HIVE Digital Technologies Ltd. Q2 FY2024 Earnings Call

Hello, everyone, and welcome to today's webcast reviewing HIVE Digital Technologies financial results for the quarter ended September 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, and thank you to all shareholders and media representatives tuning into this webcast. We are pleased with our progress. This year promises to be an exciting roller coaster, and I believe the worst is behind us, with a brighter future ahead. I always kick off my presentations by highlighting the volatility of Bitcoin prices, which is crucial to understand. Each asset class has its own volatility, and Bitcoin's daily volatility is about six times that of the S&P 500 and gold, meaning that 70% of the time, it experiences fluctuations of around 6%. Recently, daily volatility for Bitcoin has stabilized, but over a 10 to 14-day period, it remains significantly higher. Part of the increased volatility stems from our shift away from mining Ethereum to our new AI strategy, which we will discuss shortly. It's essential for potential investors to comprehend the difference in standard deviation between HIVE and Bitcoin since Bitcoin's price movements dictate our stock performance. Our correlation to Bitcoin is around 97%, while correlations with other crypto mining stocks are very high as well. It's vital for investors to recognize that Bitcoin's price action is the main driver here. Bitcoin represents decentralized asset wealth, comparable to alternative asset classes like gold and private equity. The interest in Bitcoin remains strong despite market fluctuations. For example, attendance at conferences like the one in Lisbon, boasting over 100,000 participants, underscores the vibrant crypto community, which starkly contrasts with the gold market. The decentralized nodes validating the Bitcoin network number around 13,000 to 14,000, confirming its global relevance. Despite regulatory skepticism, a new demographic is increasingly viewing Bitcoin as a legitimate alternative asset. Recent data shows a surge in the number of Bitcoin addresses holding significant amounts, reaching record levels. This growing interest can be partially attributed to the potential approval of a Bitcoin ETF, which has sparked more enthusiasm. Bitcoin's capped supply of 21 million coins becomes increasingly relevant as adoption rises. With only a fraction left to mine, the dynamics of supply and demand suggest a potential price increase fueled by adoption, reflecting Metcalfe's law. Our mining operations remain competitive, with the best technology and cost-efficient electricity being crucial factors. However, rising difficulty levels in mining indicate that overall profitability may decrease as competition intensifies. As cryptocurrency mining companies face potential shutdowns in response to low profits, the difficulty may lessen, which could result in improved margins. We are also preparing for Bitcoin's halving event next April, which will cut reward earnings by half, making miners compete for fewer coins. This competitive landscape highlights the impact of market dynamics, similar to the relationships seen in other capital markets. Moving forward, we remain focused on innovation and efficiency, particularly with our green energy commitment in Canada, Iceland, and Sweden. We were early movers in public listing and technological advancements, and our expertise in mining Ethereum translates well into our AI strategy. HIVE has outperformed major indices this year, which is noteworthy given the broader market context. While the gold market grapples with regulatory challenges, Bitcoin is increasingly viewed as digital gold within a diversified asset portfolio. In terms of community outreach, our involvement in Boden, Sweden, emphasizes our commitment to the local area, promoting youth engagement through hockey initiatives. Our approach to shareholder dilution remains cautious, ensuring minimal impact on share value while maintaining our growth profile. As we look to the future, HIVE will continue to seek efficient cost management and growth opportunities, emphasizing solid corporate margins and cash flow. We have developed a strategy that differentiates us from traditional mining operations by focusing on innovative technologies that support sustainability. Our ventures into high-performance computing have been fruitful, yielding promising returns, and we see significant potential for scaling these operations. Now, I will hand over the presentation to our CFO, Darcy, who will provide further insights into our financial performance and strategy.

