Applied Digital Corp Q1 2025 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Lucas Pipes - B. Riley Securities - Analyst : Wes and team, congratulations on the recent investment round and the progress. Wes, my first question is about the lease negotiation. And it was my prior understanding that you had extended the exclusivity period under the LOI. And I wondered, has that exclusivity period expired? Or has it been renewed? Or are we still operating under that exclusivity? Wesley Cummins - Applied Digital Corp - Chairman of the Board, President, Chief Executive Officer, Treasurer, Company Secretary, (Principal Executive Officer) So the exclusivity period has officially expired. We chose not to renew exclusivity. We're just pursuing the finalization of the natural lease document then I think neither parties saw any reason to extend the exclusivity just to complete the document.

Question: Darren Aftahi - ROTH Capital Partners LLC - Analyst : Congrats to Saidal and David on their appointments. Could you clarify something first in the PR. It talks about the finalization of the lease with the hyperscaler for 100 megawatts. So I just want to be clear, is the lease just for 100 megawatts? Or do they -- is that hyperscaler have options on additional capacity in the campus? Wesley Cummins - Applied Digital Corp - Chairman of the Board, President, Chief Executive Officer, Treasurer, Company Secretary, (Principal Executive Officer) Yes. Darren, thanks. So what you should expect, and I think we've always talked about this, is the initial lease will be 100 and then the other 300 will be in a different form. But the expectation is that the lease will include reservation on the other 300 megawatts. I think we talked in the script, we're already designing those facilities or largely designed those facilities. We've started some earth work on those, some early work to get moving. I feel like we've ran through this several times about the winters in North Dakota. So we've already started making progress on those, but the expectation is that, that single tenant will take the entire campus, but it will come in two leases.

Question: Robert Brown - Lake Street Capital Markets - Analyst : Maybe moving to the GPU business, you talked about additional clusters, and I guess you're running at pretty strong demand there, full capacity. What's your thoughts on additional clusters and how do you see the timing on that? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 09, 2024 / 9:00PM, APLD.OQ - Q1 2025 Applied Digital Corp Earnings Call Wesley Cummins - Applied Digital Corp - Chairman of the Board, President, Chief Executive Officer, Treasurer, Company Secretary, (Principal Executive Officer) So Rob, as we talked about in the script, we expect to start deploying additional clusters. We have capacity that we're holding data center capacity at very attractive prices. I would add for the deployment of those additional clusters, we see the demand in the market. The thing that's going on in the market right now is do customers want to deploy hopper? Do you want to wait and move to black well when you're really in the later part of the first half of next calendar year. So we're having those discussions, and that's really what we're looking at. But we expect in the second half of our fiscal year, which as you know, starts December 1 to begin deploying additional clusters again. We've done a lot of work to make sure that we are doing the right type of financing. So again, the P&L that I talked about with the rework of the leases that we have that we recognize the depreciation appropriately that the payment schedule pushes out to three years versus two years so that it matches better the business model. So we've done a lot of work over the past nine months to make sure that we have the appropriate financing to push that forward. We have a lot of interest. We've got a really good boost from the investment back in September, and a lot more visibility on us. So you should expect that we start deploying additional clusters under a different financing structure in the second half.

Question: Mike Grondahl - Northernland Securities - Analyst : Wes, just talking about the demand environment and after the 400 megawatts are leased up. Have you already started talking to potential customer number two or number three? And any ideas on where that data center might be located? Wesley Cummins - Applied Digital Corp - Chairman of the Board, President, Chief Executive Officer, Treasurer, Company Secretary, (Principal Executive Officer) Yes. So thanks for the question. So I alluded to a little bit in my prepared remarks, since our last call, so in late August last week of August, through the month of September, we saw a significant increase in activity. We're one data point, so I don't want to make a market a market call on that. But we saw a significant amount of inbound interest from three additional hyperscalers, have talked about the hyperscalers we typically target in the past, but three of those additional to the one we're working with in North Dakota are pushing aggressively for 2025 and 2026 capacity. We're marketing the sites that we have to those customers. From our perspective, we've seen a significant step up in the demand for especially '25 and '26 capacity. '25 is basically done at this point. There's no additional '25 capacity out there that we'll have the 100 megawatts in Ellendale for '25 that a lot of people have started moving to the first half and even the second half. But we're seeing a significant amount of demand and working to get into another LOI at a different location, likely to be in the Dakotas. So I wouldn't say North Dakota, but likely to be in the Dakotas for us for that second site. But we are seeing a significant amount of demand for what we have.

