HIVE Digital Technologies Ltd. Q1 FY2024 Earnings Call

Welcome to today's webcast reviewing HIVE Digital Technologies Financial Results for the First Quarter ended June 30, 2023. On Slide #2, I would like to briefly note disclosures. Except for statements of historical fact, this presentation contains forward-looking information within the meaning of the applicable Canadian and U.S. securities regulations. These forward-looking statements are based on expectations, estimates and assumptions as of the date of this presentation. On the next slide, I'm pleased to introduce today's presenters: Frank Holmes, Executive Chairman; Aydin Kilic, President and CEO; and Darcy Daubaras, Chief Financial Officer. I would now like to hand the presentation over to Mr. Frank Holmes for a macro recap of the quarter. Frank?

Thank you, Holly. I want to express my gratitude to all our loyal shareholders. I hope you find this information informative, timely, and somewhat entertaining. I've been observing the unique volatility of different asset classes. Recently, I noticed that HIVE's volatility over ten days was at 26%, and rolling over a month, it pushed 50%, which I find remarkable. Initially, we became a proxy for gold investors, and now crypto investors are also exploring us, particularly those cautious after events like Celsius and FTX. When considering an investment in HIVE, it's essential to recognize that our volatility is six times that of gold or the S&P 500 over a ten-day period. This context makes the idea of buying the dip a strategic consideration. Interestingly, it seems that a quantitative fund, possibly Citadel, has been trading crypto stocks as a basket every minute. I doubt retail investors are entering collectively like this. However, the correlations among these stocks are significantly high: HIVE's correlation is 0.86 with Riot, 0.96 with Bitfarms, and 0.94 with Hut 8, indicating a strong link to Bitcoin as well. HIVE offers high-quality exposure similar to gold stocks, which can provide two to three times the leverage on the upside, but also exposes investors to greater risks during downturns. This has been evident over the year, as seen in the gold surge through mid-July, which reached 81%, while gold itself only rose 7% and the S&P 17%. In contrast, HIVE experienced a remarkable increase of 315%, showcasing a significant 12-month rate of return, largely due to this year's rebound. HIVE Digital Technologies has adopted a new name and is strategically expanding in artificial intelligence, utilizing NVIDIA GPU cards. We purchased our NVIDIA cards not just for Ethereum mining but also for future capabilities we envisioned over three years ago as we developed a B2B AI functionality. This potential accelerated rapidly with the rise of ChatGPT. While some competitors have invested in NVIDIA chips for single purposes, our acquisitions have been multifaceted. Entering the AI space is complex. Competitors often announce their intentions, but HIVE brings substantial experience in GPU mining and branching into AI services. Mining Bitcoin is straightforward: it only requires quality chips and energy efficiency. However, managing an AI data center presents far greater complexity. To put it simply, managing AI services is like trying to placate several kids in a fast-food restaurant, each with unique requests. Clients look for various services like memory options and are willing to pay differently based on their needs. This intricate landscape requires a skill set that few possess, but HIVE does, and we bring over six years of GPU mining experience. Regarding the macro landscape, Bitcoin represents decentralized portable wealth. Observing government policies is critical, regardless of political affiliation. Economic policies significantly influence currencies and, ultimately, gold and Bitcoin's standing as valuable asset classes. Notably, PayPal's recent announcement has sparked potential global adoption of Bitcoin through their vast user base of over 400 million accounts. Unlike the backlash faced by Facebook’s Libra Coin, PayPal already has a reputation in digital payments, which gives them an advantage. Following Ripple's success against the SEC, confidence in launching cryptocurrency initiatives appears renewed. Overall, HIVE has positioned itself as a technology leader, launching in Canada in September 2017. We’ve made significant strides, from acquiring data centers to developing ASIC mining rigs with Intel chips and focusing on green energy. Our leadership team is adept, with Aydin Kilic as our CEO and President, Darcy Daubaras as CFO, and dedicated personnel across various roles. HIVE's commitment to green energy is evidenced in our initiatives in Canada, Iceland, and Sweden, alongside our community involvement, such as sponsoring local hockey teams. We've also explored sustainable food practices, aiming to build a greenhouse powered by our facility's heat. Our capital structure reflects our rebranding efforts while maintaining a cautious approach toward investments and financing. Despite industry challenges and increasing competition in Bitcoin mining, I remain optimistic about America’s innovative dominance in the ecosystem. HIVE has consistently maintained a low SG&A ratio per Bitcoin mined, reinforcing our efficiency with minimal dilution from stock options. As we expand into Latin America, our Bitcoin production continues to excel, and we're proud to see share price growth over the last month. Overall, the move towards clean and green Bitcoin will increasingly attract value as we reach a capped supply of 21 million coins. The recent growth in ordinals has opened new avenues for Bitcoin, which was traditionally limited in its use cases. The Ordinals protocol allows for the creation and storage of digital artifacts directly on the Bitcoin blockchain, leading to increased network utility and excitement within the community. This technology enables various forms of data to be embedded directly onto Satoshis, creating a new category of Bitcoin NFTs. The rise in transactions within the Bitcoin network is a sign of potential growth opportunities, especially with PayPal’s initiatives and the lightning network enhancing transaction efficiency. I look forward to the developments ahead and will now hand over the presentation to Darcy, our CFO, for financial highlights. Thank you, everyone.

