Earnings Call Transcript - DGXX Q3 2024

Operator, Operator

Good morning and welcome to Digihost Technology Inc. Third Quarter 2024 financial results conference call. My name is Robin and I will be your operator for today’s call. Joining us for today’s presentation are the company’s CEO, Michel Amar, and CFO, Paul Ciullo. Following the remarks, we will open the call for questions. Please note that this event is being recorded and a transcript will be available on the Digihost website. In addition to the press release issued earlier today, you can find the Digihost quarterly report on 6-K on the company's website at www.digihostpower.com and under the company's SEDAR Plus profile at www.sedarplus.ca. Unless otherwise noted, all amounts referred to during the call are denominated in U.S. dollars. Any comments made during this call may include forward-looking statements within the meaning of applicable security laws regarding Digihost and its subsidiaries. The statements may reflect current expectations and as such are subject to a variety of risks and uncertainties that could cause actual results to differ materially from current expectations. These risks and uncertainties include, but are not limited to, factors discussed in Digihost's Form 6-Ks for the 3 and 9 months ended September 30, 2024, and 6-K for the year ended December 31, 2023, as well as the company's other continuous disclosure documents. Except as required by applicable law, Digihost undertakes no obligation to publicly update or review any forward-looking statements. During the call, management may also make reference to certain non-IFRS measures that are not separately defined under IFRS, such as adjusted EBITDA. Management believes that non-IFRS measures taken in conjunction with IFRS financial measures provide useful information for both management and investors. Reconciliations between IFRS and non-IFRS results are presented in the tables accompanying the press release, which can be reviewed on Digihost's website. I'd now like to turn the call over to Michel Amar, CEO of Digihost. Sir, please proceed.

Michel Amar, CEO

Good morning, everyone, and thank you for joining us for our third quarter earnings call. The digital infrastructure landscape is entering a pivotal era of change. As AI accelerates the need for scalable, high-density computing power, we are seeing a fundamental reimagining of a data center lifecycle. From energy sourcing to designing and building advanced infrastructure, this shift presents a powerful opportunity to tap into these enduring industry trends. Our strategy is to develop a robust platform that combines energy resources and digital infrastructure at scale, redefining our energy capacities acquired and deployed to support today's most advanced technologies. In the immediate term, our focus is on meeting the intense demand for mining colocation with a unique emphasis on energy as the foundation. Over the longer term, we aim to build a versatile energy infrastructure platform for high-performance computing, one that we will evolve with technological breakthroughs for years to come. Before discussing how we are positioning the business to achieve our goals, I will share some highlights from the quarter. Our revenue grew 104% year-over-year to $31.4 million for the 9 months ended September 30, 2024. Looking ahead, we anticipate continued top-line growth driven by two initiatives from the quarter: an expansion of our existing megawatt footprint allowing for more energy to be utilized and an expansion in our existing colocation agreement with large publicly known U.S.-based Bitcoin miners. Our EBITDA for the 9 months ended September 30 was $5.5 million positive, representing nearly a 3.5x increase compared to the same period ending in 2023. Our adjusted EBITDA was positive for the quarter and totals $3 million for the year. Despite the rising difficulty, we have remained competitive in the market due to our strategic partnership with prominent well-known U.S. Bitcoin miners. These partnerships have allowed us to use top-end equipment for maximum cost efficiency, resulting in a profitable mining joint venture between the parties, all for a fraction of the regular capital expenditure outlay required to mine with these margins. This new business model strategy allows us to invest in upstream power assets, which will continue to serve our purpose and provide consistent revenue through multiple markets for years to come. Digihost's consolidated opening capacity across the three types currently represents approximately 100 MW of developed and available power and a mining gas hash rate of 3 EH/s. The company experienced a brief maintenance period this quarter to increase the long-term efficiency at its flagship North Tonawanda power plant, and we expect to bring it back to full operational power in the fourth quarter of 2024. Looking ahead in the next 12 months, the company expects to significantly expand its total megawatt capacity as we have already completed a load study at our Columbiana Alabama plant to expand its capacity from 22 megawatts to 55 megawatts, and we expect to hear back from New York regulators in the first quarter of 2025, which would allow us to expand our capacity from 60 megawatts to 120 megawatts by pulling power from the grid. This megawatt expansion will lay the groundwork for achieving our 6 to 7 years goal by the end of Q1 2026. As the company looks ahead, we remain laser-focused on expanding our power portfolio and maximizing the optimal use of our energy resources. The company has produced more revenue year-over-year through its colocation services than through digital mining, and we expect this trend to continue. This strategy enables us to invest in our power assets with a focus on deploying each megawatt where it can generate the most substantial returns. We expect that high-performance computing will become the primary driver of value for our power assets, and we are positioning the company to serve this high-demand market over the next 12 months. The company has already initiated a development plan for existing assets to be developed into Tier 3 infrastructure, and we are excited to begin our foray into traditional Tier 3 datacenter collection as demand in the market rapidly scales. I'll summarize my remarks by reaffirming our dedication to disciplined, fundamentals-focused growth as we expand rapidly across Power Infrastructure and Tier 3 facilities. We remain committed to strengthening our balance sheet and upholding vigorous capital allocation standards. This approach, anchored in innovation, strategic commercialization, and operational excellence, positions us to deliver meaningful near-term value while building a resilient long-term enterprise at the convergence of Energy and Technology. With that, I will turn it over to Paul to discuss the impact of our strategy and our financial results in detail. Paul?

