Q1 2023 Marathon Digital Holdings Inc Earnings Call
Speaker 1: Really to really the.
Speaker 2: Ladies and gentlemen, thank you for your patience. The conference will be starting in just a few moments. Again, we want to thank you for your patience.
Speaker 2: and we will be starting shortly.
Speaker 1: And.
Speaker 1: The.
Speaker 2: Good day ladies and gentlemen and welcome to Marathon Digital Holdings First Quarter Earnings webcast and conference call. I would now like to turn the call over to your host Chris Bredler, Vice President of Investor Relations. Please go ahead. Thank you Sherry. Good morning and welcome to Marathon Digital Holdings First Quarter 2023 earnings call.
Speaker 3: Thank you for joining us for our call today. With me on the call are Chairman and CEO Fred Teel and our CFO Fred Gallagher. Before we get started, I'd like to remind everyone that our prepare remarks may contain forward-looking statements which are subject to risks and uncertainties. That may, we may make additional forward-looking statements during the question and answer session.
Speaker 3: These four lithium statements are subject to risk and uncertainties and actual results may differ materially. When using this call, the words anticipate could enable, estimate, intend, expect, believe, potential will, should, project, and similar expressions as they relate to marathon digital holdings.
Speaker 3: are as such a forward-looking statement. Please refer to our earnings release for full recitation of our forward-looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from those anticipated by Marathon at this time. In addition, other risks are more fully described in Marathon's public filings with the U.S. Securities.
Speaker 3: on Form 10-K and 10-Q for a full reconciliation of its non-GAAP performance measures to the most comparable GAAP financial measures.
Speaker 3: We'll begin today's call with the pair of marks from Fred and you. After their comments, we'll be going through some of our more popular questions from investors before transferring to a live Q&A with our covering analysts.
Speaker 3: And with that out of the way, I'm going to turn the call over to Fred to kick things off. So Fred, gooducking all of you for knowing how to leave, soized, resting for just a moment.
Speaker 3: I'm going to turn the call over to Fred to kick things off. Fred? Thank you, Chris.
Speaker 3: We started 2023 with two primary goals for the year. The first is to energize our previously purchased mining rigs to reach our target of 23 ExaHashes by the middle of this year. And the second is to optimize our performance to become more effective and more efficient.
Speaker 3: As our monthly production reports demonstrate, we've been making notable progress executing on both of those initiatives.
Speaker 3: After weathering at Tommultu as 2022, that tested the resilience of our entire industry, we started 2023 with our most productive quarter to date. During Q1, we increased our operational hash rate 64 percent from 7XH on January 1 to 11.5XH on March 31.
Speaker 3: By growing our hashrate faster than the rest of the network and by improving our uptime, we also increased our Bitcoin production. We produced a record 2,195 Bitcoin during the first three months of this year, which is a 41% increase from the prior quarter. April's production report, which we published on May 2nd, shows that these positive trends have continued into Q2 as well.
Speaker 3: Thanks to the hard work of our team and our hosting partners, Marathon's operational hashrate is now over 14 ExaHashes, double where we started the year, and 61% of the way to our 23 ExaHash target. Additionally, our installed hashrate, which we define as our operational hashrate plus the hashrate that has been installed but not yet energized, is approximately 18 ExaHashes, nearly 80% of the way to our goal.
Speaker 3: Given our recent progress, we believe we are still on track to achieve 23X2 hashes of capacity near the middle of this year. As a reminder, the miners have all been paid for, so the primary gating items at this point are the ongoing construction of facilities, the pace of installations, and some pending regulatory approvals to energize one facility where miners have already been installed in Texas.
Speaker 3: Given what we know today, the path to 23 exahashes remains clear and we believe the target is in sight. Achieving 23 exahashes will be a milestone for Marathon and for our industry, as it will establish us as the largest publicly traded Bitcoin miner in North America. But this industry moves fast, and to maintain our position as the industry leader, we must constantly push the pace of innovation.
Speaker 3: In a few minutes, I'll discuss some of the ways in which our organization is evolving. But first, I'm going to turn the call over to Hugh to discuss our financial results for the first quarter.
Speaker 3: As you all know, Hugh will be retiring shortly after this earnings call. Hugh has been a valuable member of our team since he joined us a year ago. He was instrumental in developing our finance strategy, building our finance team, and helping us transition from an early stage company into a more sophisticated organization. So on behalf of everyone at Marathon, thank you Hugh for your service.
Speaker 3: And with that, I'll let you take it away. Thank you.
Speaker 4: Oh, thanks for that. And thanks for the kind remarks I appreciate it.
Speaker 4: It's been a pleasure to work here at Marathon and I'm proud of what the team has accomplished during my time here.
Speaker 4: And I really do wish everyone at Marathon the best going forward. But now let's focus on the results for the quarter. And I'll take you through them briefly. Improving Bitcoin prices, increased production, and the commencement of our previously mentioned plan to start selling Bitcoin as a means of generating cash for the-
Speaker 4: set my lower average Bitcoin prices compared to last year's quarter.
Speaker 4: We recorded a net loss of $7.2 million or $0.05 per share in the quarter compared with the net loss of $12.9 million or $0.12 per share in the prior year quarter.
