IREN Ltd Q3 FY2024 Earnings Call

Good day and thank you for being here. Welcome to IREN's Third Quarter FY 2024 Investor Update. Currently, all participants are in listen-only mode. Please note that this conference is being recorded. After the presentations, we will have a question-and-answer session. I would now like to turn the conference over to our speaker today, Lincoln Tan, Director of Investor Relations.

Thank you. Good afternoon to all of you in North America and good morning to those of you in Australia, and welcome to IREN's Third Quarter FY’24 Results Presentation. My name is Lincoln Tan, Director of Investor Relations, and joining me on the call today are Daniel Roberts, Co-Founder and Co-CEO, and Belinda Nucifora, CFO. Before we begin, please note that this call is being webcast live with an accompanying presentation. For those that have dialed in via phone, you can elect to ask a question via the moderator after our presentation. I would like to remind you that certain statements that we make during this call may constitute forward-looking statements, and IREN 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 2 within the accompanying presentation. Thank you, and I will now turn the call over to Dan Roberts. Over to you, Dan.

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The connection will be reconnecting very shortly.

Dan, you may begin whenever you're ready.

Excellent. I think we're back on. Apologies for the technical issues, but we're ready to go. So thanks everyone for dialing in, and thanks Lincoln for the introduction. We're thrilled to be here for our quarterly earnings call. There's a little bit to get through, so let's jump straight into it. First of all, it's probably worth recapping where we're at in terms of our business and our priorities for 2024 and beyond. Working from left to right on the slide deck in front of you, the big news is we're now going to 30 exahash this calendar year. We're currently at 10 exahash of current Bitcoin mining operating capacity. We provided guidance around 30 June for this milestone. We've hit it in mid-May and we're now upgrading our end-of-year expectations. Over the next seven months and a bit, we're going to reach 30 exahash as a result of bringing forward the construction of additional data centers along with a transaction with Bitmain that we're pleased to announce today. That's obviously super exciting and will take us into that top tier of listed Bitcoin miners. The continual development of our AI cloud service business is also incredibly exciting. We've provided updates over the course of this year and are looking at ways to expand this, so we look forward to giving you further updates during this presentation. There's been a lot of commentary in the media about the value of power and land in the context of the data center and AI crunch. As many of you know, we've secured over 3,000 megawatts of power and land. This not only provides us with considerable optionality and flexibility for organic growth but also presents intriguing nearer-term opportunities to monetize some of that portfolio. It's an exciting time; there's a lot going on, and without further ado, let's jump into the Bitcoin mining side. We're now in a position to go to 30 exahash in 2024 and 20 exahash by the end of Q3. So in the coming months, we anticipate a rapid ramp-up in our capacity. We were the fastest-growing Bitcoin miner last year in the listed market and expect to maintain momentum this year. The majority of our capacity will be through the S21 Pro from Bitmain, which has an average efficiency of 15 joules per terahash. By the end of 30 exahash installations, we anticipate achieving 16 joules per terahash in nameplate efficiency and a $17,000 electricity cost per Bitcoin. In terms of size, scale, and cost, we're pleased to be in a position to become one of the industry leaders. We've got a standardized data center design that we've rolled out for years and have recently upgraded it from the 20-megawatt to 25-megawatt design. The team has simply gotten better at construction, speeding up our work towards scaling. We’re not stopping at 30 exahash; we have options for another 10 exahash. As you can see, we're pleased to announce that we're at 10 exahash in operating capacity. We anticipate hitting 20 exahash by the end of September and reaching 30 exahash by the end of December. Additionally, we've fixed-price options for an extra 10 exahash to deploy early in 2025. What’s crucial is that we've secured land and power upfront. Six years ago, my brother and I set this business up, believing firmly that power and land would be scarce. It takes significant time to develop these assets, which is reflected in the trends we're observing now, with an unprecedented demand for computing power. This includes the price of Bitcoin, the demand for AI, and various future computing applications. Once real-world demand hits critical mass, scaling becomes increasingly challenging. This is why we're seeing such high demand for new power from Bitcoin miners and data centers. You simply cannot expedite power projects due to various market constraints. We're in a strong position, prepared for organic growth. Over the next six months, you will truly see the fruits of our previous investments come alive at an accelerated pace. I’ll now pass over to Lincoln.

