HIVE Digital Technologies Ltd. Q3 FY2024 Earnings Call

Hello, everyone, and welcome to today's webcast reviewing HIVE Digital Technologies financial results for the quarter ended December 31, 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. On the next slide, I would now like to hand the presentation over to Mr. Frank Holmes. Frank?

Thank you, Holly, and thanks to all shareholders and stakeholders involved in our journey. I like to start by discussing the volatility that comes with emerging countries, sectors, industries, and technologies. Historically, gold has been more volatile than the S&P, but their volatility levels have aligned over short periods. Bitcoin, however, is significantly more volatile than both gold and the S&P. For instance, over ten days, Bitcoin's volatility can fluctuate around 7%, while NVIDIA's is about 10%. Tesla experiences even more volatility at around 13%, MicroStrategy at 16%, and HIVE, which is especially volatile, has seen fluctuations of 25%. This volatility poses challenges not only for investors but also for business operations, as we navigate the underlying volatility of Bitcoin effectively. The visual we provided illustrates the correlation among our basket of miners, which all tend to move with Bitcoin's direction. Additionally, we have partnered with Bitcoin Magazine to illustrate the potential of fundable energy available in the marketplace, which has caught the attention of major banks and lobbyists who seem concerned about the Bitcoin network. It's crucial for investors to see past the misinformation and uncertainty surrounding Bitcoin—there is no CEO, no Board of Directors, no balance sheet, and no marketing budget—only a concept, some software, and a pivotal algorithm with encryption. The Bitcoin network has grown through 17,000 decentralized nodes validating transactions, independent of large institutional creation, driven instead by community participation and investment in infrastructure development. Reflecting on our journey, I began pursuing a Bitcoin ETF back in 2017, realizing it would be a challenging feat. This led to co-founding HIVE, initially focusing on mining in locations like Iceland, Sweden, and Canada exclusively with green energy. Throughout this time, we've faced numerous challenges, especially with mining difficulty inversely correlating to Bitcoin's adoption and interest in mining. Despite doubling our operations, we still represent only 1% of the global network, all while competition increases and we mine about 900 new Bitcoins daily. When Bitcoin's difficulty rises, margins compress. We anticipate after the upcoming halving, similar to past experiences, many miners will exit the space leading to a potential reduction in difficulty and improvement in margins. Our focus has shifted from Ethereum mining as we adapt to evolving market conditions. HIVE is committed to green energy initiatives across Canada, Iceland, and Sweden, and we proudly lead in various domains: we were the first to go public, to develop ASIC mining technology with Intel, to acquire data centers, and to balance energy grids, while tackling energy waste effectively. Our leadership team includes myself as Executive Chair, Aydin Kilic as CEO, Darcy Daubaras as CFO, Johanna Thornblad as Country President for Sweden, and Gabriel Ibghy as General Counsel. HIVE and Bitcoin's performance has outpaced gold and the S&P in recent times, but it's essential to note the inherent volatility. In the previous cycle, gold and Bitcoin have emerged as decentralized, portable assets, gaining traction through various ETF offerings, similar to how gold's value surged with the GLD ETF launch. HIVE has approached its financial management conservatively, ensuring preservation of shareholder value while others took on excessive dilution. In our community, we actively engage and offer support, such as sponsoring local hockey teams in Boden, Sweden. The period leading to the FTX bankruptcy was challenging, with significant drops in Bitcoin price and the transition from Ethereum's proof-of-work to proof-of-stake affecting our operations. Despite adversity, we maintained a profit margin while navigating the loss of our stable Ethereum mining revenue. A recent report ranks HIVE second in mining efficiency while we have managed to maintain low operating costs relative to industry standards. Our focus is beyond breakeven; we aim for growth and solidify our hold on Bitcoin. We face new opportunities in the AI chip market where demand surpasses supply, allowing us to capitalize on our NVIDIA acquisition. The increasing demand for AI chips presents a unique landscape where we believe HIVE can thrive leveraging our high-performance computing resources. With the growth trajectory projected at $15.7 trillion by 2030 due to AI developments, capital raising remains a challenge but is imperative for growth. The demand for AI extends across many industries, showcasing vast opportunities for companies able to innovate and deliver solutions effectively. At HIVE, our goal is to integrate cutting-edge technology with a commitment to sustainability, continuing to drive towards our next milestone of achieving $250,000 weekly in revenue. Now, I would like to turn the presentation over to our diligent CFO, Darcy Daubaras.

