Cipher Digital Inc. Q1 FY2022 Earnings Call

Hello, and welcome to the CIFR Mining First-Quarter 2022 Business Update Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. It is now my pleasure to introduce Lori Barker, Investor Relations.

Good morning ladies and gentlemen. Thank you for joining us on this conference call to discuss Cipher Mining's First Quarter 2022 business update. Joining me on the call today are Tyler Page, Chief Executive Officer, and Ed Farrell, Chief Financial Officer. Please note that you may also review our press release and presentation, which may be found on the Investor Relations section of the website at [email protected]. Please note that this call will be simultaneously webcast on the Investor Relations section of the company's corporate website. The conference call is the property of Cipher Mining and imitating or other reproduction is expressly prohibited without prior written consent. Before we start, I'd like to remind you that the following discussion, as well as our press release and presentation, contain forward-looking statements including but not limited to Cipher's financial outlook, business plans and objectives, and other future events and developments, including statements about the market potential of our business operations, potential competition, and our goals and strategies. The forward-looking statements and risks in this conference call include responses to your questions and are based on current expectations as of today, and Cipher assumes no obligation to update or revise them, whether as a result of new developments or otherwise, except as required by law. Additionally, the following discussion may contain non-GAAP financial metrics. We may use non-GAAP measures to describe the way in which we manage our business. We reconcile non-GAAP measures to the most directly comparable GAAP measure, and you are encouraged to examine these reconciliations which are found at the Cipher earnings release issued earlier this morning. I will turn the call over to Tyler.

Thank you Lori. Hello. This is Tyler Page, the CEO of Cipher Mining. Thank you for joining our first-quarter earnings call, and I look forward to providing a business update. Let's start with an overview of Cipher Mining. We are a U.S.-based large-scale Bitcoin miner with key competitive advantages in equipment, power, and operations. We brought our first Bitcoin mining operations online in February, and we have significant build-out plans for 2022 and 2023. Notably, we have a business positioned to withstand the volatility in Bitcoin mining profitability. We do this by focusing on the main cost drivers of both CapEx and OpEx in the business. In Bitcoin mining, CapEx is dominated by the cost of your fleet of mining rigs, and OpEx is largely the cost of power. We've stayed very focused on maintaining cost discipline at Cipher, despite the inflationary environment the entire world has faced recently. That focus positioned Cipher very well for potentially lower Bitcoin prices because with comparatively lower costs, we should be able to keep our machines running profitably when competitors with higher costs face challenges. We're expecting to bring approximately 7.5 exahash per second of hash rate online by early 2023. This is an increase in forecasted hash rate from our last business update due to an improved mix of machines under contract with MicroBT. With this improved mix of machines, we also now have a more efficient fleet of mining rigs on order with an average machine efficiency of about 32.1 joules per terahash. Our average price paid for our rigs is now forecast to be $45.01 per terahash. We have a portfolio of long-term power purchase agreements with a compelling weighted average price of $2.07 per kilowatt hour. We believe this price is extremely competitive versus our peers. Our operations team is now readying the power and infrastructure at four separate data centers and we expect to have 275 megawatts available to accept our mining rigs by year-end. We anticipate the CapEx costs for these sites outside of the cost of the mining rigs to be about $450,000 per megawatt. Let's discuss some milestones Cipher has achieved since our last call. First, our first-quarter shipments of rigs from Bitmain have been installed on time at our Alborz data center and are now hashing. Our hash rate build will accelerate throughout the year as shipments get larger and we anticipate that growth and hash rate will pick up meaningfully in the coming quarters, as I will discuss in greater detail later in our deck. Next, we have now increased our hash rate forecast to 7.5 exahash per second as we recently upgraded our machine purchase contract with MicroBT to include a more efficient mix of higher-performing rigs. This new mix of machines in our fleet will add an additional 400 terahash per second to our previous forecast. Lastly, we recently closed our first equipment financing at our Alborz data center joint venture with BlockFi, for about $47 million. The proceeds from this financing will go towards previously incurred costs for the Bitmain machines ordered for the Alborz site. We are excited to partner with BlockFi on the first of what we anticipate will be multiple debt deals for the company in the near future. Now let's turn to our implementation plan and strategy. Our operations team is currently hard at work deploying our first four data centers with an expected commissioning date to begin later this year. You will notice that our updated forecast reflects the fact that we have pushed out the anticipated start date for Bear Phase II and Chief Phase II to 2023. Our updated end-of-year forecast for power and infrastructure availability is for a total build of 345 megawatts with 275 of those megawatts belonging to Cipher, and the remainder belonging to our joint venture partners. This is more than enough power to accommodate installation of all the rigs we have on order. Across the bottom of the slide, you can see the hash rate associated with the mining rigs being shipped, built by quarter. We forecast having roughly 7.5 exahash per second up and running in early 2023. Here are some updated pictures of our Alborz data center, which is nearing completion. The data center is currently operating the rigs we received in the first quarter and we'll continue to add machines as they arrive in the second quarter until the full 40 megawatts is operational. As you can see from the turbines in the distance, Alborz is 100% powered by wind. We're thrilled with the progress here already, thanks to our best-in-class construction and operations teams, and look forward to more exciting and fast-paced construction at Odessa over the coming months. Now I will pass it off to Cipher's CFO, Ed Farrell.

