Applied Digital Corp Q4 2024 Earnings Call Transcript

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

Question: Lucas Pipes - B. Riley Securities, Inc. - Analyst : Thank you very much operator. Good afternoon everyone. Wes, to you my first question is on the Ellendale HPC campus. And I wondered if you could speak to the percentage completion on the first 100 megawatts and the remaining capital requirements from here? Thank you very much. Wesley Cummins - Applied Digital Corp - Chairman of the Board, President, Chief Executive Officer, Treasurer, Company Secretary, (Principal Executive Officer) Sure, Lucas. So we have a little over $200 million into the facility as it stands today. The building, I'm sure you've seen some of the video footage is fully enclosed, we are progressing with MEP at this point, and then we'll do the final fit-out later this year -- early next year. And we go back to -- so this facility will be roughly $1 billion -- a little over $1 billion for the first 100 megawatts, which is on par with standard Tier-3 data center capacity. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 28, 2024 / 9:00PM, APLD.OQ - Q4 2024 Applied Digital Corp Earnings Call And so with the $200 million in, I think I've talked about this in the past. We are working with banks that typically provide project-level finance in this space. We have term sheets and we've actually selected a bank that we are moving forward with. And the expectation is that they will fund the remainder in the -- we've seen 80% to 90% loan-to-cost quotations from this, we just need to get past the lease finalization and the project level finance process is already running at this point. So we'd hope to close that shortly thereafter.

Question: Lucas Pipes - B. Riley Securities, Inc. - Analyst : Thank you very much for this. And change in topics really quickly on the cloud services business, can you speak to the ramp in your fiscal first quarter, how many clusters did you have online? And how would you kind of frame up the revenue opportunity Q1 -- fiscal Q1 here versus just this fiscal Q4 period that you just reported? Thank you. Wesley Cummins - Applied Digital Corp - Chairman of the Board, President, Chief Executive Officer, Treasurer, Company Secretary, (Principal Executive Officer) Sure, Lucas. So where we are there, as we said in the prepared remarks, we're six clusters online in Q1, and it won't be for the full Q1, but those came online I believe, in June, so it will be for the majority of it. So with the six clusters up, that business is roughly $110 million revenue run rate on an annual basis. And right now, I've talked about on previous calls that our team is very focused on the enterprise market. We started with the AI labs and the AI start-ups, we are very focused on the enterprise market at this point. We have been working on it for seven or eight months now. And we've probably seen recently, we've hired a new CRO that came from IBM that's very focused on that market. And so we see the demand there, and we will continue to ramp that. The other piece of the puzzle here is we have been working on financing that we are putting in place that -- it finances this deployment, this equipment in a way that makes it run through our income statement more fairly versus what it does today. So we don't want to keep adding a lot with the capital lease structure that we currently have just because of -- you see what it does to the financials because we are forced to do the depreciation over two years versus the industry standard of five or six. So those two pieces are coming together, and then -- but we do still see a significant amount of demand, but really growing demand from the enterprise side of the market.

Question: Rob Brown - Lake Street Capital Markets LLC - Analyst : Good afternoon. Just following up cloud -- on the AI cloud business, I think the six clusters, what's sort of the range of clusters, do you think you can grow that business into? And how do you think about that versus the data center business in terms of capital investments. Wesley Cummins - Applied Digital Corp - Chairman of the Board, President, Chief Executive Officer, Treasurer, Company Secretary, (Principal Executive Officer) On both of these businesses, Rob, we think about these businesses in the same way. These are asset heavy businesses, capital intensive businesses. We need to have the right mechanisms in place to do asset level financing for both of them. And so we've talked about that on the data center side. We are almost there. We talked about it pretty extensively on the GPU side. I think we're almost there as well. And so when we have the correct asset level financing mechanisms in place, I think we will be able to grow significantly on both sides of that business. On the AI cloud portion of the business with the data center capacity that we have in place today and what's available to us as we go through 2025, we can generate significant growth in that business, and we see the demand for it, but we need to get the right capital base in that business to grow it aggressively. Right now, we are kind of feeding both of them, and we need to move that financing down to an asset level from a company level.

Question: Rob Brown - Lake Street Capital Markets LLC - Analyst : Okay, great. Thank you, I will turn it over.