Great. Thank you very much, Frank. As usual, at this part of the presentation, I'll be taking you through a snapshot of the most recently completed period, looking at some financial indicators. First of all, I'd like to remind our stakeholders that our earnings comprise our operational earnings or cash flow plus our investment earnings, which includes realized and unrealized earnings, often including noncash charges. Mark-to-market is an accounting 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 was sold at that point in time. Next slide, please. Mark-to-market losses are our paper losses generated through an accounting entry rather than the actual sale of the security. The swings in additional assets impact paper profits and losses each quarter. Our Bitcoin digital assets generate unrealized gains and losses each quarter. It's important that our stakeholders and investors understand the differences in operating earnings, or losses, in addition to mark-to-market paper gains and losses each quarter. Noncash charges are a write-down or accounting expense that does not involve a cash payment. Depreciation, amortization, depletion, stock-based compensation, and asset impairments are common noncash charges that reduce earnings but not cash flows. Next slide, please. During our most recently completed quarter of December 31, 2023—which is our Q4, or sorry, our Q3 for our 2024 March 31 year-end—we recorded $31.3 million of revenue and a $17.3 million profit in adjusted EBITDA. This was driven by the production of 830 Bitcoin-equivalent mined and increasing Bitcoin prices during the quarter, which we're seeing starting to come out of this bear market. Next slide, please. As you can see here, we continue to be proud of having a healthy balance sheet. Our cash position stood at $17.8 million at December 31, 2023, along with an additional $71.9 million in digital currencies comprised almost entirely of Bitcoin. We also had $8.2 million in accounts and amounts receivable and prepaids, a decrease from the prior period. The market value of our strategic investments also increased due to the mark-to-market on these holdings. We maintain a strong net cash position and healthy working capital to fund our operations and growth objectives that we've been working on consistently. Next slide, please. Now switching gears and taking a look at our gross operating margin on a year-over-year basis, comparing the third quarter to the third quarter, our gross operating margin, which equates to our total revenues minus direct operating and maintenance costs, increased in absolute dollars to $11.3 million or 36% in the most recent quarter compared to $3.6 million or 25% in the prior year comparative quarter. As you could also see there, the average price of Bitcoin has had a dramatic increase on our results this quarter. Gross mining margin is also partially dependent on various network factors, including the high mining difficulty we are experiencing; the amount of digital currency rewards miners receive; and, as mentioned, the market price of the digital currencies, which were, on average, higher than the comparative period. In this most recent quarter, we are reporting a net loss of $0.08 per share compared to a net loss of $1.13 per share reported in the December 31, 2022, last year. Moving on to the next slide, our year-over-year revenue. We generated total revenue in the third quarter of fiscal 2024 of $31.3 million versus $14.3 million in the previous year third quarter. This increase in revenues versus the same quarter in fiscal 2023 can be attributed mostly to the average Bitcoin price, which is double what it was last year. This is even with the ever-increasing Bitcoin difficulty hash rates that we've experienced over the last 12 months. As mentioned previously, our gross mining margin, which equates to our revenues minus direct operating and maintenance costs, increased in absolute dollars to $11.3 million in the most recent quarter compared to $3.6 million in the prior period comparative. Turning to the next slide, now comparing our current fiscal Q3 quarter to the previous Q2 quarter, we generated revenue in this quarter of $31.3 million versus $22.8 million in the previous quarter. This increase in revenues versus the prior quarter was impacted positively by the increases in the price of Bitcoin that we are seeing. Our gross operating margin, also in absolute dollars, rose to $11.3 million in the most recent quarter compared to $4.6 million in the prior quarter comparative. The increase in gross mining margin versus the prior quarter was positively impacted by the increase in the price of Bitcoin in the quarter. Switching to the next slide. Our adjusted EBITDA increased in the third quarter of fiscal 2024 to positive $70.3 million versus a negative adjusted EBITDA of $1.5 million just a quarter ago. I will highlight again for our stakeholders that adjusted EBITDA is a non-IFRS figure. In the third quarter of fiscal 2024, we experienced a loss of $7 million compared to a loss of $24.5 million in the prior quarter. At this time, I'd like to thank our loyal stakeholders and turn the presentation over to our President and CEO, Aydin Kilic, for an executive update. Aydin?