Speaker 4: The $5.6 million favorable variance in net loss year over year was driven by three main factors. First, we realized the gains on sales of the digital assets associated with our sales program. That was $17.6 million.
Speaker 4: Second, impairment of digital assets improved by 11.5 million year over year as Bitcoin prices were generally increasing during this quarter. And third, you will remember last year we had an investment fund with Bitcoin in it and it had a 5.3 million unrealized loss.
Speaker 4: last year we have no such fun this year so we benefited from the absence of that law.
Speaker 4: Adjusted EBITDA improved to 18.6 million from 9.8 million in the prior year period. And the drivers of adjusted EBITDA were similar to what I already mentioned, including the gain on sale of digital assets, reduction in impairment, the absence of the unrealized loss and those benefits were offset by a lower margin, excluding DNA, because we're talking about EBITDA, of 21.5 million. Turning to our Bitcoin holdings, cash flow and liquidity, cash and cash equivalents increased to 12.4 million during the quarter to 124.9 million at March 31st.
Speaker 4: Also at March 31, we held 11,466 Bitcoin with a carrying value of 189.1 million on the balance sheet.
Speaker 4: The fair value of a single Bitcoin was $28,474, so the fair value of our holdings was approximately $326.5 million. We reduced our leverage during the quarter when we repaid the entire $50 million outstanding on the term loan facility with Silvergate Bank and terminated both the term loan facility and the revolving credit facility.
Speaker 4: Although there were no pre-payment penalties associated with this transaction, we did record a small loss on the extinguishment of debt of 0.3 million. This was primarily related to the write-off of unamortized debt issuance costs related to those facilities.
Speaker 4: We sold 2,900-fitcoins during the quarter, realizing cash proceeds of 62.6 million. These proceeds were utilized to fund cash operating expenses during the quarter.
Speaker 4: including cost of revenues for energy hosting and other cash operating expenses and certain deposits we made in conjunction with the ramp up our production activities.
Speaker 4: So, all in all, a good quarter for the balance sheet as we increase our task position by over 12 million while also reducing leverage by 50 million.
Speaker 4: As mentioned in our April production report, our cash balance at April 30 was 123.5 million and we held 11,568 Bitcoin with a fair value of 319.2 million. So our most recent update is not that much different than the March results I just went through on the balance sheet.
Speaker 4: We expect our future Bitcoin holdings will generally increase but will fluctuate depending upon operating and market conditions. We intend to add to our Bitcoin holdings primarily through our production activities. We will also continue to sell Bitcoin as a means of generating cash to fund monthly operating costs and for general corporate purposes.
Speaker 4: And that completes my update. So I am now turning it back over to Fred. We'll talk a little bit more about our operations and our ongoing plans. Fred?
Speaker 3: Thanks Hugh, and thanks again for all your hard work. To ensure we maintain our leading position in the Bitcoin mining industry, we need to constantly push the pace of innovation.
Speaker 3: It's easy to view Bitcoin mining as commoditized. All miners convert electricity into economic value in the form of Bitcoin. The commodity we all produce may be fungible, but the techniques we implement to produce that commodity, the technologies we develop and deploy, make all the difference.
Speaker 3: At Marathon, we have always believed in staying ahead of the technology curve because it allows us to optimize our performance and further differentiate Marathon from our competitors. We have continuously invested in the latest, most energy efficient mining rigs, and we're the only public-traded miner that runs its own mining pool.
Speaker 3: Now we're further leaning into the strategy to develop new proprietary mining techniques and own more of the process. Vertical integration is a popular term in our industry.
Speaker 3: And when most people in the industry use that term, they're really referencing power and data centers. We take a different approach. Marathon is the only Bitcoin miner that is vertically integrating the Bitcoin mining technologies stack, where the only miner that either directly controls or influences each aspect of the Bitcoin mining tech stack.
Speaker 3: all the way from the mining pool down to the ASIC. This includes our mining software, firmware, hardware, and infrastructure.
Speaker 3: Bitcoin mining is a game of speed and efficiency, and we believe technological innovation is essential to maintaining an edge in both. Let me give you some examples of our key competitive advantages.
Speaker 3: We operate our own mining pool, Meripool, which reduces latent scene allows us to orchestrate how and when miners begin working to solve a block.
Speaker 3: Our team has built custom controller boards which gives us flexibility over firmware. We have always invested in the latest and most efficient mining hardware and we maintain good relationships with manufacturers.
Speaker 3: Once fully deployed, we expect to be one of the most energy efficient Bitcoin miners at scale. As 66% of our hash rate will come from S19XPs, which are 30% more energy efficient than the prior generation. And we've been designing, co-developing, and deploying immersion cooling infrastructure that reduces maintenance and improves efficiency.
Speaker 3: In fact, our technology expertise is one of the primary reasons we were selected by Zero2 to help develop and operate the first large-scale immersion Bitcoin mining facilities in the Middle East, the details of which we disclosed in a press release earlier this week.
Speaker 3: While our first domestic deployment of immersion cooling came online last month at Wonder Applied Digital Facilities in North Dakota, we had already been successfully running immersion in Albuqabi as part of a pilot program with 0-2.
