Cipher Mining Inc. (NASDAQ:CIFR) Q1 2024 Earnings Call Transcript May 7, 2024
Cipher Mining Inc. beats earnings expectations. Reported EPS is $0.1311, expectations were $0.01. Cipher Mining Inc. 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 day and thank you for standing by. Welcome to the Cipher Mining First Quarter 2024 Business Update Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I will now hand the conference over to your speaker today, Josh Kane, Head of Investor Relations. Please go ahead.
Josh Kane: Good morning and thank you for joining us on this conference call to discuss Cipher Mining’s first quarter 2024 business update. Joining me on the call today are Tyler Page, Chief Executive Officer; and Ed Farrell, Chief Financial Officer. Please note that you may also review our press release and presentation, which can be found on the Investor Relations section of the company’s website. Please note that this call will also be simultaneously webcast on the Investor Relations section of the company’s website. This conference call is the property of Cipher Mining and any taping or other reproduction is expressly prohibited without prior consent. Before we start, I’d like to remind you that the following discussion as well as our press release and presentation contain forward-looking statements, including, but not limited to, Cipher’s financial outlook, business plans and objectives and other future events and developments, including statements about the market potential of our business operations, potential competition and our goals and strategies.
The forward-looking statements and risks in this conference call, including responses to your questions are based on current expectations as of today, and Cipher assumes no obligation to update or revise them, whether as a result of new developments or otherwise, except as required by law. Additionally, the following discussion may contain non-GAAP financial measures. We may use non-GAAP measures to describe the way in which we manage and operate our business. We reconcile non-GAAP measures to the most directly comparable GAAP measures and you are encouraged to examine those reconciliations, which are filed at the end of our earnings release issued earlier this morning. I will now turn the call over to Tyler Page. Tyler?
Tyler Page: Thanks, Josh. Hello, this is Tyler Page, CEO of Cipher Mining. Thank you very much for joining our first quarter 2024 business update call. Let me begin the call with a few summary financial statistics from our outstanding first quarter of 2024. Our CFO, Ed Farrell will give a full breakdown of our numbers during his portion of the call, but I wanted to highlight our continued strong performance during the first quarter upfront, because it represents our second quarter of operating our full initial data center portfolio, and it is our second sequential quarter of growth in positive revenues, GAAP net earnings and adjusted earnings. We continue to believe that the best way to evaluate the success of a public bitcoin mining company is to look at the financials, the company files with the SEC.
There are important growth narratives and key performance indicators that are not always encapsulated in backward-looking numbers, but ultimately, it’s the numbers that validate the story. Cipher’s progress continues at full pace. Quarter-over-quarter, we improved revenues from $43 million to $48 million, GAAP net earnings from $11 million to $40 million, and adjusted earnings from $28 million to $63 million. We are very proud of our continued record-breaking numbers. And with the fourth bitcoin having now behind us, we believe that the relative advantages of being a low-cost producer of bitcoin will only increase going forward. As of the end of April, Cipher held 2,033 bitcoin in inventory and $96 million of cash. While our total self-mining hash rate has grown to 7.7 exahash per second.
For the literary minded among you, you will recall that T.S. Eliot shared that April is the coolest month, and he may as well have been speaking about bitcoin miners in 2024 as the having reduced the blocker awards of new bitcoin to 3.125 bitcoins per block. In order to address this known impact to bitcoin revenues, Cipher is built to succeed with approximately 96% of our portfolio energize through fixed price power at an industry low cost of electricity of roughly $0.027 per kilowatt hour. As a reminder, electricity represents the large majority of our operating costs, and our low price is a key driver of our best-in-class unit economics. As we bring online our planned site expansions at our Bear and Chief data centers and complete the full Black Pearl site in 2025.
We expect our overall rig fleet efficiency will improve from 29 joules per terahash currently to 22 joules per terahash. With a combination of cheap hedged power costs and an efficient fleet of rigs, Cipher has a sustainable business model that is positioned to survive downturns while benefiting from operational leverage in rising profitability environments. We have been very busy expanding our production capacity over the last few months. Slide 5 shows construction progress at our Bear and Chief data centers. Bear’s infrastructure is now complete and the first new rigs will be delivered on-site this week, with full completion of the expansion expected to be completed this month. Chief’s infrastructure is expected to be completed in June, and we expect full energization and operations at the site by the end of June.