Thanks Dan. To provide context, the next couple of slides will cover the CapEx requirements, funding needs, and further details around the S21 Pro agreements we’ve signed. Regarding CapEx, as previously mentioned, the expansion to 20 exahash is now fully funded and is being advanced to the end of September this year. We need an additional 10 exahash of miners and 150 megawatts of data center capacity to reach 30 exahash. By the end of this year, at Childress, we will have 350 megawatts of operating data center capacity. The guidance for CapEx regarding mining hardware and data centers is about $300 million: roughly $190 million for 10 exahash of the latest generation Bitmain S21 Pro machines, and about $110 million for 150 new megawatts of data centers, in line with previous guidance. The benchmarked data center CapEx is about $750,000 per megawatt. For the funding strategy, we plan to fund the step-up to 30 exahash through a mix of existing cash resources, operating cash flows, and other capital sources. As of April 30, 2024, we have $322 million in cash, generating strong operating cash flows which we are introspectively reinvesting into the business. Reported operating cash flow year-to-date is $48 million. We're continuously seeking new funding opportunities throughout the capital structure. We also have an existing ATM with $137 million capacity remaining, and a newly filed $500 million shelf in ATM. We’re also looking at debt capital opportunities for data centers and equipment financing for GPUs. Lastly, regarding returns, the use of the ATM program is at our discretion, and we view it as instrumental for funding strategic growth while maximizing shareholder returns. We've benchmarked the market’s valuation of larger scale miners at around $135 million for installed exahash, while our incremental hash rate is being built at $30 million CapEx per exahash, creating distinct value for our shareholders. We envision raising capital to establish ourselves as one of the largest and most efficient publicly listed miners this year as a pathway to long-term value for our investors. Moving to the next slide, we won’t dwell too long here. We have entered into various purchase and option agreements with Bitmain that facilitate our growth to 30 exahash this year and position us for 40 exahash in the first half of 2025. These agreements involve a combined 35 exahash of S21 Pro Miners with an efficiency of 15 joules per terahash, structured intentionally with delivery dates that align with the data center rollout as we have discussed. The flexibility to have options allows for greater agility around growth and protects against changing market conditions. We were able to amend agreements to utilize the latest generation S21 Pros without affecting deployment timelines. Moving on, the chart shows Bitcoin mined in April while the table shows market capitalization and installed hashrate across the sector. We were the fastest-growing miner in 2023, increasing our hashrate from 1.5 exahash to 5.6 exahash and we aim to continue this trajectory in 2024, growing to 30 exahash this year and 40 exahash in the first half of the next year.

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With the technical difficulties, I’ll summarize the next couple of slides while we work on reconnecting with Dan. When we established this business, we focused on being versatile from the start, capable of supporting various computing power types. We've partnered with Dell Computing in the past with plans to bring customers and hardware to our facilities. When the AI demand surged last year, we pivoted and ordered NVIDIA H100s, integrating them into our existing data centers, transitioning from ASICs to GPUs. This parallel business line is highly complementary; we view it as enhancing our Bitcoin mining operations. The power costs are minimal when considered against potential earnings; $100 million in GPU expenditure only utilizes around 1% of our data center capacity. If we maximized our GPU deployment, we'd see substantial run-rate earnings based on market data, using only 10% of our capacity. This growth opportunity is promising, especially given the challenges Bitcoin miners face in securing financing recently, but our dual capabilities improve our collateral value and position in discussions with lenders. Our successful venture into cloud services has also encouraged lenders to view our infrastructure more favorably. We're receiving a lot of positive customer feedback which is essential for scalability. The GPUs we installed have proven highly efficient, working within our power and land portfolio strategically. We're in conversations to potentially secure GPU financing, following trends shown by CoreWeave and Lambda as they also secured large financing deals recently. We see substantial market demand for our cloud services, evidenced by our customer engagements. We're developing an on-demand market model allowing flexibility and fostering relationships with prospective customers. Our findings suggest optimizing our tech setup can enhance performance, given our high-density rack installations, which could be leading to the remarkable service levels our customers report. Testing different pricing models is also in progress, as we explore incremental growth strategies. Several stakeholders confirm the AI demand challenge is indeed real, with reports outlining the monetization potential of our power and land assets. We’re exploring various frameworks to identify opportunities, valued ideals, engaging with investors and banks, although we remain committed to our organic growth approach. I'll now pass to Lincoln for financial summaries. This page reflects our previous half-yearly update, updated with current market economics. Bitcoin mining margins remain robust post-halving, projected at $17,000 electricity cost per Bitcoin, with annualized hardware profits of $408 million, ensuring sub-two-year payback periods based on recent Bitcoin prices. In the AI cloud service business, margins stay high, with gross margins above 95% and paybacks around two years on GPU hardware. We're pleased with the healthy margins driving our investments in both business lines. The next slide shows we have recorded revenue for AI cloud services for the first time, reflecting a rapid increase since onboarding Poolside in February. Their contract extension in April is expected to yield increasing revenues. We've noted a $14 million to $18 million revenue opportunity tied to the current GPU fleet.