Paul Ciullo, CFO

Thanks, Michel, and good morning, everyone. I'll start by reviewing our full year third quarter results by segment. Our colocation service segment, new to fiscal year 2024, produced revenue of $10.7 million compared to $0 in the same period of fiscal year 2023. Our partnerships with large U.S.-based miners allowed us to leverage cutting-edge mining infrastructure, such as S21 miners paired with competitive energy costs, allowing for the proliferation of multiple profitable joint ventures with different mining counterparties in the United States. The company expects to aggressively pursue this vertical as an immediate revenue growth strategy while focusing on its future development of HPC infrastructure. Our digital mining business experienced a year-over-year decline in revenue from $13.5 million to $10.3 million, primarily driven by a reduction in Bitcoin mined following the halving and an increased focus on its colocation service segment. We recognize the capital-intensive nature of self-mining, and as a result, we are shifting our CapEx investment upstream in our power production assets. This shift upstream will allow us to focus on more profitable mining colocation and Tier 3 development in the future. Our Energy Sales segment produced revenue of $10.3 million compared to $1.7 million in the same period of fiscal year 2023. This revenue medium is unique in our space, as we can participate in behind-the-meter generation bidding programs with the New York Independent System Operator. This allows us to sell power back to the grid from our natural gas combined cycle power plant at peak kilowatt rates during heavy demand cycles. This ensures that no generated revenue goes wasted, and we can consistently assign and apply power to the highest and best use case, whether through self-mining or power sales back to the grid. Regarding our cash position, the company produced a net positive adjusted EBITDA for the quarter and generated positive working capital of close to $1 million. This positive net working capital, paired with the $4 million financing that took place early in the quarter, provides us with a cash balance of close to $9 million, positioning the company to deploy meaningful CapEx for upstream power investment and Tier 3 data center expansion in the quarters to come. Looking ahead to 2025, we expect further improvements to profitability as we roll out additional megawatt capacity at our existing energy sites. Our focus on finding the highest and best deployed case of power will continue to hold as we pursue future development. To conclude my remarks, the digital infrastructure sector is on the brink of transformation. We believe our distinct power-first approach to data center development positions us well to capitalize on these secular trends. With that, I'll turn over to the operator for Q&A.

Operator, Operator

Thank you. Our first question is from Kevin Dede with H.C. Wainwright. Please go ahead with your questions.

Kevin Dede, Analyst

Good morning, Michel and Paul. I can't tell you how enthralled I am that you're hosting a call. I really appreciate it. Michel, I understood that I think you're operating at 3 EH self-mining and things turned down in the September quarter. Could you just run through the detail of that, please?

Michel Amar, CEO

Good morning, Kevin. Nice talking to you. So every three years, we do a major maintenance program and we take the opportunity to not only maintain the turbines but also to repair all the little defects that happened over three years. It's a little bit like when you own a jet; you have to maintain your maintenance program every three years, every 10 years, every 20 years. So the finalizing should be done in a couple of weeks, and we should be up again in the first week of December and run fully. So the results of Q3 are lower than what we were expecting because of that maintenance.

Kevin Dede, Analyst

Okay. So how much of the September quarter was planned down?

Michel Amar, CEO

I would say 2/3 of it.

Paul Ciullo, CFO

Yeah, 2/3 of it.

Kevin Dede, Analyst

Okay. And then it was down through October and November and then up through the month of December?

Michel Amar, CEO

In December, we will resume full capacity. So just to comment on our revenues and performances this year compared to last year, we have to also appreciate that the reality happened on April 19, 2024, which cut everyone's production of coins in half. And despite that 50% cut, we still managed to increase dramatically our revenues for the year to date compared to last year's year to date. So it's really positive.

Kevin Dede, Analyst

So just help me understand exactly how things are split up at your fleet, Michel and Paul. How much of your mining capacity is at the North Tonawanda plant?

Michel Amar, CEO

You are talking about in normal conditions. I would say we are still running at the power plant, but we are running partially from the utility instead of the generation. We have two sources of power at the power plant: we have utility power and we have generation power. Except that the utility is limited until we get this approved load study that should come in the first quarter of 2025, where we would have 60 MW utility available power. So in normal times, the power plant represents 55% of the total. Now it's reduced because of the maintenance, but we are still running partially from utility.

