IREN Ltd Q4 FY2022 Earnings Call

Good afternoon to those of you in North America, and good morning to those of you in Australia, and welcome to the Iris Energy Earnings Conference Call for the Fiscal Year Ended June 30, 2022. My name is Lincoln Tan, Senior Manager of Corporate Finance, and with me on the call today is Daniel Robert, Co-Founder and Co-CEO; Lindsay Ward, President; and Belinda Nucifora, Chief Financial Officer. Before we begin, please note that this call is being webcast live with an accompanying presentation. There will also be an opportunity for some Q&A following the main presentation. I would like to remind you that certain statements we make during this conference call may constitute forward-looking statements. Iris Energy cautions listeners that forward-looking information and statements are based on certain assumptions and risk factors that could cause actual results to differ materially from the expectations of the company. Listeners should not place undue reliance on forward-looking information or statements. Please refer to the disclaimer on slide two within the accompanying presentation. Thank you, and I will now turn the call over to Dan Roberts.

Thanks, Lincoln. Good morning. Good afternoon, everyone. Thanks for joining us for our inaugural annual earnings call. We've done a couple of quarterlies already, but this is the first annual, and I appreciate everyone's support and time to dial in today. I’m very excited to go through a quick update on the business, where we're at, where we're going, and go through some of the details. So, without further ado, I thought it was worth recapping at the top of the presentation, who we are, why we're here, and really it comes down to three fundamental beliefs. One is, we believe as a team that Bitcoin is here to stay. If it's here to stay, there's only $21 million; you can't stop it, you can't change it. It feels like it's likely to go up in value over time and be proven as a store of value asset. The second thing is, we believe Bitcoin mining can be done better. Bitcoin mining has evolved rapidly over the 11 years Bitcoin has been around. It's evolved from hobbyists on their computers and laptops, through graphics cards, to the start of the ASIC era to where we are today, which is hitting a level of maturity where we've caught traditional computing in terms of efficiency levels. The game is now more about large-scale energy data center infrastructure, where everyone has access to the same technology; it's really about the energy component now and how you access energy markets and do that in a socially responsible way. Finally, we believe Bitcoin mining can be done better. It's evolved from hobbyists and enthusiasts at home on their laptops or computers, to early mining farms with shipping containers and old warehouses, and now we're really starting to see the emergence of an institutional asset class. Last year alone, 2021, generated $15 billion of revenue. The sector is growing, it's growing really rapidly, and it's maturing and evolving accordingly. We've set this business up over the last four years, focused on doing it the right way, not taking shortcuts, building an institutional-grade platform, building an asset base for the long-term. We haven't held any coins, that's not because we're not bullish on Bitcoin. We are very bullish on Bitcoin. But we believe it's not in the best interest of our shareholders for us as a business to hold Bitcoin. We think you double down on risk; when Bitcoin is going up, it's great, but when it goes down, you're getting hit on your P&L and on your balance sheet as well. The optimal strategy is to liquidate daily, lock in those profits. As you can see, we're mining Bitcoin at $8,000 a coin, locking that profitability, and making a capital allocation decision with that profitability that remains. Today, even in the current market, Bitcoin mining is profitable, incremental returns on CapEx are profitable. Why would you hold Bitcoin on the balance sheet if you can reinvest that Bitcoin in additional infrastructure and computing capacity to generate another Bitcoin every 12 to 15 months? I understand that not every business can do that, but we set up our business as a growth platform with a substantial number of development sites. The optimal strategy continues to appear from our perspective. The second point, we've delivered. We pride ourselves on doing what we say we're going to do, and we have. Without pre-empting an announcement a little bit later on, we're pleased to report that we continue to hit our milestones. We said 3.7 exahash by the end of September, and we will hit that milestone. Every milestone along the way, we’ve at least met if not exceeded in terms of time frame. Not only that, but the facilities we're building are highly efficient. We've been saying this for a year; we don't do shipping containers; we don’t take shortcuts with temporary facilities. We build, own, and operate our own proprietary data center infrastructure, where we have now invested four years in optimizing ventilation, airflow, and networking design infrastructure to house these chips in the optimal operating environment, and that’s now proven results. We're in a good balance sheet position as of June 30, with US$110 million of cash on the balance sheet, and no corporate debt. We've got some hardware financing, but that is limited to the asset level. Again, a key differentiator with other listed firms. We have not given parent company guarantees. We do not have cross-defaults. Those financing arrangements are