Thank you, Frank. As usual, around this time of the presentation, I will be taking you through a snapshot of the past year, looking at the most recently completed quarter and some indicators. First of all, I'd like to remind our listeners that our earnings are comprised of our operational earnings plus our investment earnings, which includes realized and unrealized earnings, a lot of which include non-cash charges. Mark-to-market accounting is an accounting practice that involves adjusting the value of an asset to reflect its value as determined by current market conditions. Market value is determined based on what a company would get for the asset if it were sold at that point in time. Mark-to-market losses are paper losses generated through an accounting entry rather than the actual sale of the security. Swings in digital assets impact paper profits and losses each quarter. So our Bitcoin digital assets do generate unrealized gains and losses each quarter depending on the price of Bitcoin compared to the prior reported period. It's important that investors understand the differences in operating earnings or losses in addition to mark-to-market paper gains and losses each quarter, as it can swing the results drastically. A non-cash charge is a write-down or accounting expense that does not involve a cash payment. Depreciation, amortization, depletion, stock-based compensation, and asset impairments are common non-cash charges that reduce earnings but not cash flows. During this most recently completed quarter of June 30, 2023, we recorded $23.6 million of revenue and $5.3 million in adjusted EBITDA. This was driven by the production of 834 Bitcoin equivalent mined at an average cost of USD 18,687 per Bitcoin. Our cash position stood at $4.5 million at June 30, 2023, along with an additional $59.5 million in Bitcoin digital currencies. We also had $9 million in amounts receivable and prepaids. Amounts receivable mainly consisted of sales tax receivables this quarter. The market value of our strategic investments decreased during the quarter by approximately $630,000 due to the mark-to-market accounting spoken about, bringing it to $2.2 million. We did not acquire or dispose of any investments during this period. We maintain a strong net cash position and healthy working capital to fund our operations and growth. Our Bitcoin holdings at June 30, 2023, were 1,957 Bitcoin, down from the June 2022 month-end period of 3,231. We have strategically sold some of our Bitcoin over this quarter to invest in higher efficiency ASIC machines to prepare for the halving in the first half of 2024 and to invest in high-performance computing equipment. Our gross operating margin, which equates to our total revenues minus direct operating and maintenance costs, decreased in absolute dollars to $8 million, or 34% in the most recent quarter, compared to $27 million or 61% in the prior year comparative quarter. Gross mining margin is also partially dependent on various external network factors, including the HIVE mining difficulty we continue to experience, the amount of digital currency rewards miners receive, and the market price of the digital currencies at the time of mining, which are on average lower than the prior comparative period. In addition, the company is no longer mining Ethereum since the merger took place on September 14, 2022, which has contributed to the decrease in gross revenue from digital currency mining by approximately 47%, while operating costs decreased by only 9%. In this most recent quarter, we are reporting a loss of $0.19 per share compared to a net loss of $1.41 per share reported in Q1 last year. Taking a look at our year-over-year revenue on the next slide, we generated total revenue in the first quarter of fiscal 2024 of $23.6 million versus $44.2 million in the prior year fourth quarter. The decrease in revenues compared to the same quarter in fiscal 2023 can be attributed to three main headlines, and these might sound familiar: the ever-increasing Bitcoin difficulty, hash rates over the past year, the significant drop in the price of Bitcoin, and the Ethereum merger on September 15, 2022, as this quarter and operations moving forward do not include any Ethereum revenues. This triple punch contributed strongly to the significant drop in revenues we experienced. As mentioned previously, our gross mining margin, which equates to our revenues minus direct operating and maintenance costs, decreased in absolute dollars to $8 million in the most recent quarter compared to $27 million in the prior year comparative. Moving on to the next slide, comparing our current fiscal Q1 quarter to the previous Q4 quarter, we generated revenue in the first quarter of fiscal 2024 of $23.6 million