Thank you, Darcy. It's been a phenomenal quarter for us, and I'm excited to provide a little snapshot into the accomplishments we've had strategically, but also what lays ahead. So I'm going to talk about our HPC and AI business first. It's quite exciting. These are new pictures from our deploy in Montreal. This is a Tier 3 data center. You can see on the left how clean and organized these racks are. This is very different than a crypto mining center. I want to explain to everybody that our AI compute is not in our Bitcoin mine. They're 2 physically different facilities, like hours apart by car. This is what a Tier 3 looks like; you can eat off the floor. On the right is our first cluster of nodes; we have gotten 96 H100s. These were just installed last week, and they're going to be cash flowing in a couple of weeks as we build out the networking components. A note on that: a lot of people are talking about buying H100s. But, hey, they don't have any pedigree or experience running GPU clusters, number one; number two, there are so many other components at the infrastructure level that you have to build out that I'm not going to get into details because it's a little bit of a trade secret, and there is a certain level of know-how that is not common in crypto mining. This is in the data center world when you're building high bandwidth, tight elasticity redundant systems. So, anyways, it's very exciting. And next slide. Here's why. So we've talked about growing. We did almost $1 million of revenue this last quarter. But notably, as of the end of the quarter, we actually reached a run rate revenue of $5 million. That's because we're growing, right? We're growing. The infrastructure has been installed now, which is exciting. That's why we provided that picture. The marketplaces we work with are having more demand as we've got servers listed. We are targeting $50,000 a day for the end of this current quarter, which would be a $20 million annual run rate revenue. This is very exciting for us because, going into halving, we have a high-margin business with our GPUs that will supplement the income while there will be a lot of volatility in the Bitcoin mining space. It's a very exciting time. And again, I want to emphasize—we've already built the infrastructure; we built it in Stockholm; we built it in Montreal. The GPUs are installed; they're up and running. You saw the H100s. We've got 2 clusters—2 more clusters in Stockholm and Montreal. We even have a small cluster in Boden, where we're doing some high-performance computing in a small section of our facility. So it's very exciting, and I'm very proud of my team as we work towards our quarter-end target. Next slide, please. Of course, with the halving coming up, here's our Bitcoin mining quarterly update. It was a good quarter for us. We produced 830 Bitcoin from September to December, averaging 9 Bitcoin a day, which is that magic number we like to maintain. There are 900 Bitcoin a day rewarded; 1% of 900 is 9 Bitcoin a day. This is up 4% quarter-over-quarter. What's remarkable is that the difficulty this quarter was 19% higher on average than the difficulty in the previous quarter. We actually grew our production by 4%, even though difficulty grew by 19%. So we grew more than the Bitcoin mining network group, which is fantastic. Next slide, please. Now here it is operationally and financially; I know Darcy touched on some of these things. Revenue, $30 million; gross mining margin, $11 million; and our exahash, we hit over 4 exahash. Now next slide. Let's look at the growth factors here. We had 10% growth in our hash rate. We had almost 40% growth in our revenue. But we had almost 150% growth in our gross mining margin, which is phenomenal. We've been lean and mean through the bear market. As profits return, as Bitcoin flourishes, having those low operating costs means we have more profit on the table. I'm very pleased that we've got a big increase in our gross mining margin. Our corporate G&A for this quarter is only $3.8 million. So what that means is, our corporate margin, if you take the gross mining margin of $11.3 million and subtract the $3.8 million in cash, G&A operating costs, our corporate margin, the company still made $7.5 million. That is a statistic I like to talk about because when you look at a lot of crypto miners and you subtract their G&A costs off their gross mining margin, many of the miners are actually in the red. We've mined profitably. We're going to do a little historical recap. We mined profitably even with our G&A through the entire bear market. I'm very proud of my team for that. Next slide. Now it's about understanding the intrinsic