Thank you, Tyler, and hello to everyone on the call. As evidenced in the photos that Tyler presented, you can see that we've made significant progress in building out our data centers in the first quarter of 2022. This resulted in fulfilling the commitments we previously announced relating to purchasing mining rigs, electrical infrastructure, security deposits for our power purchase agreements, and corporate-related expenses to support our business. During the quarter, we made scheduled payments relating to mining rigs of approximately $97 million, bringing our total deposits to $207 million, which is recorded as deposits on equipment on the balance sheet. In addition, we made progress payments for property and equipment, which includes transformers and switchgears of $6.5 million. On March 31st, 2022, we had cash of approximately $99.5 million and since then have continued investing capital in a planned progressive manner. If we look at our GAAP operating results for the quarter ending March 31st, 2022, we had a net loss of approximately $17.5 million, resulting in a net loss per share of $0.07. The primary drivers of this loss include stock-based compensation of $9.5 million, and corporate-related expenses of approximately $8 million, which include insurance, professional fees, employee compensation benefits, and other public company expenses. I'd like to highlight that although we did mine Bitcoin this quarter, please note that this occurred within our joint venture Alborz, which Cipher owns 49% of, and as such, our economic interest will be accounted for under the equity method. The Bitcoin reward we received is disclosed as a current asset on the balance sheet. We believe non-GAAP financial measures are also helpful to investors in comparing our performance across reporting periods on a consistent basis. Our non-GAAP P&L and non-GAAP diluted earnings per share exclude the impact of certain non-cash recurring items, which includes depreciation of fixed assets, change in fair value of warrant liability, and stock compensation expense. These measures are not a substitute for our GAAP results, but management will use these non-GAAP financial measures internally to help understand, manage, and evaluate business performance, and help us make operating decisions. So for the three months ended March 31, our non-GAAP loss is approximately $7.9 million, resulting in a non-GAAP loss per share of $0.03. We have provided a reconciliation on our GAAP versus non-GAAP results. Finally, we achieved several key milestones in the first quarter, and we look forward to reporting our progress in future periods as we continue to scale Cipher's operations. I'll stop there and Tyler and I are happy to take your questions.

Thank you. Your first question comes from the line of Kevin Dede with H.C. Wainwright.

Morning Tyler, Ed. Thanks for holding the call and thanks for having me on it. A quick question on the deposit for equipment. Now, is that the entire 7.5 exahash and include all the financing you need for that, including the full deployment of what, almost 350 megawatts?

