Applied Digital Corporation (NASDAQ:APLD) Q2 2024 Earnings Call Transcript January 16, 2024
Applied Digital Corporation misses on earnings expectations. Reported EPS is $-0.1 EPS, expectations were $-0.00614. APLD isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to Applied Digital Fiscal Second Quarter 2024 Conference Call. My name is Sheri and I will be your operator today. Before this call, Applied Digital issued a financial result for the fiscal second quarter ended November 30, 2023, in a press release, a copy of which will be furnished in a report on a Form 8-K filed with the SEC and will be available in the Investor Relations section of the company’s website. Joining us on today’s call are Applied Digital’s Chairman and CEO, Wes Cummins, and CFO, David Rench. Following their remarks, we will open the call for questions. Before we begin, Alex Kovtun from Gateway Group will make a brief introductory statement. Mr. Kovtun, please proceed.
Alex Kovtun: Thank you, operator. Good morning, everyone, and welcome to Applied Digital’s fiscal second quarter 2024 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 securities laws and involve a number of risks and uncertainties. As a result, we caution you that there are number of factors, many of which are beyond our control, which could cause actual results and 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.
We 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. We will also discuss non-GAAP financial metrics and encourage you to read our disclosures and the reconciliation tables, the applicable GAAP measures in our earnings release carefully as you consider these metrics. We refer you to our filings with the Securities and Exchange Commission 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 Factors in our quarterly report on Form 10-Q.
You may get Applied Digital’s Securities and Exchange Commission filings for free by visiting the SEC website at www.sec.gov. I would also like to remind everyone that this call is being recorded and will be made available for replay via a link available in the Investor Relations section of Applied Digital’s website. Now, I will turn the call over to Applied Digital’s Chairman and CEO, Wes Cummins. Wes?
Wes Cummins: Thanks, Alex, and good morning, everyone. Thank you for joining our fiscal second quarter 2024 conference call. I want to start by thanking our employees for their ongoing hard work and service in supporting our mission of providing digital infrastructure solutions to the rapidly growing high-performance computing industry. Before turning the call over to our CFO, David Rench, for a detailed review of our financial results, I’d like to discuss some recent developments across our business. Let’s start with our data center hosting operations. Our 100-megawatt Jamestown facility continues to perform as expected and operated at full capacity with consistent uptime throughout the quarter. This marks the fifth consecutive quarter in which the Jamestown facility has operated at full capacity.
Our 180-megawatt Ellendale facility in North Dakota also operated at full capacity with consistent uptime during the quarter, bringing our total hosting capacity to 280 megawatts across our North Dakota facilities. Both facilities are contracted out to customers on multiyear terms. During the quarter, we announced the initial energization of our 200-megawatt Garden City facility in Texas. This is a significant milestone in Applied Digital’s ongoing efforts to meet the growing demand for low cost scalable digital infrastructure. The Garden City facility had a small contribution to our results this quarter and is currently operating at approximately 132 megawatts, with the remainder of the capacity expected to come online in the next several months.
As we brought on the facility, we realized there were additional infrastructure improvements needed for the grid. We expect these improvements to be made no later than April. Our customers continue to send miners to the facility and we are actively installing them. With the increase in the cost of bitcoin, we are seeing demand increase significantly for hosting services. As a reminder, our Garden City facility is fully contracted with fixed prices, so we are not exposed to volatility in the crypto markets heading into the halving event this year. Once our Garden City facility becomes fully energized, we will have approximately 500 megawatts of hosting capacity across our three data center hosting facilities. We expect our three sites to deliver up to $300 million in revenue and $100 million of adjusted EBITDA on an annualized basis.
Operating cash flow from data center hosting services will ramp up significantly in March as the majority of our prepayments burn off in February. Let’s move on to cloud services, which provide high-performance computing power for primarily AI applications. It continues to grow quickly as we progress further in supporting our existing contracts and pursue additional opportunities in our pipeline. Since our last earnings announcement, we have added an additional cloud customer, which brings our total annual contract value of cloud service contracts at full capacity to approximately $398 million. We tailor our agreements to our customers so that they — as they raise money, we can exercise options embedded in the contract to deploy GPUs and ramp-up hosting capacity over time.
While the typical customers for our cloud service have been private VC-backed companies, we are now also seeing strong demand from the enterprise market for large amounts of GPU compute capacity. We are excited to see demand increasing from this important segment of the market and have plans to hire sales talent to enhance our outreach efforts. We continue to secure access to GPUs, however, there have been some delays in installations attributable to pending deliveries of networking components. We believe it’s prudent to receive GPU deliveries only when all associated equipment is on-site and ready for installation, which is how we structure our client deposits. Additionally, we continue to actively explore vendor financing and other tailored financing options to support the capital requirements for the 34,000 H100 GPUs we have on order to support our current customer demand.
To date, we have four 1,024 clusters installed and are planning to ship an additional four in the next two weeks. These clusters, as they are currently configured put us in an elite class of next-generation supercomputers in terms of raw compute power or petaflops for the most demanding AI applications. We expect to reach a minimum of 10 before the end of the fiscal year with the Jamestown cluster representing the opportunity to put us in the top 10 supercomputers for AI workloads. The fully commissioned clusters are expected to generate over $200 million of annualized revenue. Lastly, let me provide an update on our purpose-built HPC data centers. During the quarter, we broke ground on our first 100-megawatt high-performance compute facility in Ellendale, North Dakota.
