lines coalesced to produce what we've described as an emphatic start to the year. Our active hash rate was approximately 2.67 exahash as of March 31 compared to 2.52 at the year-end. The lifting of certain curtailment programs should bring that figure above 3.0 in the near term. We employed a cautious approach to fleet expansion heading into the halving, and we are still evaluating the post-halving landscape for growing our mining fleet. Our goal remains to reach 6 exahash by year-end. We're in discussions with counterparties for new hosting opportunities and fleet deployments, some of which we expect to finalize imminently. However, we are approaching fleet growth cautiously and will only implement new growth programs if the economics meet our criteria. Having two uncorrelated revenue streams allows us to be selective on the timing of deploying capital growth. Our average fleet efficiency for the active fleet was 28.3 joules per terahash as of March 31, 2024, a slight improvement compared to the year-end 2023. We aim to improve that metric considerably as we build out our mining fleet with more efficient miners. As of March 31, 2024, our bitcoin mining fleet was approximately 85% carbon-free, a decrease from our year-end 2023 run rate of 93%. The decrease was driven by an increased consumption of power grids that use more carbon-based energy sources. We continue to strive for our operations to become entirely carbon-free, but we must weigh the economic trade-offs in each deployment. Ultimately, we hope the market starts to demand greater transparency on the power sources that miners use. This will help incentivize greater sustainability practices from the mining industry at large. As I mentioned last quarter, we still need to secure around 40 megawatts to reach our 6 exahash goal. We are currently in late stage discussions with several potential hosting partners that would put a significant dent into that requirement if the respective agreements were consummated. We're also actively evaluating several M&A opportunities, both on the mining side and for high-performance computing services, or HPC. We've seen an increase recently in reverse inquiries from entities either looking to be acquired outright or from some sort of strategic partnership. We expect the M&A opportunities to likely ripen further on the mining side if the hash price remains near current levels. Regarding potential M&A, we're not particularly interested in solely acquiring hash rate. We're more focused on opportunities that fill a strategic gap in our portfolio or improve pro forma margins and returns. One of the reasons we have slow-played our exahash build-out this year is that we wanted to maximize our flexibility to capitalize on opportunities that might arise post-halving. I believe one reason prospective sellers have approached us is the strength of our balance sheet. We had over $160 million worth of cash and digital assets at the end of March and zero debt. However, we are actively evaluating debt financing options to accelerate the growth of our Bit Digital AI business. Our first quarter 2024 results represent the first time that the contribution from this business, referred to as high-performance computing services within our financials, has impacted our income statement. For the quarter, this business produced $8.1 million in revenue and a gross profit of $3.2 million. You may notice that the revenue number is about $1.3 million lower than the sum of the monthly revenue numbers we published in our monthly reports for the first three months during the first quarter. The delta is driven by a one-time $1.3 million credit that we issued to our customer as compensation for reduced utilization during the initial deployment period, which included testing and optimization phases. To be clear, this is a non-recurring charge. For illustrative purposes, if we add the credit back to revenue, gross margins for the HPC segment would be approximately 72.5% compared to the reported 61% that includes the one-time customer credit. I would also like to point out that the gross profit includes our lease expense, as we treat that as an operating lease for accounting purposes. As previously disclosed, our anchor client for our Bit Digital AI business has requested that we double the size of the GPU deployment and contract another 2,048 GPUs. We are in the process of finalizing the terms with our customer and respective vendors, and we hope to announce the final terms in the coming weeks. We also continue to progress in our discussions with other prospective customers. Our goal to grow the HPC business segment to $100 million of annualized revenue by year-end remains intact. Given the market pricing trends and volume-based discounts, it's unlikely that we will achieve this run rate only from owning the additional 2,048 GPU deployment from our existing customer, assuming that the contract is finalized. However, we expect to procure the GPUs at a reduced rate relative to our initial purchase. This should help us maintain a similar returns profile and payback period relative to our initial deployment. Nonetheless, based on our conversations with prospective customers and the overall view of the market, we continue to believe that we will achieve our revenue goal for the year. We are set up for strong multi-year growth in this business. To date, we've invested minimally in the business development or customer acquisition side of the HPC business. However, it has become clear that we need to expand our team and add dedicated headcount to support the growth of this business. So we are now actively working on making very key hires that will help us accelerate that growth. I'll now hand over the line to Erke who will discuss our financial results.