Speaker 3: Due to its climate, the Middle East is an incredibly challenging place to mine Bitcoin. This part of the world should be a haven for Bitcoin miners because it has an abundance of stranded, sustainable energy, but the climatology, the heat and the dust, has made deploying air-cooled miners in the region infeasible. Typically, air-cooled miners require cleaning and maintenance approximately every 30 days.
Speaker 3: Like the type we're deploying that reduces maintenance and runs effectively in harsh climates, suddenly opens the door to several new opportunities, the first of which for marathon is in Abu Dhabi.
Speaker 3: With the pilot successfully complete, we were selected by Zero2 to be their partner in developing and operating the first large-scale immersion Bitcoin mining facility in the Middle East.
Speaker 3: The joint venture we are establishing is for two sites, a 50 megawatt site in the port zone of Minas Ayd and a 200 megawatt site in Masdar City, which is the sustainability hub for Abu Dhabi.
Speaker 3: Both sites are expected to be operational before the end of this year.
Speaker 3: In aggregate, they will generate approximately 7 ExaHashes of security for the Bitcoin network, and through the JV we will represent 20% of the total project. And just to be clear, our 20% is additive to our 23 ExaHash target.
Speaker 3: While we are intently focused on optimizing the mining tech stack, innovation doesn't just come from technology. It can all so be expressed in business models. And the joint venture we entered into at zero to is the first example of this evolution.
Speaker 3: In 2021 and 2022, our strategy was simple. It was to be asset-like, to outsource the muscle of our operations, and to remain as lean and scrappy as possible.
Speaker 3: By outsourcing, we were able to grow faster in our competition as it allowed us to invest most of our capital almost exclusively in mining rigs, which are revenue generating assets. But we were also able to avoid many of the pitfalls that other miners fell into last year, including overleveraging their business with debt or being upside down on power contracts. This strategy was essential to building the foundation on which we now stand and from which we are growing this year.
Speaker 3: But all businesses evolve.
Speaker 3: Startups outsource initially, but once they've established a proof of concept and found product market fit, they begin to bring more resources in-house to optimize their processes and they begin to iterate on their business model to become more effective and ideally more profitable in the long run. Marathon is currently going through this growth phase. While public, we were essentially a startup at the beginning.
Speaker 3: last year and now after proving out our initial thesis, we are evolving. We're taking what we learned over the past two years and we're starting to build some of the muscle in house. This muscle includes several new team members across operations, strategy, growth and technology. It also includes designing and investing in the technologies of the future.
Speaker 3: like immersion cooling, as well as taking a more active role in the development and management of some of our current and future deployments.
Speaker 3: To be clear, we aren't abandoning asset life. We have no intention of losing our agility. We do believe that diversification is integral to creating a more resilient business.
Speaker 3: We've been applying this principle to our operations over the past year by adding new hosting providers and deploying our mining rigs in different geographies.
Speaker 3: Now with the joint venture with zero two, we're starting to apply it to our business model.
Speaker 3: When done correctly, joint venturing can be a synergistic.
Speaker 3: as it allows each party to play to their strengths. We have deep technical mining expertise and experience with a variety of mining sites, business models and geographies.
Speaker 3: Zero2 is a local, well-capitalized collaborator with a regional expertise, a proven record of infrastructure development.
Speaker 3: For us, this was an ideal match. Each deployment comes with its own unique challenges and requires a curated approach. We believe in staying flexible and adapting to the circumstances to ensure the best outcome. And technological innovation and adaptation are in our DNA, and we believe they will remain key components of our future as we continue to pursue to expand Marathon's footprint and diversify our operations. We're becoming more diversified, more sophisticated, and as a result, more resilient.
Speaker 3: We are smarter now than we were a year ago and ultimately in a much better position. We are a company with a strong balance sheet, a roadmap to hitting our primary target of 23 exahashes of capacity near the middle of this year, a growing team of subject matter experts, a technology stack that is becoming increasingly more vertically integrated and efficient.
Speaker 3: a unique approach to mining that's allowing us to effectively expand our hash rate to support the Bitcoin network.
Speaker 3: At Marathon, we're all working extremely hard to ensure that we energize our portfolio mining rigs on schedule, and that we optimize our operations to become not just one of the largest, but one of the most energy efficient and most technologically advanced Bitcoin mining companies in the world.
Speaker 3: And with that, I'll turn it back to Chris so we can begin with questions. Chris. Thanks, Fred. At this time, we're going to commence the Q&A section of today's call.
Speaker 4: We'll start with by answering some of the questions submitted by investors on our Q&A platform. Our first question comes from Brandon B.
Speaker 4: What is the minimum Bitcoin price that would allow you to sustain for profitability based on current operating costs? Be friend.
Speaker 3: due to just whether driving more demand for energy or less. But our expectation is that obviously more hash rate will continue to come online. So that kind of break even point will continue to edge up sort of a month by month. Great, okay. Our next question comes from Jacob B.
Speaker 3: Are we still on course to achieve our 23 exahash per second target by June or July ? What obstacles may get in the way of that goal? Also what is the cause of our hashrate run over the last week? We've hit block numbers we've never seen. What's the catalyst? Like and subscribe!