These two on-time expansions will add a total of roughly 1.25 exahash per second of self-mining to our portfolio. Once we are finished with the Bear and Chief expansions, our full attention will be on Black Pearl. But before we begin a progress update of Black Pearl, I want to take a detour into our past with some pictures from the progress we made while constructing our Odessa data center. Odessa began life as 50 acres of dirt and mesquite in late 2021, and a year later, our team of construction experts transformed it into our flagship data center. Take a look at just how different a site can look and operate in a year’s time. With that in mind, let’s turn to Black Pearl. The next two slides show the beginning of work at Black Pearl and a rendering of what we expect the completed data center to look like.
Remember that we are scheduled to energize the site in the second quarter of 2025. The time difference between now and our scheduled energization at Black Pearl is about the same as the time difference between the pictures on the previous slide of the Odessa data center construction. We have done this exercise before with the same team. Long lead time items are secured, and we fully intend and expect to continue our habit of on-time execution. Within the Bitcoin mining industry, Cipher has proven uniquely capable of identifying and negotiating the acquisition of greenfield sites, structuring optimal power arrangements, and then building best-in-class data centers all the way to completion. This process takes longer than simply signing a hosting agreement or buying a completed facility, but we believe it delivers the best return on investment in the long run.
With an eye toward delivering the best returns to our shareholders, I am pleased to share that we have accelerated our building plans at the site and plan to energize in 2025 not only the first half of our total capacity at Black Pearl, but the full 300 megawatts available. Slide 8 shows a 3D rendering of the data center we expect to see at Black Pearl in 2025. Slide 9 is a high-level overview of a Bitcoin mining business that we like to include each quarter to remind everyone how our business model works. We operate the box in the middle of the drawing that says mining equipment, which represents our data centers and mining rigs. As I discussed earlier, the majority of our operating expenses is electricity, which our data centers convert into computing output.
Unlike traditional data centers, which operate a similar model and sell their computing output to enterprise clients for dollars. Cipher sells its computing output called hash rate to the Bitcoin network for bitcoins. To make this model operate profitably, a Bitcoin mining company needs to control both its electricity costs and the capital it spends to build its data centers, including mining equipment. Controlling these costs enables a miner to be a lower cost producer, and our focus at Cipher has always been on controlling these specific costs to produce the best possible unit economics. That illustration hopefully gives you a good sense of a straightforward Bitcoin mining business. Cipher, however, does have an additional element to our business that is incredibly valuable.
We have the ability to sell power back to the grid at our Odessa facility. Our power purchase agreement gives us a combination of downside risk protection, as well as upside optionality to our revenue streams that doesn’t exist for most Bitcoin miners. Let’s now turn to page 10, and look at some recent bitcoin market events. A lot has happened since our last business update. We have seen all-time highs in both bitcoin price and network cash rate, as well as the having and a brief period of skyrocketing transaction fees related to the launch of the rooms protocol, thereafter. Now that the having has passed, we are seeing the anticipated squeeze on minor economics, and we at Cipher are witnessing firsthand the benefits of being a large, low cost producer in real time.
We believe that the supply and demand dynamics of Bitcoin, given the halving of new supply coming to market will likely eventually produce bitcoin price appreciation as seen in previous halves. We have also been encouraged by the enthusiasm for the US bitcoin ETFs thus far, as a driver of potential new demand. With the squeeze on minor economics, we have seen a pickup in acquisition discussions over the last several weeks, and we are engaged in several ongoing reviews of opportunities. We continue to have a disciplined focus on potential return on investment in our evaluation, and we are looking for opportunities where Cipher’s unique strengths can unlock extra value. As we move forward, Cipher is focused on finishing the expansions at bare and cheap while ramping up the build out of Black Pearl and selectively looking for new growth opportunities via acquisitions.