Thank you, Sam. I will now discuss certain financial results for the first quarter of 2024. Total revenue was $30.3 million, a 266% increase compared to the prior year. The revenue increase was primarily driven by a higher realized bitcoin price and the start of our HPC services business. Our bitcoin production increased by 13% year-over-year to 410.7. The increase was driven by an increase in our active hash rate, partially offset by an increase in bitcoin network difficulty. Our HPC services business began generating revenue in late January and recognized $8.1 million during the quarter. This is net of a one-time $1.3 million credit issued to a customer as previously mentioned. I assume this strategy generated approximately $326,000 during the first quarter, and the total cost of revenue was $16.2 million, compared to $5.2 million the prior year. The increase was primarily driven by an increase in our active mining fleets, higher bitcoin network difficulty, and the start of our services business. Our electricity price was approximately $0.05 per kilowatt hour for the quarter. Our production costs per bitcoin, defined as electricity and other hosting fees divided by bitcoin production, amounted to approximately $19,700 for the quarter. Profit amounted to around $10,300 per bitcoin for Q1. Profit-sharing fees spiked due to the sharp increase in bitcoin price. However, following the halving and reduction of profit-sharing fees, they should decrease materially in Q2 at current bitcoin prices, which should partially offset the margin impact from the halving. General and administrative costs were approximately $6 million compared to $5.2 million during the prior year quarter. The increase was mostly driven by higher personnel and consulting expenses. Depreciation and amortization expense was $6.8 million for the first quarter compared to $3.6 million last year, with the increase driven by a larger mining fleet and our GPU fleet that was deployed in early 2024. Adjusted EBITDA of $58.5 million for the quarter compared to $1.5 million in Q1 2023. The improvement was primarily driven by gross margin expansion and the introduction of the high-margin HPC business, along with higher bitcoin prices. We implemented the new FASB fair value accounting rules during the quarter, which resulted in a pre-tax gain of approximately $43.5 million on our digital assets. GAAP earnings per share were $0.43 for the quarter compared to a loss of $0.03 the prior year. Turning to our balance sheet, we held approximately $35 million of cash and restricted cash as of March 31, 2024, and our digital assets position was worth approximately $28 million. The total assets amounted to $291 million at the end of the quarter, while shareholders' equity was $265 million. Our balance sheet remains debt-free, but we are actively evaluating potential debt financing to grow our HPC business. CapEx was less than $1 million during the quarter and was used for the purchase of approximately 2,300 miners. Note that our capital commitment to the quarter was reduced by the decision to enter into a sale-leaseback agreement for 96 SPC servers. We raised approximately $38.7 million of net proceeds from the issuance of 12.9 million ordinary shares during the first quarter. The majority of the shares were issued in January when our share price was higher, and the proceeds were raised partially to fund the build-out for the HPC business and to fortify our balance sheet ahead of the halving. I'll now turn the call back to Sam for closing remarks.

Thank you, Erke. Bit Digital is focused on building a company that succeeds in all phases of the cycle. We have benefited from the run-up in bitcoin prices, but we knew that the halving would offset that benefit, and it has, with the halving price falling to all-time lows at the end of April. We were expecting a difficult mining environment post-halving, and we prepared accordingly. We have a formidable balance sheet and an HPC business that generates enough income to cover our cash overhead. It's also worth reminding ourselves that there is no halving event in AI. Look, we still run a profitable mining business at the current hash price, but the margin for error has been reduced. This is why we designed our business to be resilient to hash price, as we don't want to find ourselves held hostage by macro events we don’t control. Bitcoin mining is speculative in nature, and we accept that risk-reward tradeoff. But we don't want our entire business to be predicated on speculation. This is why we diversified into the HPC space. Bit Digital's AI business is not aspirational; it's real. And we see significant growth runway on the HPC side, and we are actively looking to capitalize on those secular tailwinds. We are starting to build out our team and have earmarked capital to expand our GPU fleet and enhance the breadth of our offerings. Having two distinct business lines affords us optionality in terms of when and where we can allocate capital, which we think is a key advantage. We are not forced to always reinvest in a single business line regardless of the returns profile. We believe our company remains misunderstood by the markets. It is our opinion that our bitcoin mining business and the HPC business are complementary and synergistic business alliances, and we were able to grow the HPC business to a $50 million run rate revenue business in a very short time with the same team we used to run the mining business. That said, it does seem like the retail side of the market is more concerned about growing the mining business, while institutional investors would like to see us invest exclusively in the HPC business. It's unclear how this plays out, but regardless, we believe our valuation will normalize over time. With that, I would like to open the line up for some questions.