Question: Darren Aftahi - Roth Capital Partners LLC - Analyst : Thanks. Just following up on the lease. I guess from a big picture perspective, like how much of this is small details being ironed out versus a larger framework, and I guess my other question in regards to the lease is just how much is a backlog in the law firm that actually doing this holding on this process. Thanks. Wesley Cummins - Applied Digital Corp - Chairman of the Board, President, Chief Executive Officer, Treasurer, Company Secretary, (Principal Executive Officer) That's a good question, Darren. So as far as the details, there's large items, and then there's very small items and sometimes the small items can take as long as the large items there. But there is an extensive process around fiber connectivity, power, firm power, redundancy on power that took a significant amount of time to complete, but there is a lot of small details. So I would say it is a split between those, and it's funny, sometimes some of the smaller details take longer. But the question on the -- it is hard to get a view on the law firm, but there is only a few that deal with most of these contracts. And so there definitely is a backlog out there, but I can't handicap or just talk about how much slowdown is due to that. This is our first time through. So this is the only environment we've experienced.

Question: Darren Aftahi - Roth Capital Partners LLC - Analyst : Great. Thank you.

Question: Mike Grondahl - Northland Capital Ltd - Analyst : Hi, thanks guys. Wes, could you repeat what you said, the six clusters are driving an annualized run rate of how much revenue? I heard $100 million, but it kind of came through a little garbled. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 28, 2024 / 9:00PM, APLD.OQ - Q4 2024 Applied Digital Corp Earnings Call Wesley Cummins - Applied Digital Corp - Chairman of the Board, President, Chief Executive Officer, Treasurer, Company Secretary, (Principal Executive Officer) Yes, it's about $100 million to $110 million, Mike.

Question: Mike Grondahl - Northland Capital Ltd - Analyst : Sure. And in the press release, you kind of referred to this development platform on the HPC side with the potential to go from 400 megawatts to 1.4 gigawatts, do you think that first hyperscaler customer is interested in more than the existing 400 you're talking to them about? Could you end up being a one-stop shop for them, for another big project or two? Wesley Cummins - Applied Digital Corp - Chairman of the Board, President, Chief Executive Officer, Treasurer, Company Secretary, (Principal Executive Officer) I definitely think we could, but there is other demand in the market as well from similar type customers. There is a significant amount of demand for this capacity, especially near-term power. So '25 power -- 2025 power is done unless we have that for Ellendale. Now we're focused on 2026 power and then 2027 power. But I think near-term power is key, and you need to have the right type of power. Again, one of the reasons when we talked about selling our Texas facility, we don't believe that facility works for HPC, at least not the way we want to develop it. So you need the right type of power. So we're really focused on near-term power. And Mike, just to clarify, the 1.4 gigawatts is just the additional three sites. It doesn't include Ellendale. So that's what we are focused on, the market there. But I think the potential current customer as well as others like them, there's a significant amount of demand for near-term power in the market.

Question: George Sutton - Craig-Hallum Capital Group LLC - Analyst : Thank you. Wes, nothing on the call has surprised me except for one statement. You mentioned it's not clear when the customer might want to go live with the lease. Can you just clarify that statement? My assumption has been we want to get this up and running as fast as humanly possible, and that's why you're building out as rapidly as you are. Wesley Cummins - Applied Digital Corp - Chairman of the Board, President, Chief Executive Officer, Treasurer, Company Secretary, (Principal Executive Officer) Yes. So that's correct, George, a correct way to look at it. But there is different stages for this as far as when you're doing fit-out, what we are adding in for the fit-out. So there's a lot of moving parts there. I mean it is fairly buttoned down, but we'll save the details of that for when this is finished, and we can share that publicly.

Question: George Sutton - Craig-Hallum Capital Group LLC - Analyst : So just to clarify on that, the finance years are saying we are happy to put them together. We want to see the customer names. And once you

Question: George Sutton - Craig-Hallum Capital Group LLC - Analyst : Got it. Okay, thank you. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 28, 2024 / 9:00PM, APLD.OQ - Q4 2024 Applied Digital Corp Earnings Call