On Slide 11, we give a portfolio overview of our existing data centers and the time line for expected scaling of our data centers and expansion in our self-mining hash rates. In the first quarter, we paid an average all in electricity cost of $11,912 per bitcoin produced at our data center. We are very proud of this number and it drives our best in class unit economics. Please note that when some of our competitors talk about these costs, they only include electricity and not transmission and other charges. In contrast, when we talk about all in electricity costs, we mean the total cost to deliver electricity to our mining rigs. So our numbers include all transmission and other charges and our low numbers dramatically demonstrate our competitive advantage.
On the left side of this slide, you have an overview of our four current data centers, along with our all-in electricity cost per bitcoin at the respective sites for the first quarter. The charts on the right side of the slide, give you a graphic illustration of the amount of megawatts we manage related to our self mining operations and the hash rate produced by those operations as well as the additional growth opportunities in the coming year and a half. As discussed in 2025, we anticipate bringing on the full capacity of the Black Pearl site. At this point, we will turn to production by site. On Slide 12, you can see a picture of our Odessa facility. Odessa is the most significant part of our portfolio as it represents approximately 90% of our Bitcoin production.
Odessa is a wholly owned facility, with a five-year fixed price power purchase agreement and some of the lowest cost power in the industry. We report a third-party independent valuation to give investors a sense of how much value is represented in the fixed price power contract alone. And that contract continues to be valuable and differentiating for us. As always Ed, will talk more about it in his remarks. We currently generate approximately 6.7 exahash per second at the site, utilizing approximately 207 megawatts. We have mined roughly 1,183 Bitcoins at the site year-to-date through April 30th. On Slide 13, we show a picture and highlights from our Alborz data center, which we believe is a truly unique site. Alborz is 100% powered by wind.
And as a joint venture that we share with our energy provider, it currently has a total operating capacity of 40 megawatts when the wind blows that 40 megawatts powers roughly 1.3 exahash per second of rates. Alborz has mined approximately 168 bitcoin year-to-date through April 30th, roughly half of that total capacity and site production belong to Cipher. We expect to supplement the wind production at Alborz with the grid connection by the end of the second quarter. This grid connection will allow us to bring our uptime at Alborz is in line with Bear & Chief and most importantly, generate more bitcoin with the existing equipment at the site. We currently target roughly 75% uptime at the site. And with the supplemental grid connection, we anticipate our uptime will be closer to roughly 95%.
Slide 14 shows operational highlights from our Bear & Chief data centers. Combined, the sites operate 20 megawatts, which can generate approximately 0.7 exahash per second. Bear & Chief are also structured as joint ventures and feature shared economics similar to Alborz. Unlike our other sites, which have Behind the Meter power arrangements, Bear & Chief are set up in front of the meter at a location in Texas that typically features attractive market prices. And we are excited to report on their production next quarter when they will each be four times their current size. As you can see, we are extremely busy at Cipher as always. We have been a company focused on long-term success since day one and our disciplined approach, strategic decision making continues to differentiate us.
In the post halving environment, the value of our low cost producer model is clear. We believe our ability to identify attractive electrical interconnection opportunities at Greenfield locations and manage their evolution all the way to the state-of-the-art data centers we operate makes us unique. We are thrilled to have two consecutive quarters of GAAP profits and the way we are going to celebrate is to keep investing in the expansion of the business. At this point, I’ll turn it over to our Chief Financial Officer, Ed Farrell.
Ed Farrell : Thank you, Tyler, and hello to everyone on the call. Tyler has already discussed some of the key financial metrics for the first quarter. Before we proceed with the walk-through on the balance sheet statement of operations, I’d like to add some further insights and context. Last quarter, we emphasized the importance of having all four of our data centers fully deployed, and we still have the beneficial effects of this reflected in our earnings. In the first quarter, we observed a continuation of many of these favorable trends amplified by a tailwind from higher Bitcoin price. Slide 16 and 17 are some financial metrics on both the sequential and year-over-year basis, highlighting our performance and strength of our underlying business.