nature of the business. So even though our production grew 10% and difficulty grew 19%, our revenue grew almost by 40%, right? The reason why is hash price was up this quarter. Now hash price is very volatile. This is what it actually looks like on the right. On the left, it's summarized in a single average figure for the entire quarter. In Q3, it was about $80,000 per exahash per day. That means whether you're mining in Kazakhstan, Canada, or in our case, Sweden or Iceland, you're earning USD 82,000 a day for every exahash that you have on the Bitcoin mining network. This is a network-wide statistic. As crypto miners, we analyze these statistics. I understand the underlying health, what we call hash rate economics. Now the previous quarter was $68,000 an exahash per day. So you see there's a 20% increase quarter-over-quarter. While we grew our production 10%, the profitability of the hash power also grew by 20%. That's allowed us to realize fantastic numbers this quarter. Next slide, please. By the way, we had a really strong finish to the calendar year. We announced our S21 purchase. We have seen how our stock has been trading at a discount, and it is fairly common knowledge that there are a lot of funds that will take aggressive short positions on companies. We were able to cover that short. With the announcement of our S21 purchase and special warrant financing of CAD 28 million, we rallied at the end of the year. It was a really strong finish to the year for HIVE shareholders, and I'd like to thank our loyal shareholders as we continue to navigate challenges and hurdles. As a result of that, we were actually the best performing stock in British Columbia last year. We were covered by BCBusiness Magazine as the best full year performance stock. So that was exciting. Next slide, please. But let's get back to business. I want to provide a macro summary for all our loyal shareholders and investors who are curious about the halving event. To understand the future, you need to know your past; you need to know your history. We're plotting here the hash price, dollars per exahash per day, from summer of 2022 until February of 2024. Why am I going back to summer 2022? That was when Celsius went bankrupt, when FTX went bankrupt. You see on the left of this chart $100,000 an exahash a day; those are healthy mining economics. After the Celsius news came out, and when FTX came out, hash price dropped to $60,000 an exahash per day. That's that blue line. Pay attention to that blue line. $60,000 an exahash per day is pretty brutal. Those economics caused other crypto miners to file for bankruptcy during 2022. You see the floor; it never dipped below $60,000 a day. Why? Because the difficulty will drop if Bitcoin price does not increase, right? You’ve noticed how the hash price broadly tracked the drop in Bitcoin mining price, now the orange line, if you pay attention to 2022. After Bitcoin dropped and stayed at the $40,000 trough, so did the hash price. Then it finally recovered when Bitcoin price recovered. We had a nice rally from Ordinals, which weren't correlated to Bitcoin price but rather transaction fees, which was good for miners because the demand for sending and receiving Bitcoin was high as people paid higher transaction fees. That gave you that nice little spike. But you know what? Bitcoin fell again and was below $30,000. Around September, October, again, we are in that $60,000 an exahash per day territory. This has been that floor exahash value we've seen twice in the last 1.5 years; it's never fallen below that. Why? Because miners need to be profitable, and if it's unprofitable, miners shut down, and difficulty drops. There’s parity between Bitcoin pricing and difficulty, which is best represented by the hash price. I explained this for our loyal shareholders and investors who are keen to learn about the nuances of crypto mining economics, which we have great expertise at HIVE. We're not about scale—we're about navigating these volatile markets as effectively as possible, efficiently low cost, and driving for the best cash flow return on invested capital. More recently, we saw another rally with the ETF news, good price action where Bitcoin rallied from $30,000 to $40,000. Even when Bitcoin was static at the $40,000 range in December, we saw another surge in transaction fees relating to the ETF news, which caused a nice rally in hash price to the $120,000 range for a short time. Bitcoin sort of came down a little below $40,000, then we finally saw inflows again, where now ETFs are actually buying Bitcoin and Bitcoin started trading towards $50,000, and we saw hash price grow. This is an accounting