Kevin Dede, Analyst

Okay. How should we think about the way that you categorize your revenue? Obviously, the September quarter marked an important shift to colocation services and our revenue was $7.1 million in the quarter. But I struggle to figure out how much EH is contributing to that, right? Can you give us a ballpark on how much you're hosting for your colocation customers and how that revenue splits between Digihost and your customers?

Michel Amar, CEO

So, it's more like a joint venture than a hosting agreement. We have a split profit formula, which we signed an NDA not to disclose for reasons of confidentiality, but we have a split of revenue from the coins mined and with the latest miners, the S21, as you saw. And then we also get revenues from our generation of energy where we get a markup margin on top of it. So we have a dual revenue structure on that, and it looks like we are increasing our ratio of energy revenues independently of the Bitcoin Mining. I think we are at 25%, Paul?

Paul Ciullo, CFO

Yes.

Kevin Dede, Analyst

So if I remember correctly, you have the ability to take the Alabama facility to, what about 50 MW, I think was the number. I'm wondering how much of that is running?

Michel Amar, CEO

55 MW.

Kevin Dede, Analyst

Okay. How much of Alabama is running now?

Michel Amar, CEO

Currently, we have a developed setup for 22 MW. We are running about 14 MW as of today, and we started the process to develop a master plan for 20 MW of Tier 3 data center but in increments of 5 MW. So, we started the process of 5 MW of Tier 3. It's kind of a retrofit, and that should be down by Q4 '25, early '26.

Kevin Dede, Analyst

Okay. So we could expect 5 MW of HPC to come online at the end of next year, probably in '26?

Michel Amar, CEO

That's correct.

Kevin Dede, Analyst

Okay. And then for the balance of that 20 MW that you've set aside, would it be fair to assume that you add 5 MW incrementally through the course of '26?

Michel Amar, CEO

Correct.

Kevin Dede, Analyst

I know we're looking way out; I'm just trying to get your feel for your plan.

Michel Amar, CEO

That's correct. So we can have a 20 MW HPC Tier 3 setup there. The reason is that the market value multiples are way different for Tier 3 than for what we call a Tier 0 or Tier 1 mining operation. A Tier 1 mining operation is about $500,000 a megawatt to set up infrastructure value, and a Tier 3 site is about $15 million a megawatt. So by developing 20 MW, the value compounded with 20 MW at $15 million should be about $300 million value just for the infrastructure.

Kevin Dede, Analyst

Okay. Before we go talk a little bit more about that, I was wondering if you could highlight whether or not you finalized plans for your North Carolina site. I understand you have access to 200 MW there. I'm just wondering what your latest thinking is?

Michel Amar, CEO

North Carolina is an amazing asset. We own the site and bought it a few years ago. It's graded, and we have an understanding with Duke Utilities, which is a very large utility company in North Carolina, and we received an allocation of 200 MW. So our strategy or plan is to initially develop Alabama's first Tier 3 and then expand in North Carolina via debt financing, because we have predictable income that is way different than the crypto mining income or joint ventures with a large HPC operator. So, we are either going to joint venture, or we are going to self-develop that site through debt financing upon a large customer's colocation in a 5-year plan. That will be a great asset to develop. It's near one of the largest Google centers in North Carolina. We have 200 MW available there, so we feel really excited; that's our second step and it's our growth plan for 2026 and 2027.

Kevin Dede, Analyst

Okay. How are you working to build a customer base in HPC? Or are you more concerned now just getting your infrastructure in place? Given what we've seen for demand in power, Michel, it would seem to me that you might find partners to help you develop North Carolina tomorrow versus 2026, 2027. And I'm just wondering what you might be looking at on the business development side to maybe help you on that development or at least find customers?

Michel Amar, CEO

So essentially, Kevin, the execution of the Tier 3 project in Alabama will serve as our launching point to expand from North Carolina. We have already demonstrated our capability to operate a power plant, overcoming significant challenges. The operational standards for a power plant are quite high, even more so than for a Tier 3 center. Our team possesses the expertise needed to build a Tier 3 facility. We believe that while we construct our Tier 3 over the next year, we will also explore opportunities for the North Carolina site and begin planning to ensure that we can finalize construction and be operational by 2026 or 2027. That is our strategy. I concur that we are receptive to opportunities. Regarding HPC customers, we have already established a connection with at least one company that has a market capitalization exceeding $100 billion, which is investing heavily in AI chips. We are confident that our existing relationship in the mining sector will extend to the AI field. Therefore, we believe we can secure consistent and predictable five-year program orders that will enable us to raise capital and finance without diluting shareholder value.

Operator, Operator

Thank you. This concludes our question-and-answer session. Thank you for joining Digihost's third quarter conference call.