Thank you, Lincoln and Dan. Good morning to those in Sydney and good morning to those in North America. Thank you for joining us for our first quarterly update. I want to highlight positive cash flow from operations of $48 million for the nine-month period ended March 31, 2024. This includes revenues from Bitcoin exposure. These operating cash flows illustrate our strong underlying operational quality, which we are reinvesting to expand further. During the three months ended March 31, 2024, our net profit before tax was $12 million, with a net profit after tax of $8.6 million. This was achieved without relying on Bitcoin mark-to-market revaluations, excluding $17 million in non-cash expenses. The adjusted EBITDA for the quarter increased from $13.9 million to $21.8 million due to Bitcoin mining revenues rising from $42 million to $53.4 million. We mined 1,003 Bitcoin at an average realized price of $53,200, reflecting a 45% price increase during the quarter. Our average electricity cost per Bitcoin mined increased from $14,100 to $19,300, primarily due to lower Bitcoin volumes mined and increased global mining difficulty. Our other costs have remained stable quarter-over-quarter. For the nine-month period ending March 31, 2024, adjusted EBITDA reached a record of $42.5 million, signifying a 32% year-on-year rise, aligning well with the reported cash flow of $48 million. Bitcoin mining revenue for this period expanded from $41.3 million to $129.9 million, with an average operating hashrate increase from 2 exahash to 5.8 exahash, as we mined 3,371 Bitcoin at an average price of $38,500, marking an 87% price increase. Average net electricity costs grew from $9,900 to $15,400, reflecting heightened global mining difficulty. Our other costs rose from $32 million to $36 million due to the Childress site becoming operational in April 2023. Net cash increased by $191 million for the nine months ended March 31, 2024, attributed to $48 million cash flow from operations driven by average operating hashrate increases and higher average realized Bitcoin prices. Net cash used in investing activities rose by $188 million due to investments at Childress and our acquisition of 816 NVIDIA H100 GPUs. In financing activities, net cash grew by $331 million, mainly due to proceeds from sales under the ATM and ELOC facilities. At the end of March, we had $260 million in cash, no debt, and substantial operating cash flow. Our cash position strengthened to $322 million by April 30, 2024, with $294 million raised from approximately 56 million shares, and an additional $45 million from 8.2 million shares post-April 1. Our balance sheet is strong, with total assets of $724 million, providing us with the flexibility needed for future growth. I'll now hand it back to the operator for the Q&A session.

Thank you. Our first question comes from Lucas Pipes with B. Riley. You may proceed.

Thank you very much, operator, and good afternoon, morning, everyone. Ben, my first question is on the incremental exahash and the optionality there that you outlined earlier on the call. Could you kind of walk us through where this would be deployed and then also just in terms of the potential timing around all of that. Thank you so much.