Speaker 3: Are we still on course to achieve our 23XH per second target by June or July ? And what obstacles may get in the way of that goal? Also, what is the cause of our hash rate run over the last week? We've hit block numbers. We've never seen. What's the catalyst? I want for you, Fred.
Speaker 3: Yeah, thank you. So we're still on course to hit our 23X hash as we reiterated kind of throughout this call by the middle of this year. What obstacles can get in the way of that goal? At this point, it's really down to some final construction that's going on, which we don't foresee currently.hensible
Speaker 3: any challenges with, and then just regulatory approval of one site in Texas where we have machines installed currently and we're just waiting for energization. Those are kind of the only two things that we see as any potential risks there. Obviously all the machines have been...
Speaker 3: Purchased, virtually all of them have been delivered. And, you know, what can be installed has been installed and the rest are just waiting for buildings to be completed. So we're feeling very confident about that. If you think about the the hash rate run over the last week, many of you are familiar with
Speaker 3: The luck factor that exists within Bitcoin mining and over time in theory your luck should kind of even out. I'd love to say that it's because our technology stack is performing better than expected but i'm not going to make that comment quite yet.
Speaker 3: until we have more historical data to kind of go from. But we've been very pleased with the results, needless to say, and certainly, you know, based on kind of what everybody can see in the MEMpool by looking at how MeriPool is performing, we're definitely performing north of kind of expectations from a just pure hashrate.
and average BTC produced per exa-hash numbers that many of the analysts put out there.
Great. Okay. Our next question comes from Chetra A. Are you planning on selling any Bitcoin soon? If not, do you have enough capital for the operations for the next four years?
I can take that. We sell Bitcoin to cover operating expenses as we've done all this year.
Essentially, we'll cover energy costs operating expenses and then any Bitcoin that's left after that, we save put on the balance sheet and huddle.
So every month we've been increasing our holdings to some degree or another, other than potentially in January when we sold more Bitcoin than we produced. But as you look at our capital requirements,
going forward. We've essentially fully funded the 23x hash growth target for this year. We've funded the vast majority of the Abu Dhabi project.
as well. So, borrowing additional expansion in the back half of this year and early next year, we're pretty well set from a CAPEX STEM perspective at this point. I'm not going to comment on the next four years because that's a whole cycle in this industry and we'll have to see how things go.
Yeah Sounds good. Okay. Let's go to Brad M Yes, countries like the US and Sweden are implementing or attempting to implement large tax penalties on Bitcoin miners
What are you doing to avoid, fight, or position the company against these proposed and past discriminatory taxes?
Well, we have no operations in Sweden, so we're not very active in that area. And to be fair, in Sweden, what they did was essentially remove a tax abatement that they had and...
essentially removed a discount. And so those energy rates went back to what they had been previously. And that affected the broad data center space completely. It wasn't just something targeting Bitcoin miners. In the US, it's a very different story. The Biden administration's proposal...
of an exercise tax on energy used by Bitcoin mining is another example of this industry being specifically targeted in an unfair way. You know, if you were to think about different ways to save on energy wastage, the vast majority of energy used in this country is used for heating and cooling of homes.
And I think the government should think more seriously about if you're going to restrict an industry, then restrict instead the wasting of energy across all industries. If you want to reduce carbon emissions in this country, Bitcoin miners are the biggest users of renewable energy of any industry. And 0% of risk Michigan, 4% risk by putting up with sites could By setting the 100% risk Scenes And 15% riskiningGod breaks that becauses 18% people
consume less than a percent of the energy generated globally. And you should focus instead, if I were the administration, on fossil fuel industry, which when it comes to our electrical energy generation, coal is still 19% of our energy generation.
focus there as opposed to targeting the Bitcoin mining industries. This is clearly just a veiled attempt at
trying to push Bitcoin mining offshore, which is something we believe potentially could threaten U.S. national security. And we think it's very important for the U.S. to maintain a strong position in securing the Bitcoin network by allowing Bitcoin mining to operate within the U.S. along very economical terms.
Okay. So, C's RP asks, can you briefly expand on Marathon Digital Holdings mission for its investors regarding growing valuation and dividends? I'm not going to comment on dividends.
Companies that pay dividends typically are just mature industries where there's typically not a lot of growth happening and it's really just about optimization. In the Bitcoin mining industry, we are driven to continue to grow our capacity because of the increase in the difficulty rate and the halving of Bitcoin that happens every four years. So we're very focused on continuing to grow.
We've done a huge amount of growth this year. We've already doubled our capacity from where we were at the beginning of the year, and we're going to increase it further nearly 50 percent by the time we hit our 23x and hash target around the middle of this year. And so we'll continue to grow in the future. We've not made any public pronouncements as to how much.
But I think you could infer that minimally, we would want to maintain our share of the global hashrate going forward to maintain our share of the Bitcoin that are awarded each day.