That's a component of that, Kevin. We're still making payments with regard to the full build-out. And that has all been self-funded with the cash that we had from the proceeds of the deal.

Hey, Kevin. It's Tyler. So, I mean, I think you saw we announced recently our first equipment finance deal for about 47 million in total. We are confident at this point based on the continuing discussions we're having that this is not our last deal we will be announcing. Obviously, the market is moving around a lot, and until they're done, they're not done, but we feel confident right now that we will fund the entire build-out based on the conversations we're having right now.

Can you give me a ballpark on how close you are to that 100% financing for what goals you set for the year?

I think it's challenging to give you an exact number, and I'll tell you why. We're scaling from a greenfield company starting from zero and bringing things online. And so to answer that, I would have to get answers about what the future Bitcoin price looks like, what the future hash rate looks like because we've got payments that will be going out as Bitcoin mining is happening and coming in as revenue. We also have some other pieces that would need to be finalized on that spend. For example, half of the MicroBT machine contract is based on a floating price mechanism. We're actually reporting price per terahash with a midpoint there. If prices were to stay where they are, significantly less cash would have to be spent. So it's hard to answer that question exactly, Kevin. We've given the numbers. If you want to try to make a forecast on what we have to spend per megawatt and the machine payment terms are all publicly filed so you can see the month-by-month payments, but I think the overall takeaway should be based on the conversations we're having right now. We're very confident that we will be able to fund the entire build-out.

Okay. Well, to your point, the market is in data flux, and there is lots of pressure on Bitcoin lately. So I appreciate the color. I noted a lot of your conversation centered around MicroBT. Their Intel is a new entrant, other main suppliers, and I know you do have relationships with others. Could you refresh my memory please on why you stand there, and what you might have or might be considering in terms of alternate suppliers between the main two?

Sure. So, just to reiterate, what we have under contracts currently is 27 thousand rigs from Bitmain and 60 thousand rigs from MicroBT. Roughly, those get adjusted, put plus minus, it's in the small amounts as that's the way those contracts work for everyone, but that's the number of machines under contract. We are having conversations. It's fair to say with every potential manufacturer of equipment in the world because we do have a pretty big pipeline for 2023. We have begun having conversations about securing significant allocations from both the well-known big providers but also some smaller names, and we are certainly exploring new entrants, having discussions with the Intel folks, as well as other manufacturers that are out there. But it remains to be seen what we have under contract currently as the 87 thousand rigs from MicroBT and Bitmain.

Tyler, you mentioned a push to the right on the Phase II developments for Bear and Chief. Would you mind talking to that a little bit and maybe giving some insight on what you think your new timing might be aside from 2023?

Sure. So at Bear and Chief, our sites where we have a front of the meter power setup. And so as a result, we work with the transmission and distribution service provider on substation infrastructure. And so we have to work with that transmission and distribution service provider, and they informed us and our JV partner that the substation modifications that need to happen need to get pushed out until 2023. And mid-2023 is the forecast, but I think that that's what we've been told.

Very good. I appreciate it. Thanks for taking my questions, gentlemen.

Thanks, Kevin.

Thank you. Our next question comes from the line of Chris Brendler with D.A. Davidson.

Hey Tyler, good morning. Congratulations on the progress here. I wanted to ask about the equipment financing transaction. You received a lot of miners looking for these types of transactions. My question is, obviously with the volatile market conditions, the lenders may be a little bit more nervous. How much do Bitcoin price and the cost of power play into those financing deals, or are they more based on the rig prices themselves in a more direct basis?