versus $18.2 million in the previous quarter. The increase in revenues compared to the prior quarter was impacted by a stronger price of Bitcoin and 42 more Bitcoin mined this quarter. As the Ethereum merger took place on September 14, 2022, neither of these quarters had any Ethereum mining revenues. Our gross mining margin increased in absolute dollars to $8 million in the most recent quarter compared to $4 million in the prior quarter comparative. The increase in gross mining margin versus the prior quarter was impacted for the same reasons as stated above for revenues. Operating and maintenance costs only marginally increased by 9%. Moving on to the next slide, our adjusted EBITDA increased in this first quarter of fiscal 2024 to positive $5.3 million versus a negative adjusted EBITDA of $1.4 million in the prior quarter. I'll highlight again that adjusted EBITDA is a non-IFRS figure. In the first quarter of fiscal 2024, we experienced a loss of $16.3 million compared to a profit of $6.6 million in the prior quarter. The main reason for the profit in the prior quarter and loss in the current quarter, apart from the reasons mentioned earlier, is the increase in Bitcoin price in Q4 2023 leading to a significant revaluation of digital currency gains, while the BTC price did not fluctuate too much in the current period. I’d like to thank our loyal stakeholders. I would now like to turn the presentation over to our CEO and President, Aydin Kilic. Aydin?

Thank you, Darcy. An executive update on our business. Let's dive into it. So it was a great quarter in terms of Bitcoin mining profit margins. We saw an uptick this quarter, achieving 34%. You could see that the difficulty actually increased, averaging a 24% quarter-over-quarter hike, but we managed to keep our cost to produce Bitcoin relatively consistent, with only a 4% increase. We also experienced a strong Bitcoin price rally to $28,000. Additionally, although difficulty increased by 24%, we produced 5% more coins. Thus, we outpaced the growth of the network difficulty as we march towards our year-end target of reaching 6 exahash, and we're currently sitting at 3.7 exahash, which I'll discuss in more detail shortly. Recently, in July 2023, we issued a press release indicating we've produced 263 Bitcoin, maintaining an average hash rate during the month of 3.46 exahash. We have been steadily increasing our production by plugging in machines, concluding the month at 3.64 exahash and averaging 8.5 Bitcoin per day, with an impressive 75.9 Bitcoin per exahash. This consistent performance ranks us among the top crypto miners in terms of Bitcoin production per exahash, a testament to our technical team who operate high-fidelity software running 24/7 across 7 time zones. We ensure our facilities run optimally, and I take pride in my team for their outstanding performance. Now regarding ASIC acquisitions. To date, we have purchased over 11,000 ASICs just in 2023 alone. This figure excludes the purchases made in November and December of last year. The S19j Pros we purchased for about $11 per terahash in December have nearly achieved an 80% return on investment, a stellar ROI profile considering it's only been 8 months. Our target is a 1-year ROI on those machines. This distinction illustrates our analytical approach to Bitcoin mining hash economics, as we constantly search for the best deals, evaluating the dollar per terahash price relative to machine efficiency. We don't just purchase the most expensive machines blindly; we prioritize optimization and analytics to see favorable cash flow returns on our capital. Throughout 2023, especially from February onwards, we have executed a series of acquisitions that encompass pro-plus, jpros, and several XPs as we aim to enhance our overall global average fleet efficiency. An exciting announcement made today, alongside our financials, is the purchase of an additional 2,000 S19 XPs, which will be delivered immediately. We prefer to buy machines that are readily available for shipment so once they arrive, they can begin generating returns right away. As for our hash growth outlook, we target achieving 6 exahash by the end of the year. Currently, we have about 2,000 machines from our 11,000 machine order prepared to be plugged in within the next week or two. We’re adding some PDUs to New Brunswick, so we should reach 4 exahash within a week or two. Additionally, I've updated our September target to 4.2 exahash to encompass the recently acquired 2,000 XPs. In terms of our infrastructure, we have 150 megawatts of operating capacity. We have slightly expanded our footprint in Iceland. We might not always utilize all this power capacity because we may choose to downclock some machines for better unit economics, maximizing