No problems. Thanks, Lucas. So in terms of deployment, the majority of the capacity is being deployed into Childress. As we’ve previously disclosed, that is scaling to 350 megawatts this year. So essentially, the bulk of the new exahash growth is coming at Childress throughout the remainder of this year. Regarding the 40 exahash expansion, that will also be deployed at Childress. However, some of the capacity will be utilized to upgrade the existing fleet of S19j Pro machines, primarily located in our British Columbia data centers. It'll be a combination of both, but primarily at Childress, which is currently scaling to 350 megawatts this calendar year.

Lincoln, thank you so much for the additional color there. I appreciate it. Best of luck. I'll turn it over.

Thanks, Lucas.

Thank you. One moment for your questions. Our next question comes from Joseph Vafi with Canaccord Genuity. You may proceed.

Hey, everyone. Thanks for the update. Good morning to you. A few questions. Number one, on the 10 exahash option with Bitmain that you have, I'm just wondering if you could kind of go through what would be some of the reasons you might exercise that. Obviously, if Bitcoin is a lot higher, that may be one, but just kind of balanced against maybe some of your other initiatives that you've got going on. And I know there are a lot of moving parts, but just trying to get inside your head on that and then I'll have a follow-up. Thanks.

Thanks, Joe. To clarify, that's the 10 exahash option to go from 30 to 40 exahash?

Right, exactly, Dan.

Yeah perfect. Look, I expect we'll exercise it. The presentation is clear in terms of the metrics: when we can mine Bitcoin at around an indicative cost of $17,000 a coin with Bitcoin where it is today around $65, that's a pretty healthy gross margin and a great exposure for us going into what we predict will be the next Bitcoin cycle. All we need to do is continue building the same data centers at our existing site. We plan to execute this and continue our growth through the cycle. Market metrics indicate that miners above 10 exahash capacity are being valued at $135 million per exahash, while we’re building out exahash for $30 million. Value creation for our shareholders is crystal clear. We're growing only when it's accretive. You may have noticed that in the last six weeks we've used the ATM three days, selling a total of 5 million shares. But if we utilize it, it's to create that value for our shareholders. We plan to continue to grow and ultimately exercise that 10 exahash expansion from 30 to 40 early next year.

Great, thanks for that update. And then just maybe one quick follow-up here on the three gigawatts of development sites you have. I know you mentioned that you may entertain some deals and we might hear about that soon. Just wanted to understand, does it make sense to structure a deal now or wait another nine months to a year when there's potentially even more scarcity in the market relative to power and development. Thanks a lot.

It's a great question, Joe. The short answer is I have no idea. All we can do is work through the process and assess the options that come before us to make a decision. I can argue both sides for waiting. If we're currently facing this level of scarcity for assets, power and land, which takes years to develop, it’s plausible the scarcity may heighten over the next 6–18 months. Conversely, I believe in the saying 'a bird in the hand.' If a compelling offer arises that can significantly benefit shareholders, particularly recognizing our current market capitalization versus some figures being discussed regarding our asset value, then we must explore that. However, engaging in joint ventures or sales will have limited impact on our organic growth plans. We still have substantial development potential with over a thousand megawatts under development, a detail we don't actively disclose. Our asset portfolio allows us to monetize options without hindering organic growth.

Sure. Fair enough. It's nice to have options. Thanks a lot, Dan.

Thank you. One moment for questions. Our next question comes from Mike Colonnese with H.C. Wainwright. You may proceed.

Hey, good morning, guys. Congrats on the quarter and great to see you delivering ahead of schedule with your build out here at Childress. You’ve taken a measured approach to rolling out the AI Cloud services business, which has certainly shown early successful pull-side with the upsized deal. Now that you have this proven model in place and service ready, how have conversations evolved with potential customers for this business? How should we factor growth based on the current pipeline and some of the funding opportunities you mentioned?

Yeah, thanks Mike. It's an evolving space. Clearly, we've garnered strong reviews and demand for the cloud service. The global narrative indicates shortages of GPUs and data center capacity, and we seem to be experiencing that directly. We're focusing on expanding our service capabilities, hence why we’re developing an on-demand service that could provide higher yields in a market segment we believe holds significant potential due to non-commitment preferences among both smaller and larger customers. This will allow us to foster relationships while better understanding market needs. We’re exploring various financing structures for GPUs to align with our growth trajectory. Over the past few weeks, we've kept tight focus on establishing our 30 exahash goal, finalizing the Bitmain transaction, after which we’ll re-engage in discussions with large customer and financing providers. We're cautiously optimistic about what the coming months hold.