Question: John Todaro - Needham & Company LLC - Analyst : Wes, thanks for taking my questions. Two for you. First, just trying to due diligence as much as possible, kind of the timeline for that lease agreement. So you had mentioned they finalized their technical requirements, is that kind of you think about the first stage and how many stages would you say there are? Or is it really now just kind of down to some final details. And then second question, you had mentioned the Garden City site that you didn't think it was suitable for HPC. Obviously, a lot of the Bitcoin miners out there are kind of trying to go down that West Texas route. It hasn't been done yet. Just curious why did you think that, that site and maybe that region, would it really be possible for HPC. Wesley Cummins - Applied Digital Corp - Chairman of the Board, President, Chief Executive Officer, Treasurer, Company Secretary, (Principal Executive Officer) Hi John. On the -- I would not say, I mean, it's all kind of -- when you say is that the first step of the process on the lease side, all kind of goes together. But I would say we are finalizing the last details of that is the way I would characterize it. And then on what we've learned through this process and what we had seen previously but especially through this process is the -- I don't think, for us for our company, everyone else has their own strategy. But I don't think for us, having a large flexible load in the ERCOT market is going to be suitable for the kind of customers that we are pursuing in that business. I don't know what changes will happen, but I know there are changes in the legislature that have been proposed in the legislature in the state of Texas that will make even harder with the large flexible load structure to serve, again the type of customers we're looking at serving. So right now, we are not pursuing anything in the state of Texas at the moment. That could change in the future. But there's firm power, power redundancy and not just redundancy of what you build on the site, like UPS or backup gen, redundancy in having multiple power lines or feeds and from different directions into the substation or switching station that you're drawing power from. There is a lot of pieces that we've learned going through this process, and that's the type of sites that we have locked up and are locking up in marketing, but there's -- I'm not that bullish on just specifically the large flexible load in the state of Texas.

Question: Kevin Dede - H.C. Wainwright & Co. - Analyst : Thanks. Hi Wes. I was wondering if you could take a little time just to characterize the overall environment. Understand you're targeting 1.4 gigawatts. What's the competitive environment like? And how are you confident that Applied wins versus your competitors? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 28, 2024 / 9:00PM, APLD.OQ - Q4 2024 Applied Digital Corp Earnings Call Wesley Cummins - Applied Digital Corp - Chairman of the Board, President, Chief Executive Officer, Treasurer, Company Secretary, (Principal Executive Officer) Sure. So there is two parts to that. So from the environment, as I mentioned earlier, we see very strong demand for near-term power. So we're very focused on power that can come online through the end of '27. So power is the number one bottleneck at the moment. And then when you step back to what I believe is the number two bottleneck, it's supply chain. And there are a lot of stretched components in the supply chain. I'm happy to walk through those, but that's the second part. So we have a significant amount of experience in the supply chain. A lot of the things we -- for the first data center build we had ordered last year, we bought our places in line for switchgear transformers, a lot of the key components that are needed to build these. So those are the two pieces. And I think we're in a great position from both of those kind of competitive dynamics. I think the biggest thing for us is getting through this first lease that will be something that validates what we're doing as a company in North Dakota and our ability to go and find these sites, develop them and bring them online for very large companies and demanding companies. And so there is a lot of competition in the market. We see the majority of our competition being private data center companies that have been building for hyperscalers for years already, decade even. So those are the ones that we see as the majority of the competition in the market. And there's a handful of those platforms out there that are building hundreds of megawatts or in some cases, over a gigawatt of power out for hyperscalers. So this is not necessarily a new market. It's just a new style of data center.

Question: Kevin Dede - H.C. Wainwright & Co. - Analyst : Would you think it's also fair to say that you are looking under rocks and perhaps more rural locations with less concern on latency. Wesley Cummins - Applied Digital Corp - Chairman of the Board, President, Chief Executive Officer, Treasurer, Company Secretary, (Principal Executive Officer) So we are for sure, that's what I was mentioning earlier about how traditional data center companies go about it, and we go about it in a very different way. We've definitely tightened the bands on what we know about kind of the latency requirements. So we are not necessarily going to be looking at really far from locations, but we have a lot more knowledge base around the type of latency requirements in North America that we will need to meet for the site. So it is helped us with our site selection even more.

Question: Kevin Dede - H.C. Wainwright & Co. - Analyst : So all told, can you give us a rough ballpark on the megawatts that you have access to? Wesley Cummins - Applied Digital Corp - Chairman of the Board, President, Chief Executive Officer, Treasurer, Company Secretary, (Principal Executive Officer) We have megawatt capacity secured of just over -- for deployment just over 30 megawatts. Then Kevin, that's ready now. That's not for in the future.