Thank you, Frank. As usual, at this point in the presentation, I will be taking you through a snapshot of the period, looking at the most recently completed quarter and some financial indicators. First of all, I'd like to remind our listeners that our earnings are comprised of our operational earnings, or call it cash flow usually, plus our investment earnings, which includes realized and unrealized earnings, which often includes non-cash charges. Mark-to-market accounting is a practice that involves adjusting the value of an asset to reflect its value as determined by current market conditions. The 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 or paper losses are generated through an accounting entry rather than the actual sale of the security. The swings in digital assets impact paper profits and losses each quarter. So our Bitcoin digital assets do generate unrealized gains and losses each quarter. It is important that investors understand the differences in operating earnings or losses in addition to mark-to-market paper gains and losses each quarter. Moving on to Slide 25. As we can see, the second part of this equation is the non-cash charges. A non-cash charge is a write-down or accounting expense that does not involve a cash payment, such as depreciation, amortization, depletion, stock-based compensation, and asset impairments. These are common non-cash charges that reduce earnings, but not cash flows. If we move on to Slide 26. You take a look at the most recently completed quarter of September 30, 2023; we recorded $22.8 million of revenue and experienced a $1.5 million loss in adjusted EBITDA. It was driven by the production of 801 Bitcoin equivalent mined tokens. As you can see on Slide 27, we continue to be proud to have a healthy balance sheet. Our cash position stood at $4.5 million at September 30, 2023, along with an additional $46.9 million in digital currencies, comprised almost entirely of Bitcoin. We also had $10 million in amounts receivable and prepaids. Amounts receivable mostly consist of sales tax receivables. The market value of our strategic investments is shown there also, and we remain to have a strong net cash position and healthy working capital to fund our operations and growth objectives. Our Bitcoin holdings at September 30, 2023, was 1,738 Bitcoin. This was down slightly from the June 30, 2023 month-end period of 1,957 Bitcoin. We have been strategically selling some of our Bitcoin over this quarter to continue to invest in higher efficiency ASIC machines to prepare for the halving in the first half of 2024, which is expected in April, and also for some investments we are making in our high-performance equipment. Moving on to Slide 28 and switching gears. Taking a look at our gross operating margin on a year-over-year basis, comparing the second quarter of this year to the second quarter last year. Our gross operating margin, which equates to our total revenues minus direct operating and maintenance costs, decreased in absolute dollars to $4.6 million, or a 20% gross operating margin in the most recent quarter compared to $15.9 million, or a 34% gross operating margin in the comparative year quarter. Gross mining margin is also partially dependent on various external network factors, including the high mining difficulty we continue to experience, the amount of digital currency rewards miners received, and the market price of the digital currencies at the time of mining, which were on average higher than the prior comparative period. In addition, the company is no longer mining Ethereum since the merge on September 14, 2022, which has contributed to the decrease in gross revenue from digital currency mining. In this most recent quarter, as you can see, we are reporting a net loss of $0.29 per share compared to the net loss experienced last year of $0.41 per share in that September 30, 2022, period. Moving to Slide 29. Taking a look at year-over-year revenue, we generated a total revenue in the second quarter of fiscal 2024 recently completed of $22.8 million versus $29.6 million in the previous year's second quarter. This decrease in revenues versus the same quarter in fiscal 2023 can be attributed to two main headlines. There is the ever-increasing Bitcoin difficulty hash rates over the past year that continues to be an experience in this ecosystem; and two, to a significant extent, the Ethereum merge that happened on September 15, 2022. As this quarter's operations do not include any Ethereum revenues, that is reflected in our results. This double punch contributed strongly to the significant drop in revenues that 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 $4.6 million in the most recent quarter compared to $15.9 million in the prior year comparative. Now taking a look at the next slide of our quarter-over-quarter fiscal Q2. We generated revenue in the second quarter of fiscal 2024 of $22.8 million compared to $23.6 million in the previous Q1 quarter ended June 30, 2023. The decrease in revenues versus the previous quarter was impacted by an average stagnant price of Bitcoin comparing the two quarters, and 33% less Bitcoin mined in this current quarter. Our gross mining margin decreased in absolute dollars to $4.6 million in the most recent quarter compared to $8 million in the prior year comparative. The decrease in gross mining margin versus the prior quarter was impacted for the same reasons as stated above for revenues. Moving to Slide 31. Our adjusted EBITDA decreased in the second quarter of fiscal 2024 to negative $1.5 million versus a positive adjusted EBITDA experienced of $5.3 million in the prior quarter. I'd like to thank you, our loyal shareholders and stakeholders. And at this time, I'd like to turn the presentation over to our CEO and President, Aydin Kilic. Aydin?