Question: George Sutton - Craig-Hallum Capital Group LLC - Analyst : So I'm wondering if you could give us a little more specificity on the finalization of the lease. What remains -- my assumption has been that you have been trying to determine a delivery date based in part on the connections into the facility and in part based on the backup. So is that still where we stand on the lease? Wesley Cummins - Applied Digital Corp - Chairman of the Board, President, Chief Executive Officer, Treasurer, Company Secretary, (Principal Executive Officer) That's not really the issue up on the lease. But let me clarify that, George. I think there was some confusion around that on the last call. So I was talking about when lease revenue actually starts. And I said that it's really going to be in some ways up to the tenant. And so just to clarify what that is. So the facility will be ready earlier in the first half of '25 single feed. And then in the middle of '25 dual feed and then in the second half of '25 dual feed with backup get. And so technically, the client could take power if they're willing to go single feed with just UPS redundancy, then what do they want to wait for dual feed. And so I think from a safe perspective, looking at the second half of full backup gen dual feed so the full redundancy on site. So I think there was a little confusion just trying to clear that up. There's very little left on the lease, George. It's really just -- I try to handicap this, and I've been wrong on handicapping it several times. We feel really confident that this lease will get finalized. And in reality, this could happen in a matter of days. It could be six weeks. There's some time in that window, maybe on the outside chance of 8 weeks. But somewhere in that window, and there's not really anything specifically holding the lease up. It's just the process. We don't control the process. We push on it as hard as we can, but we're really confident in the lease getting done. And then we've done a lot of work around the site-level financing. We have the bank group lined up there. they're ready to fund as early as the end of this month whenever the lease gets signed. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 09, 2024 / 9:00PM, APLD.OQ - Q1 2025 Applied Digital Corp Earnings Call So we have all of the pieces lined up to go, and this will get finalized and we'll announce when it's finalized and then work through the funding at that point, which will be shortly thereafter. But I wish, George, I could give you very specific things, but we just don't control the process. And the color, I would add here, is if we're a first-time supplier, this is a really large contract for us. But I think even for the customer that we're working with here from just the size and the length of the contract from third parties. I have heard that typically is a first-time supplier to this customer, it can take 12 to 18 months to get through. So we're at about the six months. So it's moved really fast and we feel like we're at the very end of this. So I'm just trying to give as much color as I can. But obviously, we've missed a few deadlines on our expectation here. The work that we're doing with them just keeps moving forward every day and pretty significantly every week. And so from every piece of information that we have, we feel really confident that this will get signed. It's just hard to handicap when that actually happens.

Question: Michael Donovan - H.C. Wainwright & Co LLC - Analyst : Hi, Wes and David. This is Michael Donovan calling in on behalf of Kevin. For Cloud Services, can you discuss what you're seeing with customer turnover? And how has pricing changed with demand? Wesley Cummins - Applied Digital Corp - Chairman of the Board, President, Chief Executive Officer, Treasurer, Company Secretary, (Principal Executive Officer) So pricing, surprisingly has been somewhat flat lined for almost the last year on the -- let's just call it on hopper from an hour for bare metal. So we stick to bare metal on GPU price per hour has been pretty flat lined. I mean we're still quoting out in the 20 -- sorry, two 20-ish range on average per hour. And then on customer turnover, we have -- we keep expanding with our largest customer. We have a customer that has got more of a question mark around it in character with the changes that have happened there and the payment, I don't know the details of the payment. I think everyone here knows the same detail as I do, which is what I read the Wall Street Journal of roughly $2.7 billion, I believe, was the number. So there's some question marks around that, and there's a chance we swap customers out there, but we have demand for those clusters to continue to grow. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 09, 2024 / 9:00PM, APLD.OQ - Q1 2025 Applied Digital Corp Earnings Call And I'll go back to what I've been talking about the last couple of calls, which is we're very focused on the enterprise market which has been a developing market, and we're seeing more and more demand in the enterprise market. What I would say about the AI lab and the AI start-up market is that I feel like it's gotten much more prudent in that market. You're seeing a lot better, a lot more thought going into business models instead of if you went back 15 or 18 months, you were looking at how many GPUs can I get online and how quickly. So I think people are looking more around business models and actually feel a little more comfortable around those companies. And I think we have in our largest customer and Together AI, just a company that thinks about that a lot and has some really great customers on their end and a wide range of customers as well. But that market is still seeing significant demand growth. We're seeing new entrants from a customer set perspective in that market, both on the enterprise and back to the AI labs and the AI start-ups. But pricing has been largely stable there.