That's a great question, Chris. I believe I can understand the perspective of lenders and provide you with an answer. It's a combination of various factors, and I think we compare favorably to our competitors. From a lender's standpoint, they will pay close attention to the purchase price of the machines because it directly relates to their loan-to-value risk. Recently, we've noticed that lenders have become slightly more conservative regarding loan-to-value ratios in our discussions. This actually benefits us since we typically have one of the lowest costs per terahash per second of compute among miners. Therefore, I believe lenders are and will continue to be confident in our business model. Regarding Bitcoin prices and power costs, these are crucial factors for lenders when they consider future debt service coverage. Our low power costs enable us to maintain profitability in their financial projections. While Bitcoin prices are significant, it's important for lenders to assess potential negative scenarios, such as a substantial drop in Bitcoin value, whether that means the recent decline or a more considerable drop. That’s generally the mindset lenders adopt. Overall, I think we are in a favorable position within the competitive landscape due to our focus on cost discipline.

Yes. It does. As a follow-up question, did you disclose the interest rate that you're paying on that new BlockFi facility?

We did not. That contract, given that it actually faces the joint venture that we own 49% of and given the overall size of it, we did not have to file the contract, and so that's competitive secret sauce, but happy to say that we think we got extremely competitive rates based on what we've seen in the marketplace.

That was what I was thinking, given your power footprint and metrics that you disclosed here, you should be towards the lower end, that's good to hear. Unrelated question, your power contracts. I think they were great to have a year or so ago, but now what's happened to energy prices? They seem like they are even more valuable. Could you give us a sense of how much our energy costs are today, how much sort of in the money or below market those contracts are and potentially how valuable they are?

That's a great question. I think it's hard to put an exact quantum on it but fair to say, prices are much higher than $2.07 per kilowatt hour these days. Now, I think we have a very creative and market-leading power structuring team. And we can continue to work with our power providers on our future sites that we're negotiating for future deployments. Looking for creative ways to monetize curtailment and demand response ancillary services, etc., to make sure we keep a competitive power price. But yes, for example, the contract that we have at Odessa, which is a fixed-price contract for five years, is definitely cheaper than what you would get today by a decent amount. It's hard to say the exact quantum, but it is fairly in the money to use the words you used.

One last question, I may have missed it, but I think you mentioned that your hash rate target has actually increased, which is quite impressive in this environment. What contributed to the increase compared to the last forecast?

Great question. So we have worked closely with MicroBT. The way the machine rig contracts work at large scale, and it's not just for us, I think it's for everyone entering large-scale contracts is, you put under contract a blend of machine efficiencies. And I think that's sometimes because up the chain, the rig manufacturers don't know the exact makeup of the efficiency of the chips they're going to get when they get a particular batch of wafers. And so we stay in pretty constant contact with Bitmain and MicroBT. In this case with MicroBT, we talked to them and worked with them about increasing the mix of machines under contract. So it's an updated version of the mix of the 60,000 we will be receiving, and it's a more efficient mix. And so we're very excited about obviously to basically be building the same infrastructure but now be expecting to install a larger amount of hash rate. And as an investment, we have a very favorable pricing arrangement under that contract. And so this was effectively a cheap way to improve our hash rate, but also improve the efficiency of the machines that we're receiving and installing. And the sort of added benefit of that is that that is likely to extend the useful life of those machines. We're getting essentially fewer of the less efficient machines and more of the top-end machines. So yes, it was a very positive development for us, and we're very excited about it.

Great sense, right, as well. What a great way to increase your hash rate forecast that pretty easy and not that expensive. Okay. Great. Thanks for answering questions and hopefully the next quarterly update we see some better market conditions. Fingers crossed.

From your lips to God's ears, Chris. Thank you.

Okay. Thanks, Tyler.

Thank you. And I'm showing no further questions. So with that, I'll turn the call back over to Chief Executive Officer of Cipher Mining, Tyler Page for any closing remarks.

Thanks again for joining us this morning. We are making tremendous progress at Cipher. We're very busy every day executing our plan, and despite the day-to-day ups and downs of the market, we remain very positive about our long-term outlook. We have built a business with long-term advantages. Our relentless focus on cost discipline, as well as maintaining discipline in our execution and hitting milestones and deadlines, is serving us very well in a tough environment, and we will continue to do that and look forward to giving you more continued positive updates on progress and execution in the future. Thank you again for your time.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.