Applied Digital Corporation Price & Performance (APLD)

Afternoon, everyone, and welcome to Applied Digital's fiscal third quarter twenty twenty five conference call. Before management begins formal remarks, we would like to remind everyone that some statements we're making today may be considered forward looking statements under the securities laws and involve a number of risks and uncertainties. As a result, we caution you that there are a number of factors many of which are beyond our control, which could cause actual results events to differ materially from those described in the forward looking statements. For more detailed risks, uncertainties and assumptions relating to our forward looking statements, please see the disclosures in our earnings release and public filings made with the Securities and Exchange Commission or SEC. Disclaim any obligation or any undertaking to update forward looking statements to reflect circumstances or events that occur after the date the forward looking statements are made. Except as required by law. Will also discuss non GAAP financial metrics and encourage you to carefully read our disclosures the reconciliation tables to the applicable GAAP measures in our earnings release as you consider these metrics. We refer you to our filings with the SEC for detailed disclosures and descriptions of our business as well as uncertainties and other variable circumstances.

Including, but not limited to, risks and uncertainties identified under the caption Risk in our annual report on Form 10 k and our quarterly report on Form 10 Q. You may get Applied Digital's SEC filings for free by visiting the SEC website at www.sec.gov. I would like to remind everyone that the call is being recorded, we'll be made available for replay via link available in the Investor Relations section Applied Digital's website. Now I'd like to turn the call over to Applied Digital's Chairman and CEO, Wes Cumming. Wes? Thanks, Matt, and good afternoon, everyone.

Thank you for joining our third quarter twenty twenty five conference call. I want to start by expressing gratitude to our employees for their continued hard work and service in supporting our mission of providing purpose built infrastructure to the rapidly growing high performance computing industry. Before turning the call over to our CFO, Saddam Momand, for a detailed review of our financial results, I'd like to share some recent developments across our business. Starting with our data center hosting business, we currently operate 286 megawatts of fully contracted data center hosting capacity for our cryptocurrency clients across two locations in North Dakota. Both of which are running at full capacity. Bitcoin prices remain strong, which is positive for our customers and we remain optimistic about the business and its future prospects. In our HPC hosting segment, have achieved significant milestones in advancing our strategic objectives, including two transactions with globally renowned financial institutions. The first transaction with Macquarie Asset Management, one of the world's largest infrastructure investors. Upon closing, we'll allow Macquarie to invest up to $5,000,000,000 in capital to support the development of Applied Digital's next generation data centers. We believe this investment underscores Macquarie's strong confidence in the scalability and value of our platform.

The second was a 375,000,000 financing arrangement with Sumitomo Metsi Bank Corporation, one of Japan's top three banking groups and a global leader in data center financing. We believe this arrangement reflects the trust and leading financial institutions placed in the value of our data centers land assets and power infrastructure pipeline. [indiscernible] Cory and SMBC are playing instrumental roles in ongoing discussions with customers to lease the Ellendale campus. Their support is especially valuable amid the current crosscurrents in the industry and broader economy. We believe the Ellendale campus represents a highly strategic industry asset with significant expansion opportunities beyond the initial 400 megawatts of critical IT load. Importantly, our construction remains on schedule for our first building we expect it to be ready for service and ready to begin generating revenue in the calendar fourth quarter of twenty twenty five. Nearly all the equipment for this building is landed, giving us not only confidence in the schedule, but it also means tariffs will not materially impact our build cost. Construction is underway for the second building, will be a 50 megawatts of critical IT load.

This building is expected to be ready for service at the end of calendar q two of twenty twenty six and ready to begin generating revenue. Building 3, also a 50 megawatts is in planning stages is expected to be ready for service in calendar q one of twenty twenty seven. The power is secured for all three buildings as is the supply chain. Lastly, we expect to provide an update on leasing discussions in the near term. At that time, we will share updated views on the potential economics of the campus. Next, let's discuss our cloud services business. Which provides high performance computing power for AI applications. After careful consideration, our board of directors has determined the reviewing strategic options for this business is in the best interest of shareholders. This decision is driven by several factors. First, our discussions with potential customers regarding leasing our data center business is it is clear that our cloud business is typically viewed as a competitor. While this has not derailed any discussions, it is a point of friction. We also believe that if we were to transition to a data center read in the future, this would lower our cost of capital as investors typically assign higher multiples to data center businesses due to their stability and long term growth potential.