Well, in the interest of time, I think we'll have to wrap up this part of the Q&A. Thanks to our investors. We really appreciate your interest and your questions. I'll now go ahead and turn the call back over to our operator to open the line to questions from our covering analyst. Sherry, back to you. Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue.
and for participants using speaker equipment, maybe now it's time to pick up your handset before pressing the star keys. Our first question is from Jo Flynn with Compass Point Research and Trading. Please proceed.
Hi guys, thanks for the question. We were curious what drove the lower uptime in April compared to the March and if you could comment on maybe the incremental fee benefit you've been getting from ordinals and just overall network activity looks pretty strong this quarter and it looks like it started picking up.
early as March. Thanks. Sure, so what drove April's production results are a combination of some curtailment in Texas due to heat as well as one less day.
of mining 30 days versus 31 days in the month, and the increase in the global, in the difficulty rate, because of the increase in the global hash rate, primarily.
As you look at the impact of ordinals, obviously we've seen block rewards go up considerably. Where typically the average block reward we've previously been seeing is somewhere in the 0.2 to 0.5 Bitcoin per block. There were some blocks.
that were won by various pools at over six and a quarter bit coin per block, meaning that the Transaction fees were greater than the block reward fees Provided by the Bitcoin network You know, I think this is likely going to be a Kind of an initial frenzy as people
use kind of BRC20 tokens and are leveraging ordinals. And I think over time, what we'll find is...
little bit and we'll see more normalized transaction fees still above historical kind of trends in the most recent periods but not at the levels of you know six BTC per block. I think the
a race around the transaction fees. And I'm a strong believer in innovation in this space, and I think we'll continue to see development of applications and business and use cases on top of the Bitcoin blockchain accelerate. We've seen, if you look at the data around the creation of wallets,
on the Bitcoin network, it's at a record level back near or above the levels of 2017. And so obviously there's a huge demand to build things on the Bitcoin blockchain. You know, development teams focused on the Bitcoin blockchain have expanded considerably. And we're obviously very interested in fermenting as much development on this.
Thanks, that's helpful. And then just one more question on kind of if you could expand on your capital allocation plans going forward. As you mentioned, most of the, you know, CapEx is paid for at the JV and all the miners are purchased.
So just more specifically on that point, have you considered using the cash and bitcoin on hand to buy back the convert here, like at a significant discount?
evaluate growth opportunities and obviously balance sheet opportunities as we move forward. And we'll announce plans as they happen.
All right, thanks. Our next question is from Lucas Pipes with B. Riley Securities. Please proceed.
Thank you very much, operator. Good morning, everyone. Thanks for taking my question. Fred, I wanted to circle back to the earlier question regarding production costs and maybe take a slightly different angle. Could you comment on the average power cost in Q1 in terms of kind of tens per kilowatt hour and what would be your outlook for power costs once you fully ramped up to the 23.4?
and energy cost as opposed to just energy broken out but I think you know you can look at kind of the numbers there and see that our energy costs are and hosting costs all combined are somewhere in the kind of
separately. Very helpful. Thank you. And then that that six to seven cent would also apply to the fully ramped 23.3.
Very helpful. Thank you. And then that 67 cent would also apply to the fully ramped 23.3. Yes.
Francis de Van Der's purchase of P&E and then also investments in the joint venture. I just wondered if you could maybe elaborate on each of those buckets, exactly what use them for.
for example in the joint ventures that in Abu Dhabi or is that related to Kings Mountain, etc. So would appreciate the color on those investments and then also kind of at the end of the year where would you expect these these various buckets to stand based on your current budget. Thank you very much.
as Fred mentioned, the 23X hash is paid for. So, you know, we don't have any real significant capex related to hitting that. That doesn't mean we won't continue to look to grow the business going forward. I think the one that you could probably most easily.
were kind of halfway through that. And I think that's probably the best way to...
kind of walk you through it. As you can see when you compare our cash flow this quarter to last year's quarter, as we've already said, significantly lower because most of the advances to vendors, most of what happened in the first quarter was receipt of equipment and not necessarily purchases of any new equipment. Any purchases of PP&E that you see there are probably just some.
you know, maybe some containers here and there for immersion and things like that. Nothing really significant. That is very helpful. Thank you for all the color and I'll turn it over. Best of luck.
Our next question is from Tyler DiMantello with BTIG. Please proceed. Good morning, everyone. Thanks for taking the questions. So, Fred, I wanted to follow up on your comments on the vertical integration with the mining tech stack. Can you put a little more color there in how you're thinking about mining?
Sure, so I think a great way to look at this is.
And again, don't translate these numbers literally, but if you look at the mobile telephone industry and you look at Apple versus any other vendor, Apple with less than 20% share of the mobile industry generates over 80% of the gross margins in the industry because of their vertically integrated tech stack. They have the hardware device.
in the hardware device, they have chips, they have the operating system on the device, they operate the cloud services and get a fee on kind of transactions if you would that are done through their cloud services.
if you correlate that to our tech stack, what is the equivalent of kind of cloud services for us is our pool. The pool is the orchestration layer that essentially instructs miners what to do. In a traditional third party pool, the challenge is that...