of how the Bitcoin hash price and mining economics behave over the last couple of years. Next slide. We've been looking at dollar per exahash per day; I'm going to shift gears a little bit. Still growing in the same direction, but I'm just shifting gears. Now we're going to look at Bitcoin per exahash per day, okay? Similar but different. This is just what the network pays you in Bitcoin per exahash per day. The orange line is Bitcoin per exahash. In summer 2022, the network is paying 4 to 4.5 Bitcoin a day. That dropped, and you see it says TX fee spike. That was that Ordinals rally. You still can have a spike in the amount of Bitcoin that's awarded to miners because of spikes in transaction fees, but for the most part, the macro trend has consistently shown increasing difficulty levels, with new all-time high difficulties in the last couple of years. We're at about $75 trillion difficulty now, and tomorrow it's set to go to over $80 trillion in difficulty. Next slide. The long-term trend as difficulty continues to increase is the scarcity and compression of Bitcoin awarded per exahash. That might sound obvious, but I wanted to be intuitive for our loyal shareholders. These are the scarcity economics of Bitcoin. It's part of a white paper; it's how it's all designed. We are trading below 2 Bitcoin an exahash. We hit 2 Bitcoin an exahash around November, December, but now we’re trading below that. We’re at about 1.8, 1.9 Bitcoin per exahash per day, and that's today, February, I guess, it's February 14. By the way, Happy Valentine's. We've got the halving in a little over 2 months, so it's going to go under 1 Bitcoin per exahash per day. The halving will be a reckoning. Those hash rate economics that you saw at $60,000 Bitcoin a day could go down to $30,000 a day. Right now, the economics are about $80,000, $90,000 a day per exahash that you’re earning. Okay, that’s fine. But guess what? It’s been worse than that, and conceivably, it can go to a lower floor. That's why it's so important to prepare for the halving. I’m going to talk a little bit about our strategy now. Next slide. A good way to be ready for a crypto bear market is to have low overhead and low operating costs. This is an important slide, and this is the dollars, U.S. dollars, per Bitcoin mined of G&A. This is often glossed over. These are cash items. Some companies on this chart are north of $10,000 of Bitcoin just in corporate G&A—never mind the electricity; we haven’t touched that. Halving is one of the lowest-cost operators in the sector. These statistics here that we posted are based on Q2, which is period end September. A lot of these companies haven’t reported their year-end figures yet; it’s fine; it’s just a fiscal accounting thing. We’ve put our number here. Again, in this quarter, Q3, we reported $4,450 G&A cost per Bitcoin, consistent with last quarter. Many companies grow and hire more staff; their G&A might grow as well. We kept that lean and mean DNA going into the bear market because it is going to be a reckoning. Next slide. December was a great month as well. We did an average of 9.1 Bitcoin a day. We’ve been intentionally scaling the business, even though difficulty has doubled in the last year. We've managed to maintain, in fact, increase our production. Last November, we were doing around 8.2 Bitcoin, and December saw us bump that up to 9.1 Bitcoin a day. Next slide. For the entire quarter, we did 9 Bitcoin a day on average, right? 830 Bitcoin for the 3-month period. We like having that 9 Bitcoin a day—1% of the network's scale. Next slide, please. Here’s a monthly breakdown. We actually mined over 3,200 Bitcoin—3,261 Bitcoin in the last 12 months. As of our last production report, our Bitcoin HODL is about 2,000 Bitcoin, which at $50,000 Bitcoin means we've got about $100 million of Bitcoin on the balance sheet. We've always held the Bitcoin that were mined with green energy with our ASIC. That’s approximately 2,000 green and clean Bitcoin on our balance sheet. Going into the halving with scarcity and all these inflows from ETFs, for shareholders looking for exposure to companies that have Bitcoin on the balance sheet, HIVE is that company. Next slide, please. By the way, we've managed to mine profitably over the last 3 years. As we saw the calamity in the markets—look at Celsius, look at FTX—look at the green and dark blue bars. The green bar is the gross mining margin. We managed to mine profitably in the worst crypto—when Bitcoin was at $16,000, we were mining profitably in December 2022. Not many companies at all could say that. HIVE has survived the halving in 2020. My CTO has been mining since 2011. This will be