This facility will offer low cost, high-efficiency liquid-cooled infrastructure designed for HPC applications. Construction is proceeding as expected. Our unique proprietary architecture and design implementation together with the strategic placement of the Ellendale facility near sources of abundant and renewable power will offer scalable infrastructure for these workloads. It will offer significant cost reduction to our customers and deliver best-in-class performance that maximizes high power density compute. We believe that this advantage is sustainable in this emerging market for data centers specialized in running AI workloads. Our contracted power and adjoining land at our facilities will become valuable assets over the next 18 months.
We believe there will be a significant supply constraint for power in the data center market. We have already seen a robust demand for our data centers, which driven by the burgeoning AI landscape has exceeded our initial expectations. We believe we’ll be in a strong competitive position to support this demand. As a reminder, we have 400 megawatts of capacity in development across North Dakota and Utah. This does not include the current 9 megawatts of capacity we have at our standalone facility in Jamestown to support cloud service customers. As we enter the second half of fiscal 2024, we’re well-positioned to capitalize on the demand we’re seeing across both our cloud service and HPC data center business and we will continue to allocate our capital appropriately to the highest risk-adjusted returns to maximize shareholder value.
With that, I’ll now turn the call over to our CFO, David Rench, to walk you through our financials and provide an update on guidance. David?
David Rench: Thanks, Wes, and good morning, everyone. Revenues for the fiscal second quarter of 2024 were $42.2 million compared to $12.3 million for the fiscal second quarter of 2023. The increase was driven primarily by the full quarter of revenue generation from the Ellendale facility, the Garden City facility beginning revenue generation during the fiscal second quarter of fiscal year 2024, and additional revenue from the Jamestown facility due to increased uptime. In addition, the company recognized a full quarter of revenue from the first cloud service contract during the fiscal second quarter of 2024. Cost of revenues for the fiscal second quarter of 2024 was $29.2 million compared to $11.8 million for the fiscal second quarter of 2023.
The increase in cost of revenues was attributable to higher energy costs used to generate hosting revenues, depreciation and amortization expense, and additional personnel expenses, driven by the growth of the business as more facilities were energized. Selling, general, and administrative expenses for the fiscal second quarter 2024 were $21.1 million compared to $27.2 million in the prior year comparable period. The decrease was primarily due to lower stock-based compensation expense and was partially offset by increases in depreciation, amortization, and personnel costs. Net loss for the fiscal second quarter of 2024 was $10.5 million or a loss of $0.10 per basic and diluted share based on a weighted average share count during the quarter of approximately 109.7 million.
This compares to a net loss of $26.8 million or a loss of $0.28 per basic and diluted share in the fiscal second quarter of 2023 based on a weighted average share count during the quarter of approximately 93.4 million. Adjusted net loss, a non-GAAP measure for the fiscal second quarter of 2024, was $5.2 million or adjusted net loss per basic and diluted share of $0.05 based on a weighted average share count during the quarter of approximately 109.7 million. This compares to an adjusted net loss of $3.8 million or $0.04 per basic and diluted share for the fiscal second quarter of 2023 based on a weighted average share count of approximately 93.4 million during the quarter. A significant headwind we faced during the fiscal second quarter of 2024 was amortization and occupancy charges for leases of computing equipment and data center space that have been assessed — accessed by the company but are not yet supporting revenue.
The lease expense for the colocation sites not supporting revenue totaled $1.5 million and were not added back to — into adjusted EBITDA or adjusted earnings. Amortization of GPUs not supporting revenue was $3.7 million and was not added back to adjusted earnings. We expect this impact to decrease in future quarters as we resolve supply chain delays and are able to stand up full computing clusters that support revenue. Adjusted EBITDA, a non-GAAP measure for the fiscal second quarter of 2024, was $10.6 million compared to an adjusted EBITDA loss for the fiscal second quarter of 2023 of $2.2 million. Lastly, on our balance sheet, we ended the fiscal second quarter with $34.6 million in cash equivalents — cash, cash equivalents, and restricted cash, and $42.8 million in debt.
During the first two quarters of 2024, we received $81.8 million in customer payments due to the structure of our commercial arrangements with our customers that incorporate upfront deposits and prepayments. In certain contracts, the prepayments are credited back to the customers over the term of the contract. This has no impact on revenue recognition, but the upfront cash flow is a major benefit for the company as it helps with our CapEx funding as we build out our data centers. Since the quarter closed, we have received an additional $11.1 million in customer prepayments and $23.1 in net proceeds from the ATM offering. The ATM offering is now complete. Now, turning to guidance, due to the delayed delivery of certain networking components for our GPU clusters, we now expect our revenue and EBITDA to be below the low end of our previously guided range for the fiscal year 2024.
Network component deliveries improved in recent weeks, but did have a significant impact on the timing of commissioning clusters and our revenue and EBITDA. We now expect to exit the fiscal year 2024 at an annual revenue run rate of approximately $500 million and an annualized adjusted EBITDA run rate of $250 million. Now, I turn the call over to Wes for closing remarks.
Wes Cummins: Thank you, David. We’re well-positioned to capitalize on the growing opportunities across our business and look forward to continuing our momentum in the second half of the year. I’d like to thank all of our team members for their dedication in making Applied what it is today and our shareholders for your continued trust on our mission and execution. We are now happy to take questions. Operator?
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