limited recourse specifically to the individual computers and the SPVs they're holding. Furthermore, as a result of negotiations with Bitmain, we're pleased to have 6 exahash locked and loaded. We've got the hardware; it's in the process of being on the ground operating or being delivered, and we're excited about installing that over the coming year. Low operating costs come down to the benefit of our energy strategy that's been in place since day one. We target low-cost excess renewables; the cheapest power out there is marginal cost renewables. There’s no feedstock cost; there’s no commodity input. If there's overbuilt renewables, the marginal cost of that power fundamentally is the lowest cost power, and we're now starting to see the benefits of that play out given what's happening in the macro environment. I mentioned the efficiency gains, and here's a chart that seeks to highlight that. What this chart shows is how many Bitcoin we are mining per x exahash of installed capacity over this year. It's a simple metric: 1 exahash worth of computers, how many Bitcoin did you produce from that 1 exahash? There are a lot of good miners doing different strategies, different approaches, but we're very pleased and proud to be number one in that list. This has two benefits: one is the obvious operating cash flow benefit, along with the CapEx efficiency benefit, i.e., we’re generating a better return on investment by producing that additional Bitcoin. We're looking after our assets, the electrical infrastructure, and the computing infrastructure. We’re ensuring they're functioning optimally and preventing overheating, dust, or humidity exposure. These chips are extremely profitable; we manage them for the long term. I understand that I didn't want to preempt some news that Lindsay was going to address, but this chart basically does. Sorry, Lindsay, we energized 50 megawatts at Prince George literally in the last hour. It's a fantastic milestone for the business and rounds out our 3.7 exahash objective or stated guidance for the market that we've had for a long time now. It will take another week or two for the individual sections to be lit up. The miners are installed, but that takes us to 3.7 exahash, making us one of the largest listed Bitcoin miners already, which is very pleasing and in a relatively short period of time, as we only reached 0.7 a year ago. We look forward to continuing to grow that, not only into the 6 exahash that we’ve secured but beyond as well. This shows our track record of delivery and the growth pathway that we've been on and also the near-term growth pathway we’re guiding the market towards. It was only 12 or so months ago that we were at 0.4 or 0.7 exahash. We've continued to deliver these projects, and Lindsay will go into more detail around our operational and executional excellence. Fundamentally, it comes down to a team with substantial experience in building similar data center and energy renewable energy assets. Recapping where we're at in terms of our balance sheet and profitability, I’ll begin from the right side, which includes a matrix or table that many of you will be familiar with. It contains a link to an online website where you can validate this firsthand. The beauty of Bitcoin mining is that it’s very objective; it's mathematical in terms of how profitability and revenues work. As you can see, we are obviously leveraged to the Bitcoin price, but where we are at in terms of our 6 exahash capacity and over $100 million in annualized mining profit based on that capacity, we feel we’re in a very good position from a P&L perspective. As I mentioned before, we are building multi-decade institutional-grade infrastructure. We're here for the long term, committed to Bitcoin's future, and the value of our underlying asset base by locking up low-cost excess renewable energy, building electrical infrastructure, and ensuring our industry-leading data centers are monetizing that into the digital exponential age. In terms of our sites, recapping where we’re at today, the 160 megawatts across British Columbia, as of one hour ago, is now all energized. The computing capacity will come online progressively. The 30 megawatts at Mackenzie is a Q4 exercise; the 50 megawatts at Prince George, as of this morning, now has energy. We'll reach around 4.7 exahash by the end of Q4 this year, increased from the 3.7% expected at the end of this quarter, being the one ended September, with an additional 1.3 exahash to be installed at Childress early next year. Mentioning the management team a few times, we do this as a large team. We have about 100 people globally with substantial experience across data centers, electrical engineering, construction, energy, etc. Many of them are construction contractors, but we have a fantastic core group with vast experience. Many of those who are on this slide will hear from Lindsay in a moment, who will drive through what we've done around operational execution and why we’ve been able to deliver what we have. We also hear from Belinda regarding the financials in the last third of the presentation. Finally, around incentives, about a quarter of the business is owned by us. We're extremely focused; we treat every dollar as our own. We believe in where we're going into the business. We're proud of our infrastructure and the team we work with. We appreciate all that third-party investment and support and internally feel that we're well aligned to the future. On that note, I will pass over to Lindsay for an operational update on our business. Thank you, Lindsay.