efficiency while mining profitably. To communicate with the market, we are now accomplished and capable of providing 150 megawatts of operational infrastructure. As for our flagship facility in New Brunswick, it consists of 4 buildings and 2 dedicated substations, both of which we own, along with the land and infrastructure. The shot you see depicts one of our significant data halls, showcasing the dual pass cathedral architecture – a facility I find a pleasure to visit, especially in winter covered in snow. Now, regarding our corporate strategy, I will revisit the analysis we've talked about previously since we expanded on that. HIVE operates with a lean mindset, reflected in our high revenue per employee. Research from third parties such as Luxor and Anthony Powers indicate we maintain one of the lowest SG&A ratios in relation to revenue. Our share-based compensation is minimal, and last year, we had the lowest share dilution while retaining a robust position of 2,000 Bitcoin. Moving on to the next slide, it’s crucial to understand the implications for your earnings. Everyone discusses revenue, which is measured similarly across all crypto miners. However, note that non-cash charges vary by company due to auditor discretion. For example, we apply aggressive 2-year depreciation for ASICs, unlike other companies who may use different practices. But what every firm records uniformly are their revenues, the cost of goods sold, which represents direct operating costs such as electricity, data center costs, staffing, insurance, etc., necessary to operate a Bitcoin mining operation as a public company. Additionally, SG&A encompasses corporate operating costs such as executive salaries, legal fees, audit fees, insurance, travel, sponsorships, and other operational expenses. These present an apple-to-apples comparison on a cash basis. Gross mining margins reported come from public filings. HIVE's margins, along with a few competitors, are above $70 million. In contrast, some smaller firms might be at a loss. This evaluation informs effective investment strategies and potential market movements. Looking forward, hash pricing is now hovering around $0.07. However, in May, we observed a notable rally surpassing $0.10, largely driven by ordinals. Collaborating with one of our strategic partners, we scanned our wallet and discovered some uncommon Satoshis, which could secure a fantastic multiple. Lastly, on the high-performance computing front, while HIVE excels as a Bitcoin miner, we’re also recognized for our fleet of NVIDIA GPUs. To illustrate briefly, at the peak of our heat mining, we operated 150,000 GPUs; around 110,000 of them were AMD gaming-grade GPUs, efficiently mining Ethereum since 2018, yielding an ROI of 4x before the merge. These profits directed towards expanding our Bitcoin initiatives, generating high profit margins of around 80-90%. Post-merge, we liquidated our AMDs, maintaining our 38,000 NVIDIA data center-grade GPUs, which have the capacity for HPC. We’re initiating an exciting journey, bolstering our AI infrastructure now. The facility depicted here is in Boden, Sweden, and notably, it doesn't resemble a conventional crypto mining facility; it's structured like a Tier 3 data center. We possess six years of GPU operation experience, presenting us as experts to operate significant GPU fleets. Many businesses opted for retail-grade Ethereum mining, while HIVE had one of the largest Ethereum mines globally. Therefore, all our expertise is funneled into our AI infrastructure. Moving on to our AI outlook, I've previously mentioned our rebranding to HIVE Digital Technologies. AI and cryptocurrency are fundamental components of Web 3. With innovations in the Metaverse and DAOs driving development in communities like ours, we aim to establish a more adaptive web experience. Web 3 promotes a trustless and permissionless environment facilitated by blockchain technology, with crypto serving as the native currency. AI also plays a vital role in this vision. We will provide enterprise-grade AI compute services through HIVE Cloud, designed specifically for organizational needs like large language models that respect client data confidentiality. We have a 6-year track record as a leading crypto miner, currently poised to realize about $1 million in revenue from our beta GPU services. As shown on this quarter’s report, we generated approximately $220,000 from that beta test, demonstrating strong prospects as we scale our AI offerings going forward. Thank you all for attending, and please follow my new Twitter handle @AydinKilicHIVE as we enhance our social media presence. I look forward to engaging with you all there and keeping you updated on our exciting developments in the AI domain.