Earnings Call Transcript - HIVE Q3 2023

Holly Schoenfeldt, Moderator

Hello, everyone, and welcome to today's webcast reviewing HIVE Blockchain Technologies financial results for the quarter ended December 31, 2022. 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 Slide #3, I am pleased to introduce today's presenters: Frank Holmes, Executive Chairman; Aydin Kilic, President and CEO; Darcy Daubaras, Chief Financial Officer; and Adam Sharp, Editor of the HIVE Newsletter. I would now like to hand the presentation over to Frank Holmes, Executive Chairman, for a macro overview of the quarter. Frank?

Frank Holmes, Executive Chairman

Thank you, Holly, and thank you, our shareholders, and the team for pulling this together. It has been, as I'll recap for last calendar year, really amazing how we pulled through that and trying to give you color on the macro scene and what we see is going on. What's really important for all of us first, is what I think is an important disclosure and to appreciate the DNA of volatility. So often gold is compared to Bitcoin. A big reason for this is that it is a decentralized asset. As you can see, gold bullion's daily volatility means that 70% of the time it's a non-event, going up or down 1%. But over 10 days it’s 3%. In fact, gold is less volatile than the S&P 500, which on a daily basis is going up or down 2% and over 10 days, it's 4%. When we go to Bitcoin, its daily volatility is four times greater. It is not a non-event to go up or down 4%, and over 10 days it’s up or down 10%. When we compare it to Tesla, over 10 days, you can see it’s much greater than the S&P 500, and HIVE Blockchain is at 6%, and over 10 days it’s 19%. MicroStrategy, a unique technology company, continues to buy and accumulate Bitcoin, and on a 1-day basis, its volatility is plus or minus 7%, while over any 10-day period, it’s 21%. So before you think of entering this space, you must understand the DNA of volatility of an asset class. HIVE is a big proxy for many people who do not want to go to exchanges like FTX and lose all their money or invest in yield and Celsius and similarly lose their investment. So what we see here is that it is a proxy that has the DNA of both crypto and the stock market. Our strategy? We believe we're in this great digital transformation. Every year, I spend a week at Harvard with a group of 150 CEOs from 80 countries. This past year was phenomenal because it was all about the digital transformation and its subsets. It’s a great business for investors to understand that HIVE Blockchain is part of this digital transformation. With it, you need to have data centers, as those data centers allow you to participate in the huge pent-up demand. Where do we compete? As you can see, we've had many first-mover advantages: we were the first crypto mining company to go public, the first to mine Ethereum and Bitcoin on a large scale. We’ve always tried to be the first to move. We were first to use our software to balance the grid, first to buy our own data centers and build our own infrastructure. What unique value do we bring? We do something that’s different from others. We don’t hold 100% of everything and keep selling shares in public markets. We also believe we have to deliver profits. At times, we'll buy equipment opportunistically to provide a proxy for investors that want to be involved but are conscientious of risk, especially regarding Celsius or the collateral damage of FTX. The unique value we have is that we are always green. That’s been part of our unique strategy. Everything we do, we try to recycle energy. We're using hydroelectricity and recycling energy in Montreal at Lachute from our crypto mining. This is our unique strategy, continuously looking at how we involve local communities and support education to aid these communities. We believe we have this GPT-Chat phenomenon taking place. You need data centers and high-quality chips like NVIDIA, and we're seeing tremendous growth in this space. I have a great team. Aydin Kilic, after being with us for over 18 months, is embracing our culture and values. He is an electrical engineer with capital markets experience and technical experience in building data centers and Bitcoin