For the recent industry developments, including a large competitor completing their IPO, make this opportune time for us to explore strategic options. In summary, we're encouraged by the positive trends across our business and remain confident in our growth trajectory. With that, I'll turn the call over to our CFO, Sydal Momant, to walk you through our financials. Saddam?

Thanks, Wes, and good afternoon, everyone. Let me begin by highlighting some of our recent financial announcements before providing a detailed overview of the quarter.

Over the past year, the company has deployed nearly $1,000,000,000 in assets, with a significant portion allocated to the construction of our data centers.

While our construction teams have done a tremendous job delivering projects on time and within budget, one of the key challenges has been a high cost of capital. Reducing our cost of capital has been one of my priorities since stepping in as CFO. We began this process with a $450,000,000 convertible note at 2.75% followed by the strategic transaction of Macquarie Asset Management. Providing potential access to up to $5,000,000,000 in capital. Most recently, we secured a $375,000,000 financing arrangement with SMBC at highly attractive rates. We believe these transactions have not only strengthened our financial position, but have also ensured we have the necessary capital to continue funding our data center build out as well as positioning us as a strong strategic partner for potential customers as they evaluate future development data center development. Now let's turn to the quarter. Revenues for the fiscal third quarter of twenty twenty five were $52,900,000 up 22% over the prior comparable period. This increase was primarily driven by continued growth of our cloud services business due to the deployment of additional GPU clusters. In total, our data center hosting segment generated $35,200,000 in revenue while our cloud services segment contributed $17,800,000 Our Cloud Services business revenue declined sequentially from last quarter due to us placing some of our capacity into an on demand model, a shift from reserve contracts.

With this change, we experienced some technical hurdles as we moved from a single tenant to a multi tenant configuration. Importantly, those technical issues are now resolved. Cost of revenues increased $2,100,000 to $49,100,000 from the prior comparable period, primarily driven by the growth in the business as more facilities were energized and additional services were provided to customers. SG and A expense decreased to 7,300,000.0 to $22,700,000 primarily due to GPU cluster deployments as they are now revenue generating and the associated depreciation and amortization is now captured as a part of cost of revenues. This quarter, our depreciation and amortization expense decreased to 18,800,000.0 compared to $26,200,000 in the same period in 2022 Of the current quarter amount, 14,400,000.0 was attributable to D and A in our Cloud segment. Interest expense increased $4,100,000 to $8,900,000 primarily driven by an increase in finance leases and interest bearing loans between periods. Net loss attributable to common stockholders was $36,100,000 or $0.16 per basic and diluted share. Adjusted net loss attributable to common stockholders was 17,800,000.0 or $08 per diluted share. Our adjusted EBITDA increased 878% to 10,000,000 Now a few items impacted our adjusted EBITDA this quarter compared to Q2 of this year.

As we mentioned, early in the quarter, we transitioned some of the GPU capacity to on demand but encountered technical issues moving from a single tenant to a multi tenant environment. Those issues have since been resolved. We also experienced margin compression in our data center hosting business due to expected seasonal fluctuations in power cost. Now moving on to our balance sheet.

We ended the fiscal third quarter with $261,200,000 in cash cash equivalents and restricted cash along with $689,100,000 in Now with that, I'll turn over the call to Watts for closing remarks.

Thank you, Sairo. While securing our lease, for our Ellendale campus is taking longer than expected, Customer interest remains high. Additionally, the Macquarie and SMBC transactions have elevated our status in the industry. Although we cannot control the macro environment, we can continue to build our campus on time and within budget. We believe our hundred megawatt megawatt liquid cooled data center uniquely positioned to come online as industry demand accelerates. Furthermore, our 1.4 gigawatt pipeline remains one of the most compelling offerings in the market as customers continue to invest heavily in future capacity. We're proud of the progress achieved this quarter and look forward to sharing further updates as the year unfolds. We welcome your questions at this time. Operator?

Thank you. Ladies and gentlemen, we will now begin question and answer session. You will hear a prompt that your hand has been raised. Should you wish to decline from the following process, please press star followed by the number two. If you are using a speakerphone, please leave the handset before press We have a question coming from the line of Nick Giles from B. Riley Securities. Your line is now open.

Good afternoon, everyone.

First on the sale of the cloud services business, can you remind us what the updated split would be between on demand versus contracted and how you're thinking about total value there?

Nick, in the quarter, so we had four of our six clusters in remaining in reserve contracts and two moved to on demand. And the two in on demand generated small amount of revenue later in the quarter. But as as said, all I've mentioned, we've rectified the technical issues there and expect that to to ramp up in the current quarter, but that that's the split currently.

