HIVE Digital Technologies Ltd. Q3 FY2022 Earnings Call

Good morning, everyone. I would like to welcome you to today's webcast reviewing HIVE Blockchain Technologies Financial Results for the 3 months ended December 31, 2021. On Slide #2, disclosures. Except for the statements of historical fact, this presentation contains forward-looking information within the meaning of the applicable Canadian securities legislation that is based on expectations, estimates and assumptions as of the date of this presentation. You can see the full Slide #2 on your screen for the full disclosures. On Slide #3, you will see our most popular visuals, the DNA of volatility. And I would like to hand the presentation over to Frank Holmes, Executive Chairman, at this point to explain more. Frank?

Thank you, Holly, and thank you to everyone and all shareholders listening. This visual is significant because volatility often concerns many people, especially those who are not traders, while traders actually enjoy it. It's important to note that for 70% of the time, the S&P tends to have no significant movement, remaining within 1% up or down, and within plus or minus 2% over 10 days. Gold behaves similarly on a daily basis, but shows more volatility over 10 days. When we look at technology stocks like Tesla, we see that they're about four times more volatile than the S&P 500. Tesla had a daily volatility of 6% before it was included in the S&P 500. It's notable that Tesla and Bitcoin share similar volatility characteristics, with Ethereum being the most volatile at 5% daily and 17% over 10 days. MicroStrategy shows plus or minus 6% daily and 22% over 10 days, while HIVE is even more volatile, with daily variability at 7 times greater and a 27% fluctuation over 10 days. Traders favor that volatility. Our mining of Ethereum means that this volatility is inherently linked to our operations. We've observed this dynamic with gold stocks, which often experience elevated volatility tied to their gold/silver ratios, since silver is more volatile. Ethereum behaves similarly to silver in its relationship with Bitcoin, making it essential for investors to understand volatility's fundamental nature. I want to thank everyone once again, and introduce Darcy Daubaras, our CFO, and Aydin Kilic, our President and COO. Before diving into our financials and operations, I'd like to provide a macro overview. A significant milestone for us last year was our listing on NASDAQ at the end of June, which led to a notable increase in daily trading volume in the U.S. Additionally, we disclosed various strategic investments in DeFi, NTE, and COIN. It’s evident that not all miners are the same. At a recent conference in Austin, I attended a presentation by another Bitcoin-mining company with a green strategy, and they noted that all miners essentially move together, lacking differentiation. Even HIVE, known for its strong ESG strategy, gets categorized alongside others reliant on high coal energy sources. However, I believe that over time, there will be a clearer distinction. It's important to understand that the profitability of crypto miners depends on energy prices, hardware costs, crypto prices, hashing difficulty, and lease expenses. Darcy and I will explore these elements in more detail and how they impact our operations. For instance, in the past year, Bitcoin's network hashing difficulty surged due to more machines entering the space. Currently, about 900 coins are mined daily, and we account for roughly 1%, mining approximately 9 coins in terms of exahash. However, the mining process is becoming increasingly challenging, highlighting the need for more robust computers. This presents a potential headwind unless production ramps up, a feat we've managed thus far this year. The main risks miners face involve electricity sourcing, supply chain logistics, and regulatory debates surrounding centralized versus decentralized mining practices. These factors influence stock prices and should be considered as a unit. I would like to bring attention to Ethereum's co-founder, Vitalik Buterin. Although humorously, his ecosystem seems underappreciated due to volatility that attracts traders, thus increasing liquidity. We also have gamers who mine when they’re not actively using their machines, contributing to Ethereum’s global ecosystem. There are millions of users and wallets worldwide, which raises concerns over the planned shift to proof-of-stake from proof-of-work—a transition that has yet to materialize. I think it's essential to emphasize that proof-of-work, using electricity to validate a digital asset, remains a crucial concept for Ethereum and should persist. HIVE operates mining facilities in stable jurisdictions, focusing on low energy costs, low temperatures, and reliable internet. We have expanded our capacity significantly since early 2020, investing in Quebec and New Brunswick, as well as additional projects in Sweden and Iceland. We are currently undergoing significant expansions, including a 50% increase in Boden, and new projects in New Brunswick. While stock prices are influenced primarily by daily coin prices, our ability to enhance hashing power and revenue will also drive future valuation. Our revenue has experienced impressive growth—from $33 million in the previous fourth quarter to $68 million in this quarter, driven by increased Bitcoin production. This year-on-year growth reflects both increased mining output and our strategy of HODL-ing coins, adding volatility to our balance sheet while positioning us for substantial future earnings. Last year, we launched a $100 million ATM, which helped upgrade our facilities and expand our operations. Despite market challenges, we increased assets significantly, growing from $15 million in liquidity at the end of 2021 to $161 million this year, primarily through our emphasis on HODL-ing assets. HIVE's growth outlook for 2022 is promising, with detailed plans for a total of 3 exahash of Bitcoin mining and 6 terahash of Ether mining. As we report on this growth, I believe we’re significantly undervalued compared to our peers, as the benefits of Ethereum mining have yet to be fully appreciated. I now want to hand over the presentation to Aydin Kilic for an operational update.