As you can see from both comparisons the trends are favorable. Let’s move on to Slide 18 and drill down on the numbers in more detail. In the first quarter, we experienced top line growth, which translated into significant bottom line results. For the second consecutive quarter, we had GAAP net income reporting $39.9 million this quarter, a sequential increase of 277% and a 976% increase from the prior year quarter when we reported a net loss of $4.6 million. In the current quarter, we mined 924 Bitcoin, resulting in $48.1 million in revenues, a sequential increase of 11%. Year-over-year, our revenues increased from $21.9 million to $48.1 million, a 120% increase. A critical contributor to this revenue to profit conversion is our previously discussed power costs, which in the current quarter increased in step with the growth in revenues.
In the current quarter, it’s worth noting that cost of revenues include $1.1 million of non-recurring costs, purchased upgrade parts to increase the efficiency of our miners. When comparing revenues in the current quarter versus the same quarter in the prior year, you can see that the cost of power on a percentage basis was well below the increase in revenues. This is primarily attributable to our fixed-price power contract at Odessa. The value of that contract rose by over $7.3 million this quarter alone, underscoring the inherent value of the power arrangement we secured at Odessa. As you recall, we adopted the new crypto fair value accounting standard in 2023. And in the first quarter of 2024, we had a fair value gain on our Bitcoin inventory of $40.6 million.
I’d like to talk a bit about our G&A expenses and our philosophy for managing these costs. To provide greater transparency into our financials, starting this quarter, we further broken down our G&A expenses into compensation and benefits and general administrative on the face of the statement of operations. In the first quarter of 2024, compensation and benefit costs were $13 million, representing a decrease of $2.7 million compared to the last quarter of 2023. Comparing the first quarter of 2024 against the first quarter of 2023, compensation and benefits increased $1.1 million primarily due to the rise in headcount as we grew the company 2023. Now on to general administrative expenses, which include IT, corporate insurance, professional fees, occupancy and other public company expenses.
We reduced these costs by $700,000 or 11% compared to the prior quarter and increased $600,000 or 11% from the first quarter of 2023, again, due to the growth in our business. Depreciation and amortization expense of $17.2 million was up $400,000 or 3% from the prior quarter and up 48% comparing the first quarter of 2024 to the first quarter of 2023. That was driven by both the full year of service for some mining rigs, infrastructure and some new rigs that were placed into service in 2024. As Tyler mentioned, we view our ability to find greenfield sites and quickly turn them into best in class data centers for differentiating and our best return on investment in the long run. Right from Cipher’s earliest days, we have invested in both personnel and technology, because we think our model scales as well as we expand the aggregate amount of megawatts we manage.
We believe those early investments will drive top line growth for the future and in turn flows through to our bottom line. Now, let’s turn to a slide on non-GAAP measurements. We used to reconcile our adjusted earnings. Allow me to remind everyone that our adjusted earnings exclude the impact of depreciation of fixed assets, the change in fair value of our derivative asset, deferred income tax expense, change in fair value of the warrant liability, stock compensation expense and other nonrecurring gains and loss. These supplemental financial measures are not measurements of financial performance in accordance with US GAAP and as such, they may not be comparable to similarly titled measures of other companies. We believe that these non-GAAP measures may be useful to investors in comparing our performance across reporting periods on a consistent basis.
Management uses these non-GAAP financial measures internally to help understand, manage and evaluate our business performance and to help make operating decisions. When we adjust our first quarter GAAP net income, we had $23.1 million for those items I just listed. That brings us to adjusted net income of $63 million for the quarter versus an adjusted net income of $27.8 million in the prior quarter and $8.4 million in last year’s first quarter. Thanks to our top-line growth, our discipline on costs and our industry leading power arrangements. The first quarter showcased strong free cash flow. These conditions, along with our access to capital through our strategic use of our ATM shelf funding, accretive expansion opportunities contributed to significant improvement in our liquidity position and further bolstered our balance sheet and liquidity outlook.