Got it. And just to clarify, none of the clusters today are in Applied Data Center, so there wouldn't be a a structure where you would where where you would still operate some of the capacity for those GPUs. Correct?

That's correct.

Great. And my my second question was just on the BTC hosting business. Where does this business fit in the long term? And especially as you remain focused on converting to a a restructure later down the road?

Yeah. So I I think the the the BTC assets will fit in a restructure. And I think there is a is a long term match between, HPC data center capacity and Bitcoin hosting capacity. Nick, would you when you look at the sites that we're operating so let's look at Ellendale just specifically. 400 megawatts of critical IT load that, you know, moves to 530 total utility load. But that won't be if that all of that power needs to be be available at all times. But typically, these run the 70, maybe at the high end 80% of capacity, on an on an average basis. And so that leaves a significant amount of power that that would go unused, and I think that's a really great match for facilities that have, you know, that ability to dynamically adjust the load at site. So I would expect that to remain at Ellendale for us, and I would expect actually for us to take a hard look at that at new sites as well to to potentially add some Bitcoin capacity, to to be matched with the HPC capacity. But I look at those businesses as effectively one business.

Got it. That's that's very helpful, Wes. I'll turn it over for now, but continue best of luck. Thanks.

Thank you. Your next question comes from the line of Brad Novlatch from Cantor Fitzgerald. Your line is now open.

Hi, guys. This is Tom Oshinsky on for Brett. You for taking my question.

So first, I guess, you mentioned Macquarie and SMBC are playing an instrumental role in finding potential leasing partners for Ellendale. I guess, their involvement, are you seeing faster diligence timelines or improved leasing momentum, because of their sport I I think the way I would excuse me.

Phrase that is, that we've we've seen, more interest and but but with the people who are already there, I think the it is significantly increased the comfort level with our of our ability to complete construction and operate facilities with kind of world class financing partners in the in the mix.

Awesome. Great. And then, just on CapEx, I guess, can you provide an update on your expected capital needs over the next twelve to eighteen months and whether the current construction of Ellendale is being built in line with past projections of CapEx? Yep. So this is Saddell speaking. So in terms of CapEx projections, you are correct. It's in line with past projections. Now we will always you know, measure the whatever impact, if any, tariffs will have for the second and third buildings and adjust accordingly. But as of now, it is in line. And then, you know, we've we've proud prior, have kind of pointed out in terms of the CapEx cadence, you know, you're running anywhere from 30,000,000 to $50,000,000 a month in terms of actual CapEx for for the first building.

Awesome. Thanks. And then one more, if I may. On the Bitcoin hosting business. I guess, Could you provide you know, clarity on on when those contracts are up for ex expiration and if you see any risk in, you know, your large client potentially rolling off at the expiration of those contracts? You know, there's there's always risk of of nonrenewal. I don't expect that to be the case, but I believe it at Ellendale, we've roughly two years left, on those contracts. I have to to double check that, and and Jamestown is is roughly the same.

Awesome. Thank you, guys.

Thanks. Thank you. Your next question comes from the line of Rob Brown from Lake Street Capital Markets. Your line is now open.

Hi. First question is on the the kind of the remaining steps to complete the El Nio facility. At least that kind of fourth quarter would be running, but what's sort of left there and how much CapEx is left to go just in that facility?

Yeah. I think so. You know, the the good guidepost for for CapEx spend is generally for tier three data center anywhere in the range of 10 to 13,000,000 per megawatt. So we're building 100 megawatts of critical IT load for for the Ellendale, the first building. When I think about, you know, what's left, as you can see from, you know, of our social media updates, you know, the building and a lot of the OFCI, the equipment is landed. Right now, it's a lot of the what I'd like to call, the the finishing touches as well as building out the generator plant, the backup power gen, etcetera. I'd refer to, you know, our q, we a lot of PP and E, particularly from the segment disclosures, showed the spend in the assets as of February on the balance sheet.