Thank you, Frank, for the introduction. It has been a productive and active fiscal quarter. I'm going to provide an update on our calendar year production at HIVE compared to our peers. Recently, the January updates were released for the industry and the market, giving us a current snapshot of our position. Darcy will follow up with the fiscal period results. Thanks again for the excellent introduction, Frank. Let's jump into the operational update. As of today, HIVE is operating 119 megawatts globally, powered by green and clean energy. This includes 50 megawatts at our flagship facility in New Brunswick, where CBC News featured us in a video documentary in December to celebrate the completion of our third building. Our facility in Lachute, Quebec, remains steady at 30 megawatts, and we've completed a 10-megawatt expansion in Sweden, increasing our capacity there from 20 megawatts to 30 megawatts. Additionally, we have another facility in Northern Sweden that adds 4 megawatts, totaling 34 megawatts in Sweden, and 5 megawatts in Iceland. We are continuously expanding. In spring, our New Brunswick facility will grow to 75 megawatts with an additional 20 megawatts coming online and an optimization yielding an extra 5 megawatts from existing structures. We expect our total operating capacity to reach 155 megawatts by spring. Regarding our hash rate, HIVE currently has a Bitcoin mining capacity of 1.9 exahash and 4.5 terahash for Ethereum, equating to 2.9x exahash for Bitcoin mining. With our ongoing expansions, we anticipate increasing to 2.2x exahash of pure Bitcoin mining capacity in a few weeks, along with a significant delivery of NVIDIA GPUs that will boost our Ethereum hash rate to 5.4 terahash, leading to an equivalency of 3.4 exahash—an increase of over 10%. In January, we witnessed interesting developments. As Frank mentioned, we reached an all-time high in Bitcoin mining capacity, achieving an equivalent production of 425 Bitcoin for the month. This positions us among the top of our peers despite their larger market caps and footprints, with a production rate of 147 Bitcoin per exahash. Our efficiency remains exceptional. Moreover, we currently have the lowest revenue multiple among major crypto miners, with a market cap of $383,000 per petahash, making HIVE an attractive value proposition for investors. Looking at our annual production for 2021, HIVE was the only publicly reported miner to produce over 4,000 Bitcoin. This highlights our substantial growth and ongoing momentum. Additionally, we announced that our HODL position stands at 2,043 Bitcoin and approximately 25,400 Ethereum, equivalent to about 3,800 Bitcoin. This strong position in HODL reflects our superior annual production and efficiency. Taking a broader look at the industry, we examined a three-year Bitcoin mining chart indicating three significant bull rallies in the past year. Despite current challenges, Bitcoin maintains a support level in the low $40,000 range. Mining economics remain solid, emphasizing efficiency, low operating costs, and effective capital deployment. On the Ethereum side, mining economics show significant improvements, with current earnings per megahash being 3 to 4 times greater than three years ago. HIVE, as the largest Ethereum miner among publicly traded companies, is well-positioned to benefit from growth in this area. The London hard fork has positively impacted Ethereum mining economics, even amid recent price adjustments. With this snapshot, I will now pass it to Darcy Daubaras, our CFO.