We'll take our first question from Mike Grondahl with Northland Securities. Your line is now open. Please go ahead.

Hey, thanks, guys. First question, you received that letter about the second 2,000 GPUs back in late March. What's kind of taking so long there for final terms or final contract? And then do you think those GPUs will still be sort of installed and live by June 30?

This is Erke speaking. I'm so sorry, I was on mute. I apologize for that one.

Go ahead, Erke. I was on mute by accident. But go ahead, Erke.

Okay. Yes. So, why it took so long was a combination of preparing other vendors for the deployment. And ultimately as we're working with the vendor for deployment, it took a little bit more time. We are expecting to see installation by June 30 or around that time, so that's still the target.

Yes, Mike, so we're finalizing this in basically weeks.

Got it. And June 30 is still a, I don’t know your best guess of installation and one is generating revenue?

Give or take a week.

Okay. Okay.

We're talking weeks here, not more.

Got it. Got it. And related to that, you talked a little bit about a volume discount, which I think the customer is getting because it's a second 2,000. But I think you also referred to like a purchase discount. Are you finding what the market competitive for GPUs? So you're getting them at a lower price also? Could you just kind of explain that a little bit?

Sure. Erke, would you like to address that? Either of us can.

Yes. So for the one-time credit was due to the backing up and installation than we gave the customer. And yes, we're seeing more competitive pricing for those servers as the manufacturing production of shapes is coming up. So we should be seeing better pricing from our procurement perspective as well.

Got it. I think on the first 2,000 it was about 60 million for the GPUs and the networking equipment. Is it meaningly below that, or I don't know, can you kind of give us a sense of direction.

Yes, it's going to be below that, but as previously said it's being finalized, so I can't disclose that yet.

Got it. Got it. And then regarding potential customers two, three, and four, you said you're hiring a sales team to help with that process. Has that process slowed down? Or is that still moving rapidly? I guess I'm trying to understand what your message is there about getting like a second or third customer.

I'm happy to take that. So yes, the process with potential clients is moving forward. But nobody owns that process at the moment, and that's why we're hiring ahead of revenue. We've been in discussions with several experienced people in the relevant space. We need someone who actually owns the sales process to accelerate and unleash the business. So we intend to make that key hire and announce it, and in the medium term build that team. But in the meantime, Mike, the clients, the potential clients are moving forward. But frankly, it could move forward faster if we had a head of revenue, and that way the sales process is accelerated.

Got it. I mean, it's hard to draw a timeline. But do you think you could announce something summer, fall about a second or third customer? What's your best guess?

For customers, I believe we will be announcing the head of revenue soon. I would prefer to get that answer from our new head of revenue, as they will need to assess the landscape of all our inquiries and the current status with these clients. However, we still have a strong pipeline; we just need someone to oversee that process to speed up the sales cycle. It's not effective for management to run the business and also manage the sales cycle. This is a sales business, and we need a dedicated sales team. Hiring a sales team will help us maximize and expedite all the leads we currently have.

Got it. Got it. And then just lastly, on the last call, you guys talked about getting a credit facility put in place to help finance GPU purchases. Where does that stand? Is there a timeline for getting that done?

Yes. I mean, in the past we never took on debt because taking on debt and borrowing money for bitcoin mining equipment is a fool's errand; you can't predict the cash flows because you don't know where bitcoin is going to be. But, of course, we remain very open-minded to looking at credit facilities with respect to the AI business, because it's very predictable cash flow every month, we're drawing cash from the client. So that makes a lot of sense. We've been looking, there's a menu of options we’ve been considering. There are certain terms that we want. We want to optimize the very best financing terms. But until that is signed, we have to look at all our options. For now, we're speaking very aggressively with investors and counterparties who are enthusiastic to get involved in this business from a financing perspective. But we want to make sure we optimize the best term.

Okay. Hey, I'll jump back in the queue.

Thanks, Mike. Good questions.

We'll move to our next question from Joe Gomes with Noble Capital Partners. Please go ahead.

Good morning, and thanks for taking the questions.

Hi, Joe.

I want to start off on the HPC adjusted gross margin there. I think you said it was about 72.5. Should we expect that type of margin going forward? Or do you think that margin could possibly even increase from there?

Erke, do you want to take that? It's more of a finance question.

Yes, for the first batch, it's going to be the same margin as before. Going forward, we do see some pricing compressing as well. So I would say the margin would decrease, but yes, it's going to depend until the contracts are finalized and the market.