They have to be able to properly task and control
miners with a huge amount of variation in them. They may have old s9s, old s17s by bitmain, they may have micro BT machines, they may have all sorts of machines of different generations, different deficiencies, different latencies, different capacities.
connecting to their pool and they have to manage those kind of equally, which means typically third-party pools are optimizing to the lowest common denominator. That creates inefficiency if you're a large-scale miner who has the most advanced equipment in the industry. As we've said repeatedly, 66% of our hashrate will be coming from S19x.
in
the operational efficiency, it does add incremental efficiency. And in our industry, a 1, 2, 3, 4, or 5% increase in efficiency can be very significant.
And so you start with the pool, and by having our own pool, we essentially don't have to design it to operate with third parties in mind. So everything we do can be optimized to efficiency. We can remove every second of latency in the communication because A, we don't have an issue of having to validate the miners that are connecting to our pool because it's our own.
saying it's the reason why, but potentially outperform the average pools out there from perspective of how many Bitcoin per exa hash do they produce.
The next layer down is the management layer that actually operates a site. And so together with the firmware that we have built, which allows us again, optimize the operation of the miner specifically to our needs, as opposed to using...
A third party firmware that's operating in the miner that has to cover lots of different machines or the stock firmware that comes from the vendor, our firmware is specifically optimized to work with our pool and also with our controller boards. And our controller boards provide us greater control over the miner. It allows us to do things like flashing updates over the air so you don't have to physically go and update each miner. You can all do it remote.
start entering into the technology stack and having a very significant impact on the operating results of an individual miner, a site, and therefore the company.
And I think we will be absolutely the only miner who is fully integrated from pool down to ASIC in the industry. And we view that as a very critical differentiation. Okay, great. Thank you. I really appreciate that. And then I want to follow up. You made some comments on the immersion with Applied Digital, and now you're working towards the JV, but you alluded to some of those other opportunities. And presumably, you may have mentioned a little bit of those, but can you just provide some more color on those as well, if there's anything that you didn't just touch upon, please? Yeah, so as relates to immersion, there's this concept in the technology industry about you're either a pioneer, or you're a pioneer.
and you're the company that kind of is the first one into an industry or a technology. And then there's a concept called fast followers. And if you look throughout history in the technology industry, and I've spent 40 years in this industry, clearly
pioneers get arrows in their back and the fast followers are the ones who win. And the typical example people use is Google isn't the first search engine, Facebook wasn't the first social media site, etc. So it's typically a fast follower can build upon the learnings of the pioneers and do something much better.
And so we, like many companies, and again, the analog to kind of Apple, Apple's typically not the first one into a, with an innovation in a sector. They typically wait, see how things develop and come out with a much better optimized version. And that was our approach to immersion. We looked at a lot of the Gen 1 versions of immersion and how people had done those.
and we realized there were some shortcomings in those systems and we had a couple of design criteria that we wanted to have. One was simplicity and cost efficiency. It had to be as low cost as possible from a CapEx perspective to deploy it. It had to have the highest degree of reliability and uptime.
where Bitcoin mining goes on, where the operation can be totally done, lights out, so to say, with nobody touching machines and maintaining things for a 100-day period. That's kind of unheard of in this industry. And what that opens up the ability to do is now A, you're lowering your operating cost of sites because you have fewer people on the ground having to maintain it.
machines and the systems uptime. What it also does is it lowers the economic barrier to doing smaller scale sites because now typically the industry's been driven to do utility scale sites north of 50 megawatts because that's what pencils best relative to the number of people you have to have on the ground to maintain and operate the site.
But with our immersion technology solution, we believe that we can go downsize in sites which opens up many more opportunities globally for places where we can't mine. And the ability to do so with very little operating team member involvement allows us to run.
a vastly kind of distributed network if we wanted to do that. So there's some technology design decisions in there that were really key on how do we become the most highly optimized miner out there and especially with emerging technology using this generation that we're now deploying in Abu Dhabi and we're continuing to evolve.
that even as we speak further and adding more enhancements to it, I think what you'll see is, you know, we will lead always with technology whether it's the fastest most energy efficient machines, whether it's the best immersion technology, the best firmware, best controller boards, best pool, etc.
I'll turn it back to the queue. Our next question is from Kevin Deedy with HC Wainwright. Please proceed. Good morning, gents. Thanks for taking the questions. Can we go back to...
To the curtailment announcement or comment that you made with regard to the March, sorry, yeah, March operation. April , April , right? Could you.
Add maybe a little more color to that. At what point do you get to decide or do you rely on your hosting partners to decide what's sort of the threshold? How do you look at weather patterns and...
I don't know, just maybe just give us some insight on your thinking around curtailment and how you're going to manage it. Yeah, so
Kind of think of it this way, unlike some of our competitors who operate single sites, you have all of their hashrate coming from one site and are subject to the foibles of the grid and or power generation sources that they have at the one site.
we have our operations now distributed across many, many sites. And so each site handles curtailment slightly differently from an operational perspective. For example, at King Mountain in Texas, what's unique is we have a direct PPA for the...