Okay. Thanks, Dan. I want to start today by discussing operational excellence. It is a key factor to our success. As a company, we are consciously building out our operational culture that has extremely high standards. It's the only way to succeed is to set high goals and actually achieve them. Recruiting is a key part of that. Getting the right team in place allows us to excel in everything we do, including safety, environment, community, governance, operations, maintenance, asset management, construction, and financial control. We recently welcomed Heather Miller as our Vice President of People, Culture, and Community, Javier Garcia as our Engineering Manager, and our Construction Manager in Childress and Martin Krauskopf as our IT Manager, all having recently joined the Iris team. Having a motivated, flexible, and focused team is essential. Our data centers continue to outperform our competitors, as Dan discussed in that slide, and that's not a fluke. It's the outcome of focused R&D, trial and error, and learning from our mistakes, with a constant focus on building excellent infrastructure. We are confident our operating performance will continue. We're building out further 30 megawatts at Mackenzie to come online by the end of the year, and that's progressing well. We’ve found the right formula to minimize risks, particularly to Mackenzie, as we ordered the long lead items well in advance of final design. That is a key strength; we understand our data centers. We've done all the engineering and know what we need, and we can order ahead of final design to ensure we get ahead of the queue. Our in-house construction team and key subcontractors are progressively moving along. They were at Mackenzie, went down to Prince George, and are now getting back to Mackenzie and will also be supporting the Childress team. That is vital for us. Not only does it assist with procurement because we know what we need and when, but it also gives us a high level of certainty of building out our infrastructure. I want to touch on a recent example of our focused procurement efforts. We encountered an issue, where a small part that was incredibly low-cost couldn’t be found. We spoke with an electrical contractor in Childress and found a small supplier in Utah. We flew down there, picked it up, and brought it back to Prince George, ensuring we stayed on track. That focus and dedication to winning is inherent in how we build out our facilities. We're leading this construction effort ourselves, avoiding an EPC or EPCM entity between us and our subcontractors. We have one fully integrated team focused on outputs, creating things safely and cost-effectively. It’s exciting to collaborate with subcontractors who are invested in our success. In terms of technology, we’re focused on improving our systems and processes through technology. Our in-house IT team, led by Denis Skrinnikoff, our Chief Technology Officer, monitors every aspect of our operations. We’re gathering data on variables like air temperatures, airflow, dust ingress, chip temperatures, energy usage, efficiency of each mine, and more. Our site teams are hungry for this data. We can see it on large screens in offices, and on iPads in the field. They’re eager to find ways to enhance efficiency with each incremental improvement. Community is central to everything we do. We usually operate in small communities, where our presence creates real impacts through local employment and spending. We aim to employ locals to quickly engage with the community and identify needs. Recently, I attended a community luncheon and presented around $70,000 in grants, making a significant difference in the community. We're not just a check-writing organization; we’re actively involved, touching base with community groups for lasting partnerships. We are excited to start a scholarship program. We’ve successfully found our first female apprentice, who can now complete her studies with our assistance. Community grants in Childress are going well; I’ll visit in a couple of weeks to see the successful applicants. I’m equally touching on Canal Flats, where our first facility was successfully ramped up and consistently performs above nameplate capacity, thanks to our dedicated team. That’s why Canal Flats is our center of excellence, housing a significant part of our engineering team, helping us trial new ideas and concepts efficiently. Our work at Canal Flats extends benefits across our other data centers, ensuring consistent operational tweaks and training at every site. We aim for consistency and success by sharing staff across the operations. For Mackenzie, it’s been truly exciting to witness its rapid development from bare ground to operating a 50-megawatt facility. Since its switch on in August, we’ve maintained consistent performance without major issues. We’re pleased with the efficiency of the local team we've built and look forward to contributing to the Mackenzie community in the long term. Prince George is our third operating site, now home to an additional 50 megawatts and 1.4 exahash across three data center buildings. The construction is complete; as Dan mentioned, energization happened a few minutes ago, just in time for this call. In about seven months, we’ve transformed the site into a fully operational data center without major safety incidents, thanks to our dedicated team. Lastly, at Childress, the earthworks are advancing well. We plan to build an initial 40-megawatt development in 2023, hosting the additional remaining 1.3 exahash we received from Bitmain. All construction permits are in place, and we’re progressing well with earthworks, nearing completion of the first datacenter building. Our long lead times are adequately positioned. In summary, I thank our incredible team for bringing additional megawatts online swiftly and efficiently. I'm happy to take any questions regarding the operational aspect of the business, but I’ll now hand over to Belinda, our CFO, for a financial overview.