Thank you, Darcy, for that excellent summary of our fiscal quarterly performance. I'm going to provide a strategic outlook for the upcoming year, discuss our production to date, and recap our growth over the last year. It's been a phenomenal year for HIVE. Let’s get started. As of mid-November 2023, we are back to producing over 9 Bitcoin daily. This is a significant production number as the entire Bitcoin blockchain has a block reward of 900 Bitcoin per day, meaning that 1% of that results in 9 Bitcoin daily. Additionally, transaction fees can fluctuate from 1% to 2%, and we recently experienced a rally up to 9% to 10%. However, the core block reward remains at 900 Bitcoin a day. It's important to note that earning 9 Bitcoin daily is not guaranteed even with 1% of the network. There is a factor called Bitcoin network difficulty, which affects earnings over time. If the difficulty doubles while your hash rate remains constant, your earnings would halved. As difficulty increases, our production decreases correspondingly, and vice versa. Currently, difficulty is around $63 trillion, which has nearly doubled from $32 trillion a year ago. If we hadn’t expanded, our production would have halved since last year, but instead of that, we are producing more Bitcoin today. Last year, in early November 2022, we mined just over 8 Bitcoin a day, and now we are producing over 9 Bitcoin daily. This showcases our intentional scaling to maximize profits, as we've grown by 100% in production despite the increase in difficulty. In a typical 30-day month, our production of 9 Bitcoin daily translates to almost 270 Bitcoin a month, and in the last 12 months, we have mined 3,220 Bitcoins. Despite rising difficulty, our production has remained steady. For the last quarter, we produced 801 Bitcoin, and despite fluctuations in Bitcoin price impacting our revenue, we maintained a positive gross mining margin even during bearish market conditions. For instance, during the period-end December 2022, our revenue dropped significantly due to the FTX bankruptcy, dropping Bitcoin prices to about $16,500. This affected our margins, which are illustrated by the green bar representing gross mining margin. Despite the challenges, we still achieved a positive gross mining margin of $4 million at the end of March, which doubled to $8 million by the end of June. This quarter, our gross mining margin has decreased to $4.6 million, despite a steady revenue of $22.8 million, down slightly from $23.6 million last quarter due to increased difficulty. There has been some speculation regarding energy taxes in Sweden that people assumed would negatively impact us. What actually happened was a rebate that affected the entire data center industry was withdrawn. The increased energy tax we faced amounts to about $1.9 million, which came into effect in the quarter ending September, but we still managed to generate income from our grid balancing program in Sweden to help offset costs. This reflects our ability to navigate challenges while maintaining a positive gross mining margin. Overall, our current production stands at approximately 9.2 Bitcoin daily, along with $250,000 monthly from our high-performance computing GPU operations, a significant increase from $250,000 quarterly last period. We anticipate continued growth in our core Bitcoin mining business as gross mining margins stabilize. This past year, we increased our hash rate by 80% while strategically considering our expansion plans, with a target of 6 exahash for next year, which would represent a further 40% growth. As we prepare for the upcoming halving, we've strategically acquired new machines, focusing on immediate delivery and cost-effective purchases to support our scaling efforts without causing shareholder dilution. We also see significant potential in our AI GPU computing, which has demonstrated impressive growth. In our recent developments, we have successfully transitioned our operations in Boden and are launching new Tier 3 data centers, positioning us to reach ambitious financial targets. Stay connected with us through our social media platforms for the latest updates. Thank you for your attention.