We closed the quarter with over $200 million in cash in bitcoin holdings. Now, let’s turn our attention to the consolidated balance sheet. As of March 31, our total assets amounted to $250 million, an increase of $95 million from $156 million at the end of 2023. Our cash position remained relatively flat at $88.7 million, up a little bit from there $86.1 million at the close of 2023. I’ll quickly touch on some of our balance sheet line items. Accounts receivable totaled $680,000 compared to $622,000 at year end, while prepaid expenses amounted to $2.9 million, down from $3.7 million at the end of 2023. It’s worth mentioning that most of these prepaid expenses are related to corporate insurance. And as discussed last quarter, we were able to significantly reduce our D&O insurance premium.
We reported a Bitcoin balance of $123.3 million, reflecting the 1,730 bitcoin held in treasury as of March 31. This figure marks an increase from the 780 bitcoin held at year end 2023, valued at $33 million. We did not sell any during the quarter. Our treasury management philosophy remains a frequent topic of inquiry, and our stance remains consistent. We maintain an opportunistic approach, continually assessing various funding avenues for our growth initiatives. While we generally aim to increase the size of our Bitcoin inventory over time. Our decisions are guided by the markets and our overarching capital allocation strategy. We constantly assess the markets looking for the most attractive forms of capital available, and we weigh the pros and cons of all the various ways to fund our business and expansion plans efficiently.
This may be through our cash reserves or bitcoin holdings or issuing equity. Through this constant evaluation process, we determine our estimated cost of capital and manage our treasury dynamically. We tried not to be dogmatic, though we sold the bitcoin this quarter, there may be times when we sell more of our bitcoin holdings to fund accretive growth plans. Now I’d like to shift focus to the value of our Odessa power contract, which we recorded as a derivative asset. We consistently emphasize the substantial competitive advantage afforded by our power contract at Odessa. As a refresher, we began publishing a third party mark for this agreement to the third quarter of 2022. This market is depicted as derivative asset on our balance sheet, subject to revaluation each reporting period.
Essentially, it reflects the in-the-money value of the contract in relation to the time value of the contract and prevailing forward power prices at our Odessa facility. As of March 31, this asset was valued at $101 million, reflecting a $7.4 million increase since the end of 2023. This change is recorded as a gain on the statement of operations. It is important to highlight that this asset is categorized into two components on the balance sheet, $34.2 million as a current asset and $66.7 million as a non-current asset. As always, fluctuations in the fair value of this contract will impact our GAAP earnings, but we excluded from our adjusted earnings. Our other significant assets comprised of property and equipment totaling $238.5 million, primarily attributable to our Odessa facility.
Within this figure, mining rigs and related equipment accounted for $168.7 million, while leasehold improvements are valued at $137.5 million. These amounts are net of $75.9 million of accumulated depreciation. We also hold intangible assets amounting to $8.2 million, with $7 million attributable to the Black Pearl site and associated ERCOT-approval. And the remaining $1.4 million relating to capitalized software. These amounts are net of $270,000 of amortization. At the end of the first quarter, our equity investee interest in the Alborz, Bear and Chief JVs stand at $52.6 million, and we had an operating lease obligations of $6.8 million. We had security deposits totaling $23.9 million, which include the $12.5 million of collateral posted through our Odessa power provider and a $6.3 million deposit to encore related to the construction of our new Black Pearl data center.
There were no significant changes to the liability side of the balance sheet from year end, and we have no debt that hinders our capital structure. Our current liquidity position as of April 30 is $213 million, comprised of $96 million in cash and $117 million worth of bitcoin. I will close my remarks by saying, we’re extremely pleased with our financial performance in Q1 and excited about our position as we enter this new having [indiscernible]. From day one, we have been disciplined and relentlessly focused on our unit economics while also delivering a prudent growth strategy. These financial results reflect the value of all the careful decisions we have made. Now that having is behind us, I hope we’ll see the markets recognize that we have deliberately built Cipher to be different from other miners.
As Tyler stated, Cipher is built to survive market downturns and to benefit from operational leverage in rising profitability environments. As always, we look forward to updating you in greater detail on our growth plans over the coming quarters. I will pause now and Tyler and I are happy to answer your questions.
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