Okay. And then professional consulting expenses increased to $2.6 million from $1 million. Just maybe you could give us a little more color on what was driving those costs?

Yes, I can take that. Those costs were related to the sales process for appraising the deal and professional services related to installation of the equipment.

Okay. Can you provide us with more details about the overall environment you have been observing since the halving?

With respect to how it relates to the HPC business, or the bitcoin mining business or just ...

The mining business. The mining business.

Well, I mean, everything is dictated by the hash price. The sector is sometimes myopic, and they only have one lever. There's an old saying, if all you have is a hammer, everything you see are nails. And so with respect to our sector, they only have one lever and that lever is growth at all costs. That is dangerous. We've been able to avoid that because we have a real business on the HPC side; we've established that business line. I want to emphasize, it's only a business if you have access to those machines, access to a data center to house those machines, and clients. If you don't have all three, it's just an aspiration. We do have all three and we're drawing revenue every month. That’s important with respect to the bitcoin mining business, because we're able to allocate at the right time and not overpay for things. Bit Digital has always run a counter-cyclical growth strategy, and that has worked out very well so that we're not overpaying just to get sexy headlines. We're really comfortable with our position. We have levers and hopefully the market will understand that and begin to normalize our price.

Okay. And then one more for me and I'll jump back in the queue. I'm assuming with the agreement so close for the second batch on the HPC side, you already have the hosting capacity. But once that is done if you were to get customer two, three, four, do you need additional hosting capacity? Or do you already have under contract enough hosting capacity to add a customer two or customer three on the HPC side?

Yes, we have enough capacity for sure to accommodate that client demand. I would add that we are in the market to potentially acquire and get vertically integrated on the HPC side. The margins on the business require just basically 90% less energy to produce the same amount of revenue on the HPC side than on the bitcoin mining side. It’s an interesting vertical integration that we're seriously considering. We are talking to various counterparties to potentially become vertically integrated on that side of the business. But to answer your question directly, once again, we definitely have enough capacity to meet client demand. That is something we already have. But we are looking to vertically integrate on that side of the business.

Great. Thanks for taking my questions.

Thank you.

We'll move to our next question from Kevin Dede with H.C. Wainwright. Your line is now open.

Thanks. Good morning, Sam. Hi, Erke, Cam. Thanks for having me on. Sam, just to go back to your last touch, which was on my question list, about building or acquiring your own infrastructure. Can you go through your rationalization of that given your commentary regarding investments and timing? I guess you're just more comfortable there because you can see return regardless of hash price. For example, four megawatts on the HPC side produces the same amount of revenue as 40 megawatts on the bitcoin mining side. So the math is nice. Can you give us some insight on the expertise you think you'd need to do that, what you'd have to do on the management team side to accommodate that expertise, and what kind of timing you had in mind?

Sure. With respect to the expertise in the way we're doing it now, which is pretty successful, we've contracted with that data center in Iceland and things are going very well. If things were not going well, the client would not be asking to grow the fleet. Our expertise is pretty good on that front. If we were to acquire a datacenter to accommodate and vertically integrate this business, of course, there'd be a management team attached to that particular infrastructure, and we'll be leveraging that management team very deeply in order to expand the margins on this business once we're vertically integrated.

Do I have everything ...

Yes, sorry, go ahead.

That's sort of the attractive component of M&A on that side is that we would be able to acquire an existing team in place to run the operation and also just acquiring an existing book of business and an existing pipeline of new leads.

So the idea then, Cam, I should think about your expansion there as buy versus build?

That's correct.

Okay, thank you. Do I understand everything correctly, Sam, in that the next tranche for your existing customer GPU side, is that all super micro equipment? Have you had any issues with gaining that, and are you okay on the InfiniBand side too?

We are indeed and that's a great question because a lot of people think the press that, I mean, of course, the H100s are precious, but the InfiniBand is actually even more precious. A lot of people got caught down just getting H100. And I realize that they also knew the InfiniBand otherwise, they have very expensive paperweights. Yes, we have that covered. We had that covered when we executed on the first choice. So we'll have that – we already have that very well covered on the second tranche.

Would you mind …

So that will be finalized in the terms, and we'll announce that but we're not necessarily bound to a single vendor.

Okay. Would you gents mind walking me through the lease versus buy decision on the next tranche?

I guess it will basically be the math I just mentioned there. You need much less megawatts to produce the same amount of revenue.