And then that's kind of also limited by the systems that our third-party partners, in this case, USBTC have deployed on the ground. We've been doing...
number of upgrades with them to how curtailment is being handled. And I think what you'll see is with the enhancements, the technology enhancements that are being put in place, the systems are becoming more intelligent and our ability to really optimize when we shut down and how we shut down.
we'll start seeing some benefits here as we go into the summer months where typically in Texas you have higher heat and therefore you have issues around heat generated curtailment which is not a grid issue that's an operations issue but it's still important because it is a curtailment of operations if you would and so some of the things are custom firmware
allows us to do is optimize both under-clocking and over-clocking of miners as a way to deal with heat. With the APLD sites, for example, again, it's kind of site-specific how we deal with curtailment though because the North Dakota location of those sites is very different than West Texas where King Mountain is. Different weather patterns, different seasonality, different issues, grid operators, etc.
Our diversified strategy allows us to have a very diverse exposure to curtailment. And as we continue to explore and deploy more immersion, we'll have less curtailment due to heat in places where we use the emerging technology. And as we continue to build out our operations capabilities around managing, in an automated fashion, energy pricing curtailment, you'll see some advancements.
in efficiency there. And I think, obviously, as we get involved in opportunities where we're actually controlling the power purchases, we'll be able to take advantage of some of the tools that exist for buying blocks and hedging and things like that as well, which will further optimize operations there. So think of it as we're just starting on this journey of optimizing curtailment, but they'll see continual benefits throughout this year. Can we carry that?
How should we assume that power comes online? Do you think it's all in by the end of this year? Or... Yeah, maybe give us a little more insight. I know you said that you'd have something going this year. I just wasn't... I guess I just missed the details. Apologies. Sure. So, in reverse order...
the site will be fully operational by the end of this year, all 250 megawatts. And like any of our deployments, you'll see it come on gradually, starting in the not-too-distant future here and then accelerating as a whole.
more equipment is kind of landed on the ground and installed. So in Abu Dhabi specifically, if you want to think about curtailment, there in the summer months, you'll see some curtailment due to not heat, but rather energy demand.
As I think I've mentioned previously, you have this energy use symmetry that exists there where they need 4 gigawatts of power generation in the summer for all the air conditioning that they run, amongst other things. And in the winter, that's only about 1 gigawatt. And so, in the winter time, there's plenty of excess energy and in the summer time, there's a lot of energy that's available.
There are periods of the day where there may be curtailment. We may see some seasonality in the numbers and likely will see in the summer months some curtailment. In the winter period, obviously, there won't be any curtailment. There will be seasonality in those numbers. All of the hashrate when we talk about it is nameplate. We specifically don't comment.
on overclocking because two things. One, it's very easy to assume, oh, if you can overclock your miner by 10, 20, 30, 40, 50%, then we'll just bake that into your numbers. And overclocking is dependent on a lot of things. Site specific.
cooling technology specific, etc. And it just gets too complicated to try to talk about hash rate, net of kind of over or underclocking. So we believe that by talking just nameplate hash rate, there's going to be periods of the time in certain sites where we underclock miners as a way to keep them operating during summer months when otherwise they would be curtailed for heat purposes as opposed to energy purposes.
And there will be times of the year at certain sites where we will overclock. What I can tell you is that
The pilot in Abu Dhabi exceeded our expectations on the amount of overclock we were able to achieve. I'm not gonna name a specific number. I'm gonna be like the US Navy and just not talk about how fast our ships are or how deep our submarines go. But I think what you will see as we announce numbers in the forward quarters, including results from those sites, is a number
I would expect to see our operational efficiency as a percentage of our nameplate hash rate get closer to 100% at times when we can overclock and otherwise be at kind of what our normal rate is, which is in the 90-ish percentile.
What should we think about the joint ventures power costs?
So I think you should think of it as it's essentially fixed contractual price that starts in the.
kind of, you know, low single digit range and goes up marginally over the life of the contract. So there's no risk on the pricing there at all. It's fixed with kind of an annual little increase each year.
And again, because that's a joint venture operation, depending on how we end up consolidating that, we may just show it as a profit number.
based on our 20% share without kind of a lot of detail around the specific Bitcoin mine there etc but that's something those are details we're still working out. Okay, you mentioned the
Actually, I apologize. I don't sure if you mentioned the length of the contract, but can you talk to that can you talk to who has hands on assets at the conclusion of the contract? So we haven't commented on that aspect of it. It's a multi-year agreement.
and like any JV there are provisions in the contracts that allow for liquidation of the joint venture.
either at expiration or extension of it, and then there's an unwinding process that would happen there. But it is a multi-year agreement, not atypical to the typical duration of the hosting agreements that we have.