Great. Thank you for taking my questions.

Thank you. One moment for questions. Our next question comes from Joe Flynn with Compass Point Research & Trading. You may begin.

Hi guys, thanks for the question. I was hoping you could provide more color on the two-year payback on H100s. Ultimately, do you expect the data center design specifications to change materially as we advance to further generations of chips, like Blackwell? Any insights would be helpful.

Thanks, Joe. The two-year payback on the H100 chips is an approximation. In real-time, if we offer on-demand and shorter-term contracts, the payback could be shorter than that 24-month period. However, signing longer-term contracts may extend payback times. Current market pricing for GPUs is transparent; for instance, each NVIDIA H100 costs around $40,000, leading us to that rough two-year payback estimate. Regarding data center configurations, it's notable that few facilities manage the 70 kilowatt rack densities that we're achieving. Traditional data centers are increasingly resorting to liquid cooling solutions to handle the heat and ventilation necessary for such high densities, forcing adaptations to their infrastructure. Thus, our current design can be effectively future-proofed against imminent chip generations.

Great, that's all for me.

Thank you. One moment for questions. Our next question comes from Paul Golding with Macquarie. You may proceed.

Thanks so much. Just a quick question on the supply chain for GPUs. Dan, could you comment on availability? Is capital the main constraint currently? If you leverage the power capacity available through energizing Childress and the subsequent data center expansions, would you be confident in obtaining the necessary GPUs from suppliers? Lastly, regarding the continuous 95% plus gross margin, is there a scenario where it would make more sense to unplug additional ASICs in favor of more GPUs?

Absolutely, there are scenarios where unplugging ASICs for GPUs makes sense, and as discussed in the presentation, these businesses are not mutually exclusive; we can manage our Bitcoin mining operations alongside GPU deployments. If we hypothetically obtained $1 billion worth of NVIDIA H100s, roughly 25,000 units, that would displace less than 10% of our overall capacity. We're set to remain a major Bitcoin mining business while also exploring the optionality on the AI front. Currently, supply dynamics vary week to week, but at present, we can establish new clusters within two months.

Great, thanks so much.

Thank you. One moment for questions. Our next question comes from Josh Siegler with Cantor. You may proceed.

Yeah, hi guys. Thanks for taking my questions. First, could you comment on any progress regarding the co-location aspect of the HBC business and what that would entail to get set up?

Yes, we've been contemplating this as a potential joint-venture structure to monetize additional powers within our portfolio. It depends on customer type, contract length, financing structure, and opportunity costs associated with capacity utilization. We analyze whether leasing out data center capacity and access to that power would be more beneficial than using it directly for our mining operations. There are solid opportunities to explore here, but we do not feel pressured to finalize any deals when we can monetize this capacity ourselves.

Understood. I appreciate the insight. A follow-up inquiry pertains to market dynamics post-halving, including how your unit economics hold up in light of your growth plans.

It's been intriguing. I previously indicated no downward adjustment in hashrate was expected after the halving, but I was partially proven incorrect. There may be slight decreases ahead, considering current hash pricing creating pressures on higher-cost miners. Still, with a solid belief in Bitcoin's resilience, we anticipate steady to rising hashrates in the coming period. In the private miner sphere, many are looking to sell. We’ve witnessed public miners informally or formally expressing sale interests, prompting us to evaluate our organic growth capabilities, particularly in light of metrics showing $17,000 post-halving mining costs while generating shareholder value from a $30 million exahash CapEx against $135 million asset valuations.

Understood. Thank you for the insights, Dan.

I think that's over the hour now, and that's probably all we have time for. Thank you for the questions. To reiterate, we are aiming for 30 exahash this year in 2024, with a pathway to 40 exahash in the first half of 2025. We're entering a phase of very profitable growth; we were the fastest-growing miner last year, and we fully intend to maintain our trajectory. We look forward to engaging with shareholders post-results. Thank you very much for your time.

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.