We are looking at different financing options. We're looking at different credit options, we want to make sure that we get the best terms. It's much easier to get credit financing on the AI side versus bitcoin mining side. There aren’t that many counterparties who want to borrow money anymore for bitcoin mining equipment very understandably, because that got a lot of people in trouble the last couple of years. But on the HPC side, because of the predictable cash flow per month, we have a much better menu of options, but we want to optimize that. We haven't signed anything yet with respect to that kind of facility, but we're deeply engaged in discussions with various counterparties to see where that goes.

Can you …

... announcing that if we proceed with that.

Right, right. Can you remind me on how you handle the first tranche in terms of Bit Digital own versus leased?

Yes, I'll leave that to Erke. Yes, for the first rounds, we have 256 servers deployed, and 96 of them were through a lease financing arrangement. We own 156 and 96 are leased, right, Erke?

Okay.

Erke, you mentioned a $0.05 per kilowatt hour power cost and potential changes to rev share. Can you elaborate on that given you're still hunting around for 40 more megawatts? Is there a chance that we could see those prices go down? So the $0.05 are the pass-through we got from our hosts. The majority of our agreements were profit-sharing arrangements, and the rest were what we paid on top of the electricity, which we pay directly as a pass-through. As for higher pricing, I think summer, the price will be higher. But we should be able to see the pricing come down going forward because compared to last year, the gas price has come down quite a lot. Some of our portfolio hosts are giving us some better quotes as forward-looking.

Okay. Yes, I think you provided a great explanation regarding customer interactions on the GPU side. I will step back at this point. Thank you very much, gentlemen. Thanks, Kevin.

For our next question, we'll return to Mike Grondahl with Northland Securities. Your line is now open.

Hey, thanks again, guys. Just a quick question, you reported $58.5 million of adjusted EBITDA. If I back out the revaluation of digital assets, 45.7 million, I get to 12.8. Would you guys kind of think of that 12.8 million as kind of core for the quarter, what the operations produced excluding the revaluing of those digital assets?

Can you repeat the question, Mike, just so that we understand clearly?

Yes, you guys reported adjusted EBITDA of 58.5 million. And as I was reading through the financials, in the P&L, there's a line for gains on digital assets of 45.7 million. So if I take 58.5 million minus the 45.7 million digital asset gain, I get to 12.8 million. Do you guys view that 12.8 million as sort of core EBITDA if you didn't write up the BTC and Ethereum essentially?

Yes, I think that's in the ballpark. Certainly, in terms of what we define as core. Certainly, it depends on how you calculate EBITDA and what reconciliations you make, but I think that is in the ballpark.

Got it. I just want to figure out if that's how you guys think about it going forward. And then secondly, any updated thoughts on selling bitcoin or Ethereum to fund some of this growth?

I mean, we definitely love to huddle our balance sheet every now and again, but we do it judiciously. We don't have a formula, we don't have a preset formula. But we're strong believers in holding our digital assets. Otherwise, why be in this space? But we always liquidate some to fund our operations. But there is now an expansion into this lucrative business line. So we're looking at different options. That could be liquidating our digital assets, using our balance sheet, looking at these financing terms of these counterparties we've been negotiating with. So, we're looking at various capital pools in which we can expand that business line.

Got it? And then just last question from me for you, Sam. Throughout this call, you've described the HPC business. You're pretty excited about it, and you've referenced some of the challenges and the volatility in the mining BTC business. Is it fair to assume that the bar on the mining side is pretty high for incremental capital and things you're looking at over the next year or two to invest on the Bitcoin mining side?

As mentioned, we run a counter-cyclical growth strategy. We prefer to expand on the bitcoin mining side when the prices for equipment and the deals that we get with our contracting partners are good; we just make decisions based on economics. Fortunately, we're in a very unique position in our sector to have capital allocation decisions. It's not just one lever going forward; we can operate dynamically in capital allocation towards both. We look at the returns profile, and if it makes sense, we move forward on one of those two things.

Got it. Helpful. And I think you’ve pointed out, it takes four megawatts on the HPC side to run the same amount of revenue versus 40. So, that's probably a helpful way to think about it going forward too. Okay, thanks, guys.

Thank you.

Congrats on the quarter.

Thank you.

It appears there are no further questions at this time. I'd like to turn the conference back over for any additional or closing remarks.

Well, if there are no more further remarks, thanks very much for joining us today. We welcome your participation and value our shareholders. Thank you very much, and I conclude the call.

Again, this concludes today's call. We thank you for your participation. You may now disconnect, and have a great day.