his fourth halving. It is something that I want to highlight here. If you’ve seen companies go bankrupt in 2022, that wasn’t as bad as the halving is going to be. You want a company that has the experience, know-how how to navigate, and has done this successfully before. When I was running Fortress Blockchain through the last halving event in 2020, we kept a strong treasury. HIVE is going into this halving event with $100 million Bitcoin on the balance sheet and profitable operations. In a little bit, I’m going to tell you about our fleet upgrades. You can see that revenue and mining margin are on the uptick going into the halving. Next slide, please. Now we look at similar data. This is just our gross mining margin—or sorry, I should say our gross operating margin because we have some HPC revenue here. We have consistently, through the Ethereum merge—everyone thought HIVE was going to be in trouble after the Ethereum merge. Guess what? We made it through that profitably. FTX bankruptcy—made it through and mined profitably. It’s on the uptick. We’ve been through the halving event in 2020; we went through the Ethereum merge in 2022. We’re a very resilient company. Again, we have a lean DNA because we have very low G&A. It served us very well as a company. We huddle daily—over 7 times since our office in Vancouver is up at 7:00 a.m. We’re very disciplined, and we treat this like a competition sport. We’re going for the gold. Next slide, please. How have we prepared for the halving strategically? We’ve upgraded our fleet. By June of this year, once we’ve received all of our S21s, we will be at 5.3 exahash with a global fleet efficiency of 25 joules per terahash. I saw some reports that indicated we were at 38 joules per terahash—this is very stale and outdated data. We got down to 30 joules per terahash in 2023, and we will be down to 25 joules per terahash in June. For all the analysts out there, please pay attention—get your numbers right! We’ll be at 5.3 exahash and 25 joules per terahash by June 2024. We are in a strong position to navigate this halving. Before we go to the next slide, I want to point out that we’ve made a lot of strategic ASIC purchases over the last year. To summarize, we purchased approximately 25,000 ASICs for a total of 3.6 exahash, with a blended efficiency of about 21 joules per terahash. That’s how we got our global fleet efficiency down to 25 joules per terahash and a total of 5.3 exahash, running at about 140 megawatts of infrastructure. Going into the halving, you don’t want to be too top-heavy so you fall over and crack your head like Humpty Dumpty. It is a reckoning. You need to be lean, and you just need to ensure you've got sound unit economics and aren’t overexposed. If you need to reduce operating capacity, you can—and we’re set up that way at HIVE. We have really good hedge positions for fixed power costs. If we don’t need to utilize excess power, we can reduce from 140 megawatts down to 100 megawatts. It puts us in a good position. We’ve tried to stay and prepare for this halving by being lean and mean. We purchased approximately 25,000 ASICs last year with a blended efficiency of 21 joules per terahash. Next slide. January was a good month, and I want to clarify something. Our HODL as of January 31 was about 2,000 Bitcoin. I believe it was 1,974 Bitcoin. That’s an increase from the year-end HODL because our year-end HODL in December 31 was 1,700 Bitcoin and change. Why? Because when we closed our special warrant financing in late December, we did it so we can move into 100% HODL. Going into the halving, there’s scarcity of Bitcoin, and you see that Bitcoin is— the network's paying less than 2 Bitcoin a day and after the halving, it’s going to be less than 1 Bitcoin a day. We understand the scarcity economics of Bitcoin. We know that shareholders want exposure to Bitcoin; that’s why we are keeping and in fact growing, our Bitcoin on the balance sheet. So as of January 2024 end of the month, we had approximately 2,000 Bitcoin on the balance sheet. Next slide. You can see here— the quarter end was 1,704 but January was about 1,974 Bitcoin. Next slide. Follow our socials because we are posting updates on the AI story as well as our strategy in Bitcoin. We've got some great content. We look forward to sharing on Twitter—short-form content that helps you keep up to date on all the exciting things happening in the HIVE multiverse because we're working on so many things. Sometimes, it's so much information to condense into a press release, but a quick tweet might get a simple point across to keep our loyal shareholders and investors who are excited about our growth tuned in.