And, Rob, just to add to that. So we have been, I believe, since February, commissioning, equipment at the facility. So you go through a you know, a fairly lengthy commissioning process. The facility will start landing IT equipment in either the July, August time frame. And then you have the know, the deployment of the IT equipment. And this equipment is as you probably know, requires a significant amount of cabling and networking. So you'll have that piece of it as well, to go for know, our our customer. And but but we will just to think about that. The you know, we should start landing equipment, like I said, July, August, and then start cabling, racking, cabling, and have this ready to go The expectation is to start actually, turning on in October. Okay. Excellent. And then in terms of selling, like, the cloud business, what's sort of your sense on on the the plans there? You know, you start marketing it now and and hope to have it sold by by kinda year end or any kind of inside outside in terms of timeline? That that process, Rob, has just started. I I think we're prepared to give any update or any expectation on what that might be.

I think they're a lot of different ways that could go and a lot of different structures. That we could participate in. I I I wouldn't think of it as just a sale. We were evaluating everything there.

But I think it's just too early for us to give any real meaningful comments on that. Understand. Okay. Thank you. I'll turn it over.

Thank you. Your next question comes from the line of Darren Aftahi of ROTH Capital Partners. Your line is now open.

Hey guys, thanks for taking my questions.

On the AI cloud business, did you give any inbounds pre making this announcement about, putting the asset up for sale? I can't make a comment on that, Darren.

Fair enough. And then, a clarification, moving from single tenant to multi tenant and the technical issues, was was that a prior inter quarter in in the Feb core you guys just reported?

Meaning, is is kinda trued up starting the, the May?

Yes. The issues were resolved there in [indiscernible] I think the March. So it's it should be resolved for the majority of the May. Got it. And then just one last one, if I may.

The existing hyperscalers you've been talking to sort of post Macquarie has disposition about data center build changed at all just given kinda the current macro environment? Maybe has anything changed in the last three to four five weeks? Thanks. Yes. I wouldn't say it changed in that time frame necessarily. What I would say in general Darren, is, you know, for the last year for us, and then I've I've talked to a lot of CEOs that have been operating in this space for a lot longer than we have. But know, when when you're dealing with a group of know, five or six, potential customers, maybe seven potential customers, What you know, it's it's a fairly concentrated market from that perspective. And you have just kind of patterns of, you know, one of those companies is very aggressive. And one is, you know, not not very aggressive in the market. So I would say what we have have seen over the past year and one of the things, you know, that has taken longer for us to to get it to where we wanna be on the on the the final lease is just you you see demand rotate between the hyperscalers.

And what I would say overall is we see demand at least what it was, if not higher than it was, you know, three months ago when we had our call in January. But it's not always the same players. So you just see it kind of rotate between and there's a lot of I think, pretty obvious dynamics in the market where you could guess as to, you know, why that is. There's some really big end users of GPU capacity that have a lot of plans that have been announced. Over the past few months. So I think that's one of the things that drives it. But my understanding is it's also just not uncommon for, you know, some of these to to consume a lot of data center capacity, take a break, and then come back. Thanks.

Thank you. Your next question comes from the line of Mike Grondahl of Northland Securities. Your line is now open.

Hey, guys. Thanks. And you know, while you covered demand a little bit, Wes, for the hundred megawatts, are you still talking to multiple hyperscalers for that? Or has that been kind of narrowed down to to one hyperscaler you're negotiating with and if you could talk a little bit about pricing trends the last ninety days, what are you seeing?

So I would say so let me let me let me hit pricing first. So on pricing, I would say the last ninety days have been fairly stable. I would say if you look on a year over year basis, it's increased year over year and that's you know, to our comment of updating kind of our financial expectations for the campus versus what, you know, I the last time we talked about that was roughly a year ago. When when we give an update on the the leasing activity there. So the so pricing up year over year, but I would say generally stable, on the data center front in the last ninety days. And then on, to to the other question about, who we're talking to, but just to further that, you know, we've we've made a lot of progress over the past three months since our last call, but but we continue to have multiple discussions. And and and I would say about that is there's ongoing discussions with basically all of the hyperscalers, and it's not necessarily just Ellendale. We have discussions about our campus and South Dakota as well as other campuses where we've also made significant amount of progress on on pushing forward with with campus number two for ourselves.

So those conversations are just constant. I won't I won't comment on how far down the path we are with one in particular.

Got it. And then you know, the the decision to pursue a sale of the cloud business You kinda talked about some of your hyperscale customers kind of view that as a friction point or potential competition?

And you talked about how it doesn't fit into the REIT structure. And the recent CoreWeave IPO.

Would you say there was a fair bit of pressure from your hyper scale potential customers to exit that business? I'm I'm just trying to understand if was a little bit more external driven or internal driven.