Our final question is from Brian Dobson with Chardin Capital Markets. Please proceed. Hi, thanks and good morning. Just another quick follow-up on the joint venture, which is very exciting. So I guess ultimately as a management, how did you choose that partner and also which geographies were you considering and really what made you decide that Abu Dhabi was the right place?
risk relative to the locus, the country you're going to operate in, the regime risk, taxation, etc. UAE had a number of very attractive opportunities or aspects to it. One is stability, excess power,
They just recently brought on a new 5 gigawatt nuclear power plant in addition to all the existing power infrastructure that they had. And so they had excess power generation capacity, but they also had a need for Bitcoin mining. This asymmetry in the energy that exists there creates a problem.
or challenge for them, which is twofold. One is you're only monetizing your energy generation in the winter months to a much lower degree than you are in the summer months. And so that capital equipment, if you would, for energy generation, in theory, is not revenue generating in the months.
when you're not consuming the power that's needed there. And so the government and the owners and investors in the power generation assets were very interested in to find a way that would allow them to better get a return on investment in their power generating assets.
which includes the transmission line distribution of energy in the country, in a way to achieve a couple of things. One is, how do we obviously generate revenues that we're not generating today as a way to increase the ROI on the investment they made in the energy generation and distribution. The other thing is, the government provides subsidies for electricity to their people.
which is a great thing, and the ability to monetize the energy generation through Bitcoin mining is a way to allow the government to do that in a way where they're not having to take money out of treasury to do it, but instead can use this operation as a way to help subsidize the energy costs in the country. And lastly, the heat offtake from the energy generation essentially drives
the water desalination systems that they have. And the vast majority of water in that region has to come from desalination, where you're taking seawater and you're essentially heating it to the point where it converts to steam, then you condense the steam, and what you have is distilled water essentially. And that is the primary source of water in that region. And so they need the heat offtake from the energy generation, but when the energy generation drops in the wintertime, they don't have all that heat offtake. So they had to find a way to keep the heat.
going, if you would, from the energy generation in a way that was profitable because you don't want to run these systems if you can't sell the energy. So we provided the ideal solution. It was really a match made in heaven. If you think about
from the energy generation in a way that was profitable because you don't want to run these systems if you can't sell the energy. So we provided the ideal solution. So it was really a match made in heaven. If you think about who our partners are there.
power generation and distribution in the country. And so from a risk perspective, we only wanted to partner with somebody where we could dramatically decrease risk of energy pricing, energy contracts, energy distribution, et cetera. And we also wanted to partner with a partner who would have significant skin in the game to ensure that the development of an energy system trying to establish risk assessment was very, very critical to ensure because this is a data and hinges on public pat AWS
that the operation was going to operate successfully post launch. And that they were going to be able to bring the capital to the table that they said they were. And we could not have chosen a better partner. Xero2 is a great partner. Their investors are obviously some of the largest entities in the country.
We feel very honored and proud to be able to work with such a good partner there. It was kind of a combination of risk, the unique nature of the way energy markets work in that country, in that region, and also the ability for us to really deliver a technology advantage.
that nobody else could. And there were a number of other people who had attempted to partner, and we ended up being chosen because our solution was better. Yeah, excellent, thank you. I think that's really in line with what a lot of investors are talking about going forward.
you know, subsidizing the base load on clean energy projects. Do you see opportunities, you know, elsewhere in the world and what other geographies might you consider?
Yeah, a great question. So, you know, we are very focused on diversifying risk. And by the same.
token, no pun intended, that we diversified out of Texas into North Dakota and other parts of the US, now diversifying internationally, we're looking at things like optimizing for different climates in different hemispheres. For example, if you're in the Southern Hemisphere, you're going to see a lot of the
and you're operating there with seasonality there. Heat, for example, if we were to do air-cooled in the southern hemisphere, the hottest period for the southern hemisphere is when it's coldest in the northern hemisphere, and so you could essentially offset some of the seasonality in production by splitting operations between north and south hemispheres. So there are some opportunities in Latin America, which we think are potentially promising. We're not going to name locations at this point, but let's just say that there's some, you know, very interesting opportunities for renewable energy.
in Latin America. We're also looking at further growth in the Gulf region, not just in UAE but countries around there who have similar needs and similar systems and allows us to kind of leverage
our good reputation from the Zero-Two project in the region. There's some potential interesting energy sources in Africa that are renewable, geothermal energy for example, being one.
That look quite promising. You won't see us necessarily doing any expansion in Europe . You may see some expansion in Asia. There are certain opportunities in parts of Asia where there's attractive hydro energy also. I think if you kind of
look at the combination of our technology stack that we've built, kind of going back to what I said about being able to operate smaller sites hands-off, kind of remotely, allows us to take advantage of opportunities for smaller size sites that maybe are more geographically dispersed.
It kind of opens up more opportunities than would normally be open to a large scale miner like ourselves. And then you also have the opportunity, as we've spoken about before, where we believe the ability to generate energy by consuming methane gas.
from landfills, for example, is a very interesting opportunity because you're taking something that is 80 times more damaging than carbon dioxide and essentially eliminating it, converting it to energy, using that energy for Bitcoin production. And in that way, we would be fully energy self-sustaining at those sites.
and not need potentially grid energy at all for that. And so generate our own energy, consume our own energy, while at the same time having a significant potential impact on the climate. So those are kind of how we look at opportunities here going forward.
Excellent. Thank you very much for that caller. Thank you. There are no further questions at this point. I'm going to turn the call back over to Chris Binder for closing remarks.
Thanks, Sherri, and thanks everyone for your time today. If you have any additional questions that were not answered during today's call, please feel free to contact our investor relations team at IR at Mara dot com. Thank you and enjoy the rest of your day. Thank you. This does conclude today's conference. You may disconnect your lines at this time.
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