Hi, all. Thank you, Lindsay. I'm pleased to be presenting our first full-year results following our successful listing in November 2021. As the graphs show, we have seen strong revenue and earnings growth over the year as our sites have become operational. For the year ended June 30, 2022, we mined 1,398 bitcoins, a 422% increase year-on-year, due to our average operating cash rate increasing by 611%. This generated $59 million in revenue and $26.2 million in adjusted EBITDA, with an adjusted EBITDA margin of 44%. Management uses adjusted EBITDA as the year was marked with significant adjustments due to the IPO and non-cash expenses, which I will explain on the next slide. Adjusted EBITDA offers management a clearer picture of our underlying operations and allows for comparison with our peers. Adjusted EBITDA reconciliation shows our net loss after tax for the year was $422 million, but it's crucial to point out the impact of non-recurring and significant non-cash items. The hybrid financial instruments converted to equity just before the IPO resulted in a non-cash $419 million expense in the P&L. All instruments are converted and will not impact the P&L moving forward. The share-based payments expense is non-cash and is divided between the co-founders and other executives. The co-founders' shares account for $11.4 million of the expense, made predominantly of options with a strike price of $75, with vesting conditions of between $370 million and $1,850 per share. Amortization occurs over the life of the options, leading to continuous P&L expense. One-off IPO-related formal costs were incurred during this period. After non-cash and one-off expenses, the year produced an adjusted EBITDA of $26.2 million, a margin of 44% on revenue of $59 million compared to 2021's adjusted EBITDA of $1.4 million, a margin of 18% on $7.9 million revenue. Moving to the statement of financial position, this provides an update on our balance sheet. We ended the year with $110 million of cash and cash equivalents, total assets of $570 million. Our property, plant and equipment increased by $232 million and mining hardware prepayments by $83 million. This asset increase was funded from our IPO cash reserves and an additional $71 million asset financing deal with NYDIG. As of June 30, 2022, our borrowings include the $71 million, totaling $108 million. That's a brief summary of our financial statements. I'll now hand over to the operator, Melanie, to commence the Q&A.

Thank you. Your first question comes from Chase White with Compass Point Trading and Research. Please, go ahead.

Thank you. You guys are continuing to develop the Childress site. How should we think about the timing just roughly to getting to the 40 megawatts? After that, how much work is there to get to the original 100 megawatts Phase 1 target? Is there a timeframe by which you need to make a decision on that, or do you have flexibility? That’s my first question.

Yeah, absolutely. No problems. Thanks, Chase. Appreciate you dialing in, good to see you. Regarding the first 40 megawatts, we're currently working through our procurement processes. Our original target for energization of Childress was early 2023; having now secured hardware for a reasonable portion of that site, we’re evaluating the timetable for building the data centers, installing, and commissioning those computers. We haven’t got specific guidance other than saying it won’t be before the end of December this year, so it will be a 2023 project. More specifics will follow as we gain additional confidence in our project timetable. To add to that, the connection being built by AEP and ETT is for 600 megawatts and will be completed in 2023. This allows us to build out according to our preferences. There are no limitations or time constraints against how we develop the remaining megawatts at Childress. That's an important point.