So I would say your your last comment there is a fair comment. But also, you know, we've we've spoken publicly about this a fair amount that the you know, these are we've structured these as two separate businesses. They're two separate businesses. It's two different customer bases. And now we think it's it's the time to to separate those businesses you know, whether that be from from those types of pressures or just what's going on in in the market from you've had a couple of of GPU cloud businesses come public, in in the past six months. So I think it's just the right time for us, but but we've we've always structured the the know, they would eventually be separate businesses, and we just think it's the time to move towards the that separation.

Got it. And then do you still see that cloud business is roughly a 10 to $120,000,000 annual business. [indiscernible] Okay. After the on demand portion, ramps back up, you know, it it should be I expect it to be in that neighborhood where it was back in the previous quarter. And as, you know, the the piece of on demand is increasing the customer base and then also, you typically get higher pricing for on demand versus reserve contracts.

And I do think as if you look at the the H100s that we have is those reserve contracts all roll off, those will go into an on demand model. You can do reserve contracts in my opinion, on newer generation. There's you could do some reserve contracts. You're not doing two years again, but you could probably do six months or maybe one year of additional reserve contracts But I think this market is just moving more and more to an on demand model. And so, you know, we're we're we've started adapting to, to react to that.

Got it. Hey.

Thank you.

Absolutely.

Thank you. Your next question comes from the line of George Sutton from Craig Hallum. Your line is now open.

Thank you. Just a question on the sale process. With your potential lessors having issues with the ownership. Are they good with a an in process sale? Would they require a definitive agreement? I'm just curious how significant they would view this. If we Sure. There's there's there's no there's I I will be clear. There's no hard requirement on any of this. But, you know, like I said, I think this is just the right time for us to to do this. For both both of the businesses, quite frankly. So, you know, enable the cloud business to continue to grow whether you know, in a in a separate form from, you know, the combined company. And then allow us to to really focus on the large scale data center business.

Gotcha. I know you've been carrying some third party data center capacity that was unused. I'm curious how that part is involved in this process. Yeah. Well, you know, that can go or the I I will tell you that that third party data center capacity that's [indiscernible] you know, 2023 pricing, in my view, is a very valuable asset that we have. Know, we've been asked about from from third parties about getting that that capacity from us. So I I view that as one of the big assets of of this, of this business is, you know, anyone who takes that business has immediate growth potential with available data center capacity, that that is is at attractive pricing. Like I said, it's 2023 pricing versus 25 pricing.

Gotcha. Okay. Appreciate it. Thank you.

Absolutely.

Thank you. Your next question comes from the line of John Todaro of Needham. Your line is now open.

Hey, guys. Thanks for taking my question. Two here and, maybe we'll start with the the AI cloud business. So 2023 pricing, that's interesting. How long is, I guess, left on those leases And then what other what other piece would effectively be in it?

The GPUs. Is there any anything else that would kinda get sold off in that process?

So does that also on the on the data center lease they're generally five to seven years, with extensions. So that's perception on that. And then I'll let Wes talk about the the other assets.

Those those are the primary assets, the the GPUs and the data center capacity. And and then, obviously, [indiscernible] Like I said, the business we built it. It's separate from the data center business. There's no real overlap in in the working. So you know, it it from from that perspective of separating it out, it'll be gonna be easy for for for us as a seller and a potential buyer.

Got it. Understood.

And then, on the HPC side of things, it sounds like you guys are are pretty close to a lease just with those expectations for generating revenue. Is the thinking still that whoever takes the 100 megawatts at Ellendale does the full 400 megawatts for the campus. Is that still thinking And if not, kind of that expectation for building two I I it seems like you're far along with with someone, given that that timeline, seems a bit aggressive with, what, like q two twenty six generating revenue? Oh, so think of that as q three twenty six. It it ready for service at the end of q two. And then q three twenty six for rev gen. But but, John, my expectation is it remains that [indiscernible] one one customer takes that campus. [indiscernible] That the Ellendale campus does grow beyond that 400 megawatts. Out in 2028 and beyond, so I wouldn't necessarily say that one customer is gonna take all of that. But, but but I do think for the for the for the 400, they do.

Understood. That's helpful. I'll hop back in the queue.

Thank you.

Thanks.

Thank you.

And there are no further questions at this time. Turning over back to Wes Cummings for closing remarks.

Thank you, everyone, joining our earnings conference call. Look forward speaking with you. I believe this year it will be in July on the next earnings call. Again thanks to all of our employees for all their hard work in the past quarter. Thanks again. Speak to you soon.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Thank you.