Question: Michael Donovan - H.C. Wainwright & Co LLC - Analyst : Exactly. Wesley Cummins - Applied Digital Corp - Chairman of the Board, President, Chief Executive Officer, Treasurer, Company Secretary, (Principal Executive Officer) Yeah. So we been spending a fair amount of time on methods for that. So with our big (inaudible) data centers, it's much harder. So you're doing air cool. It's much harder to capture the ambient heat you create for any use case. But with the HPC facility, the Ellendale 2 facility as we move to liquid cool, it makes -- it creates a much easier opportunity to capture that that waste heat that's created in the facility and look for opportunities that we co-locate in the areas that we're in, we really need to look towards agricultural opportunities to offload that heat, and we're examining that and we expect to start deploying some of that in the calendar 2025 as that facility comes online. But you're really thinking about things like greenhouses or aquafarming or mushrooms or things that are agriculturally based in the areas. We are in North Dakota for that to try to make use of that waste heat from the facility.

Question: Jon Gruber - Gruber & Mcbaine Capital Management - Analyst : Wes, my question is your last call, we at 91% or are we in 99.5% now? Where do we stand you write -- gave us a rating last call. Wesley Cummins - Applied Digital Corp - Chairman of the Board, President, Chief Executive Officer, Treasurer, Company Secretary, (Principal Executive Officer) It's a great question, Jon. And I think if I remember correctly on the last call, 90% of the work complete. I think I had trouble handicapping what the timeline is on the last 10. But I would say that we're 98.5% or 99% there, we're -- it's mostly just Jon asked you, Clark, at this point for us. So like I said, I wish we had more control of the process, but we push where we can. But I think we're at the very end of this process. The team has done a great job getting there.

Question: Darren Aftahi - ROTH Capital Partners LLC - Analyst : Hey, guys. Just a follow-up, Wes, on the comments you made about the two leases. I'm just curious, when you talk on yield on cost on the second one, is there a target range that you guys are looking at in terms of that? And then I guess on the second lease, given the way you -- what about building before maybe getting a client booked? Are you looking to get some prepayment piece to help fund Buildings 2 and 3 going forward? Wesley Cummins - Applied Digital Corp - Chairman of the Board, President, Chief Executive Officer, Treasurer, Company Secretary, (Principal Executive Officer) So Darren, on -- I'm not going to talk about the actual yields for lease rates for pricing there. I think it's premature to talk about that. But it still fits in the model that we've really always talked about from an economic perspective. The -- as far as the expectation for Buildings 2 and 3 or B&C as our vernacular is internally, the -- we'll do -- like I said, we're putting some money in very low dollars, not big CapEx spend, the expectation is we'll have a lease signed and project financing in place to, build there. And so we won't go through anything close to what we did on the first one, I've repeated, I think, again and again, that I think the way for us to break into this market is a full stack developer was speed to market, and I think that's working out well for us. But on Building 2 and 3, you expect (inaudible) get signed before we're doing anything CapEx dollar spend. But I will say from a market perspective, just going back to the market and what we've seen in the last -- really in the month of September, we are seeing those potential offers out there from hyperscalers of offering capital to build and upfront payments. We have down that, we'll be down that for some of our other campuses. But we are seeing some of that in the market just as it speaks to the demand for '25 and '26 and the scarcity of what's out there.