Got it. That’s helpful. Could you remind us when the power price in British Columbia is reset? Any indications on where the rate could go in the next rate setting?

It sets annually and remains the same price for every electron, 24/7, 365 days a year. Given how the British Columbia power market works, it's regulated, and the price is set by the regulator, with reference to a regulated pricing model. Our energy strategy has been about pursuing low-cost excess renewable energy globally. Historically, changes indicate that price adjustments are relatively immaterial year-on-year.

Thank you very much, good morning from Silicon Valley. I wanted to ask about your CapEx plans, considering that labor and material costs have been changing. Can you walk us through your CapEx plans as we think about them?

I'll let Lindsay speak to labor costs, material costs, and how we've been managing that. In terms of CapEx planning, our advice is clear: 6 exahash capacity is what we’re committed to building out. Post June 30, that requires $76 million of incremental investment. We feel that 110 million cash as of June 30 is the right amount of CapEx to commit to in the current environment. Having energized the first 40 megawatts at Childress opens an attractive scaling opportunity with relatively low marginal costs; we’ll be assessing when the right timing for additional capital is based on market access. Just a 30-second edition on labor and capital costs. We placed high-expense long-lead items 12 months ago at fixed pricing. We've been relatively insulated from recent price increases, managing costs under contingency, and we're not having issues attracting labor. We had 85 people on site at Prince George during July and August, with no significant labor cost blowouts so far.

Thanks so much. Congrats on a great first year. Any thoughts on utilizing the 600 megawatts of capacity at Childress for hosting other miners as an additional cash generation approach? Additionally, how does the Childress's smaller initial footprint impact power rate settings going forward?

In regard to utilizing that excess 560 megawatts, we pride ourselves on being a proprietary miner, owning a vertically integrated stack. We wouldn’t rule out hosting completely, but it's unlikely. However, the capital market remains challenging, and we’ll consider other options to continue building and monetizing our investments as we move forward. Regarding power procurement, we are concluding an RFP process for securing energy partners for Childress. We’ll look at optimizing our pricing based on market conditions.

Hi. Thanks for the question. Daniel, I want to drill down on your corporate overhead structure at the end of the quarter. It appears the corporate overhead expense increased fairly sharply. What drove that? Also, are you at sufficient headcount at Mackenzie and Prince George? How should we expect site overhead costs at Childress to ramp during the second half of the year?

The term corporate overhead could be misleading; many construction activities get bundled into that classification. There are challenges around audits and classification of expenses. Broadly, we need site overheads, which Lindsay can discuss regarding our teams and resourcing. We don’t expect large workforces across all sites even when Childress reaches 600 megawatts, anticipating only around 56 people total.

Hey, good morning, gentlemen. Thanks for taking my questions. I had two quick ones. You called out a 40-megawatt initial build-out. Is 40 megawatts your minimum effective dose? What's the incremental CapEx needed at Childress for expansions beyond 40%, and is there a rough rule of thumb for us to follow?

We’re comfortable building out as little as 20 megawatts or ramping up to 40 megawatts. The main goal is getting the site connected, and after securing the connection facility, we’ll assess future expansions with an eye on cost. The capital investments necessary for each build-out of 20-megawatt facilities is modest.

We were fortunate to negotiate a low $30 per terahash price with Bitmain during our negotiations while the market softened, which, with rising hardware prices, kept our expenses more manageable.

Thanks, Daniel. Just conscious we're running over time. This is probably all we have time for. Dan, do you want to make closing remarks before we end the call?

Certainly, thanks Lincoln. I'd like to express our gratitude for your attendance and support. Less than a year ago, we laid out our vision during our IPO, and we've delivered. Lindsay's been instrumental to that. Together, we built a platform to tackle the emerging sector, and we’re proud to have become one of the top listed miners globally. Thank you to our dedicated teams, communities, and your continued support. Have a great day, and enjoy your evening if you’re in North America.