mining. He’s taking on this new responsibility which allows me to focus on macro themes. We have Darcy Daubaras, our CFO, and Johanna Thornblad, our President of Sweden, along with Gabriel, who has done an outstanding job as General Counsel. We've been first to go public in 2017, first to develop our own ASIC mining rig, and first to buy a green energy-focused data center. HIVE for shareholders has been the leanest of all these entities. I believe we have that discipline. We focus on generating the highest cash flow returns on invested capital. Our auditors in the crypto space seem very quick to write down all assets, showing a propensity to doubt sustainability, but I believe Bitcoin is sustainable. Our thesis of having our own data centers and acquiring and building facilities gives us a long-term opportunity in this industry. The capital structure of HIVE includes options of about 3.1 million RSUs, with 1.3 million issued and about 83 million shares outstanding. It is a relatively tight float compared to our peers. Despite last year going through a 5 to 1 rollback, we can still look at our returns on invested capital. What matters is that we generate the highest cash flow returns on invested capital. The crypto market cap appears to be leveling off and has had a bounce this year. The crypto mining stocks, including HIVE, have outperformed Bitcoin's bounce. Understanding the DNA of volatility is crucial; Bloomberg and almost every Internet trading facility offer tools called relative strength indicators over 14 days. It shows both positive and negative tensions, excitement and fear, giving tremendous trading opportunities. We've had extreme buy opportunities, allowing for great trades. HIVE has experienced oversold and overbought conditions; it has had a bias towards overbought before correcting to the mean over a 14-day strength period. The correlation between HIVE and Bitcoin is extremely high, meaning HIVE has become a preferred option for investors and traders seeking refuge from exchanges where they risk losing investments. Bitcoin has fallen over 50%, a fascinating but painful situation. The increased mining difficulty means there are more participants mining Bitcoin; therefore, fewer rewards. HIVE currently represents slightly over 1% of the global network, and daily, around 900 Bitcoins are mined globally. The technology and energy you use affects mining potential. I'm happy to report, despite a 60% increase in difficulty, HIVE has added more efficient machines. Our purchase of S19 Pros was strategic during November and December when prices dropped significantly. We upgraded our facilities to enhance production efficiency, focusing on low-cost energy. HIVE is a green energy company, and we specialize in low-cost energy operations. We've been involved in the community, supporting local initiatives, including youth hockey programs, allowing us to engage with local populations and foster positive relationships. Through our projects like building greenhouses, we aim to aid local food sustainability initiatives. Financially, we reported $14.3 million in revenue during a challenging quarter. Despite the Ethereum merge and the fallout, we achieved positive EBITDA, which none of our peers managed. We took a look at our cost of Bitcoin production: it amounted to $13,634 due to various efficiencies we implemented. The ongoing volatility in Bitcoin prices and mining difficulties affects our gross margins, but we remain optimally lean in our operations. Regarding Bitcoin mined and our balance sheet, we've increased our HODL position while strategically selling Bitcoin to invest in energy-efficient machines. From last year's low of $15,000, Bitcoin has rallied to around $25,000. Historical data indicates a Bitcoin bull run begins about 500 days after halves, and while we cannot guarantee repetition, we remain optimistic. The narrative surrounding crypto, having faced criticisms, is now seeing increased interest reflecting the technology's resilience. We managed risks effectively, avoiding exposure to platforms like Celsius during a time of high market instability. Our caution about counterparty risks has allowed us to maintain stability amidst turmoil in the sector.