Thank you very much, Aydin. And once again, I want to express my gratitude to all the investors and shareholders who are listening to us today. We will go over the financial statements for the third quarter ending December 31, 2021. As in previous quarters, we maintain a very strong and healthy balance sheet. We have $63.7 million in cash, over $26 million in investments, and we are particularly proud of our total current assets amounting to $268 million. A significant part of this growth comes from the increased production in our Bitcoin mining operations in Quebec and New Brunswick, allowing us to build up a HODL position with digital currencies totaling over $168 million at the end of December 31, 2021. This positions us well for the future, and we can utilize this reserve to fund our operations if necessary through coin sales, although we are mostly holding onto them for now. Looking at our gross mining margin from year to year, comparing Q3 of the 2021 fiscal year to Q3 of the 2020 fiscal year, we observed nearly a sixfold increase, rising from $10.1 million to $61.6 million. The increase in production has been remarkable, and we are very proud of our achievements. As previously mentioned, closing transactions during the COVID period has further strengthened HIVE going forward. In terms of our activities regarding new additions and miner purchases, we have consistently increased our hash rate over the last three months. Since September 30, our Bitcoin mining hash rate has risen by 35%, and for Ethereum, which has been our primary focus since 2017, we’ve increased our hash rate by 14%. The robust capitalization we have with our crypto asset portfolio puts us in an excellent position as we move into calendar 2022. One challenge we face, as noted by Frank and Aydin, is the rising difficulty rate. Although we’ve seen a decline in Ethereum mining because of this, the advantage is that we remain a low-cost producer of Ethereum. Our revenues from mining have continued to rise, despite our reduced coin output due to the increasing difficulty, as the price of Ethereum has also been going up. This trend is evident over the past five quarters in terms of the amount of Ethereum we've mined. This illustrates that our mining revenue is increasing due to higher prices, even as both Ethereum and Bitcoin face challenges with rising difficulty. Our revenue has grown from $13.7 million a year ago to $68.2 million, while our gross mining margin jumped from $10.6 million to $61.4 million. When comparing the quarter ended September to the one for December 31, 2021, we saw an increase from $52.6 million to $68.2 million. We have shown consistent quarter-over-quarter increases, as noted in Frank’s earlier slides. Additionally, our gross mining margin rose from $45 million in the quarter ended September 30, 2021, to $61.6 million in our most recent quarter. In terms of adjusted EBITDA, we've increased year-over-year from $13.7 million to $75.3 million, and our net income has also seen significant growth, rising from $17.2 million to $66.2 million. I want to clarify that adjusted EBITDA is a non-GAAP measure to avoid any confusion. Once again, we see how the Ethereum margins contribute to our company’s growth, with adjusted EBITDA rising from $52.3 million to $75.3 million in the most recent quarter. Our net income increased by about $7 million, and our gross profit margin moved from $45 million to $61.6 million in the completed quarter ended December 31. Thank you very much.

Thank you, Darcy, and thank you, Aydin. We want to demonstrate that we have extensive content available to assist people in making informed decisions. In the past quarter, we observed significant confusion and the propagation of fear, uncertainty, and doubt about the energy sources utilized in crypto mining. A major transformation occurred last year, especially with the shift of mining operations to North America, particularly Texas, as China closed down its mining activities. We've also noticed misinformation regarding energy consumption in different regions. To address this, we took Michael Saylor's 30-minute presentation and condensed it into a 3-minute segment with visuals and slides, which we translated into French, Swedish, Spanish, and English for investors worldwide. The facts show that energy consumption by the crypto industry is significantly lower than previously reported, and a larger percentage now comes from cleaner energy sources. However, some problematic areas remain, such as Kazakhstan and other nations where mining is their primary source of revenue. Overall, the leadership in the crypto mining industry has improved since HIVE's inception, fostering a greater commitment to reducing carbon footprints, a trend that will likely continue. We are proud to participate in the Bitcoin Mining Council and contribute to educational efforts. I encourage our global investors to engage with these visuals and share them. Please follow us, and if you have any questions, reach out to Darcy, Aydin, or myself, and we will respond as best we can. I want to express my gratitude to everyone, especially our loyal shareholders who have stood by us through this volatility, supporting our vision, including those who continue to mine Ethereum due to its profitability, and our plans for growth. We hope to bring more exciting news to our growth profile soon. We are constantly working for our shareholders. Thank you all, and thank you, Darcy and Aydin, for an outstanding year.