Darcy Daubaras, Chief Financial Officer

Thank you, and I will now talk about our snapshot of growth for HIVE. Just want to begin by addressing how HIVE has maintained other revenue sources, allowing us to weather the recent contagion effects like FTX. Some of these sources include selling energy back to our Swedish electricity provider and load balancing strategies at our major facilities. Unfortunately, many of our peers lack these diversified revenue sources. I want to remind listeners about two accounting practices that materially affect HIVE's results: mark-to-market accounting and noncash charges. Mark-to-market involves adjusting asset values based on current market conditions, while noncash charges include write-downs that reduce earnings without cash movement. In the recent quarter, we took two significant noncash charges due to prevailing market conditions: an impairment on mining equipment of $38.8 million and a provision against deposits of $22.7 million. Moving to our results overview for the 9-month period ended December 31, 2022, we recorded revenue of $88.1 million, a mining margin of $46.6 million, and adjusted EBITDA of $31.6 million. Our digital currency balance was at $39 million, and we mined a total of 2,466 Bitcoins. Over the 9-month period, the equivalent BTC mined, including coins converted from Ethereum and others, was 3,503. Our balance sheet remains healthy with $8.6 million in cash and additional digital currencies valued at $39 million and $13.6 million in receivables. The market value of our strategic investments fell slightly due to instability but remains in good standing at $5.5 million. Our gross mining margin decreased to $3.6 million, down from $62.3 million the previous year as market dynamics changed. The recent quarter showed a loss of $1.09 per share, a downturn from net income of $0.66 per share last year. This year-over-year revenue decline from $14.3 million in Q3 fiscal 2023 reflects increasing Bitcoin difficulty hash rates and a drop in Bitcoin prices, along with the Ethereum merge's impact. Our strategy is to evaluate the advantages of market pricing while remaining grounded in efficiency and prudent financial management, even amid significant declines. Looking back at our financial performance, our adjusted EBITDA decreased to $1.5 million this quarter versus $69.6 million in the prior year due to accounting impairments and market actions. In the last quarter, we also realized a loss of $90 million compared to $51.2 million the same quarter last year. These large losses stemmed from the noncash charges we experienced. We strive to provide transparency into the workings of our profitability and the hurdles we face within the bear market; nonetheless, we maintain strong operations amid these challenges.

Aydin Kilic, President and CEO

Hello, everybody. I'm Aydin Kilic, the President and CEO of HIVE. Being that this is our quarterly earnings presentation, I'll provide a quarterly efficiency analysis. HIVE led our peers in Bitcoin for exahash, displaying robust metrics of 115, 105, and 114. While network difficulty will vary month to month, it's essential to understand how our peers are performing. We consistently achieved performance metrics above 100 while others lagged at 60 or 70. Profitability remains the ultimate goal in this sector. Despite producing 44% fewer coins, we strategically downscaled operations to prevent unprofitable production. This quarter, we achieved a 25% profit margin, even witnessing a 20% rise in production costs. We ensure we are always aiming for efficiency, closely monitoring electricity costs and mining opportunities. While we have 140 megawatts of global power infrastructure, this quarter’s average blended cost remains incredibly low at $0.034 per kilowatt-hour. This is vital as we navigate global energy challenges. Our January production yielded 260 Bitcoin with 110 Bitcoin per exahash. We're ramping operations with energy prices declining in New Brunswick. As of mid-February, we're achieving 2.8 exahash, planning to scale to 3.25 exahash by March, ultimately reflecting a 15% increase in our hash rate. This is accomplished by strategically optimizing machine deployment aligned with market conditions, including our NVIDIA fleet's performance. A major factor in our growth is the HIVE BuzzMiner—a commercial deployment, marking a significant moment as the first public Bitcoin miner to vertically integrate. Through collaboration with Intel, we developed this early prototype, emphasizing our commitment to technology and efficiency. We're focused not solely on maintaining operations but on optimizing every aspect and revealing the true profit potential that exists.

Adam Sharp, Editor of the HIVE Newsletter

HIVE has drawn valuable lessons from the 2018 bear market, instilling a sense of discipline within the company. Reflecting on administrative costs as a percentage of revenue since 2021, HIVE remains optimized at 9% compared to peers. This efficiency is further illustrated as HIVE maintains low stock compensation at just 4% of revenue for 2021 and 2022. Moreover, share dilution was kept minimal, only 5% in 2022 despite challenging market conditions. Our financial metrics showcase HIVE’s commitment to being lean and efficient in navigating the complexities of the crypto landscape. To encapsulate these observations: HIVE effectively demonstrates low administrative costs, minimal stock compensation, and among the lowest shareholder dilution relative to peers. Our approach seeks to strengthen our position within the fluctuating cryptocurrency climate while maximizing value for shareholders. Thank you all for tuning in today. You can find us on various social media platforms or email us at [email protected].