Q2 2025 Applied Digital Corp Earnings Call
Speaker Change: Good afternoon and welcome to Applied Digital's fiscal second quarter 2025 conference call.
Julian: My name is Julian, and I'll be your operator for today.
Julian: Before this call, Applied Digital issued its financial results for fiscal second quarter ended November 30, 2024, in a press release, a copy of which will be furnished in a report on a Form 8K filed with the SEC and will be available in the investor relations section of the company's website.
Julian: All joining us on today's call are Applied Digital's Chairman and CEO, Wes Cummins, and CFO, Saidal Mahmoud. Following their remarks, we will open the call for questions. Before we begin, Matt Glover from Gateway Group will make a brief introductory statement.
Speaker Change: Thank you, Julian. Good afternoon, everyone, and welcome to Applied Digital's fiscal second quarter 2025 conference call.
Speaker Change: Before management begins formal remarks, we would like to remind everyone that some statements we're making today may be considered for looking statements under security laws and involve a number of risks and uncertainties.
Speaker Change: We refer you to our filings at the FCC for detailed disclosures and descriptions of our business, uncertainties, and other variable circumstances, including, but not limited to, risks and uncertainties identified under the caption, Risk Factors, in our annual report on Form 10-K and our quarterly report on Form 10-Q.
Speaker Change: Now I'd like to turn the call over to Applied Digital's Chairman and CEO Wes Cummins.
Speaker Change: Thanks, Matt, and good afternoon, everyone. Thank you for joining our fiscal second quarter 2025 conference call.
Speaker Change: Starting with our data center hosting business, we currently have 286 megawatts of data center capacity for our cryptocurrency clients across two fully contracted locations in North Dakota, which are operating at full capacity. As many of you know, Bitcoin recently hit $100,000, and the demand for our services in this sector remains robust.
Speaker Change: Next, let's discuss our cloud services business, which provides high-performance computing power for AI applications.
Speaker Change: Through the Our Wish program, we are addressing housing shortages and supporting workforce growth in Allendale, North Dakota.
Speaker Change: This is a significant accomplishment for an emerging firm like ours in the data center space as we were finalists alongside established companies from around the globe such as Google, NTT Data from India, and Telehouse Europe based in London.
Speaker Change: I strongly believe that our Elendale campus is a valuable asset with 100 megawatts of critical IT load available in 2025.
Speaker Change: We believe it is in our shareholders' best interest to continue managing what we can and avoid speculating on an exact date.
Speaker Change: They have been recognized as one of the largest infrastructure investors in the world for the past 12 years, raising over $80 billion in capital last year alone. Macquarie brings extensive experience in infrastructure investment and data sets.
Speaker Change: The investment will take the form of perpetual preferred and 15% common equity interest in Applied Digital's HPC business segment.
Speaker Change: Unknown Attendee, Matt Glover, Alex Kovtun, Unknown Attendee, Matt Glover, Alex Kovtun,
Speaker Change: At today's build cost, we have a significant portion of the equity needed to construct over 2 gigawatts of HPC data center capacity, including our L&L HPC campus.
Speaker Change: With an 85% ownership stake in both existing and future HPC assets to a project-level preferred equity financing facility sufficient to fund our HPC project pipeline, we believe we are positioned for transformative progress.
Speaker Change: We're excited to have McCoy's support as we establish ourselves as a leader in the Tier 3 data center infrastructure sector while continuing to develop and operate large scale state-of-the-art data centers for world-class customers at the forefront of the AI revolution.
Speaker Change: In summary, we're encouraged by the positive trends we're witnessing across our business and remain confident in our growth trajectory.
Speaker Change: With that, I will now turn the call over to our CFO, Sethol Moulmand, to walk you through our financials and provide an update on guidance. Sethol?
Sethol Moulmand: Thanks, Wes, and good afternoon, everyone. It has been an active few months for our finance and accounting teams, and I am delighted to lead the department as the new CFO.
Sethol Moulmand: Let me begin by highlighting some of our recent financial announcements followed by a detailed overview of the quarter.
Sethol Moulmand: In December, we announced a $150 million Senior Secure Debt Financing Facility with New Quarry Equipment Capital, and simultaneously repaid our Senior Credit Facility with SimGroup. This allowed us to remove encumbrances on assets, as well as the parent guarantee.
Now let's turn to the quarters.
Sethol Moulmand: In total, our data center hosting segment generated $36.2 million in revenue, while our cloud services segment contributed $27.7 million.
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Speaker Change: This quarter, our depreciation amortization expense increased to $26.4 million, compared to $13.4 million in the same period of 2024.
Speaker Change: Of this amount, $21.7 million is attributable to DNA in our cloud segment.
Speaker Change: This segment's DNA was primarily driven by the amortization of our GPU leases over a two-year period, which we have discussed in previous earnings calls.
Moving on then to the next panel.
Speaker Change: Net loss attributable to our common stockholders was $138.7 million, or $0.66 on a basic and diluted share.
Speaker Change: We also recognize a loss on change in the fair value of debt of $87.2 million due to adjustments to the fair value of the 2.75% convertible senior notes during the two-week period in which the conversion option was recorded as a derivative.
Speaker Change: This was prior to us receiving shareholder approval at the annual meeting on November 20, 2024, to increase our authorized share count.
Justin, he increased 93% to 21.4 million as well.
Moving to our balance sheet.
Speaker Change: We ended the fiscal second quarter with $314.6 million of cash, cash equivalents, and restricted cash, along with $479.6 million in debt.
Wes Cummins: With that, I'll turn over the call to Wes for closing remarks.
Thank you, Seattle.
Speaker Change: The rapid expansion of hyperscale data centers driven by growing demand for AI capabilities is presenting significant challenges to the electricity availability in the U.S. According to a recent Morgan Stanley report, there could be a shortfall of approximately 36 gigawatts in power available for U.S. data centers by 2028.
Speaker Change: Addressing this issue is not straightforward, as adding new capacity requires lengthy planning, regulatory approvals, and the development of new generation and transmission infrastructure, processes that can span years or even decades.
Speaker Change: These investments not only validate our vision and approach, but also lower our cost of capital and accelerate the development of our pipeline, transforming it into a highly valuable asset for our shareholders.
Speaker Change: Our vision is to establish a platform for building and operating multiple HPC data centers. We're proud of the significant progress achieved this quarter and look forward to sharing further updates as the year unfolds. We welcome your questions at this time. Operator?
One moment while we poll for questions.
Unknown Speaker 0. Okay. Unknown Speaker 0.
Nick Giles: And our first question comes from Nick Giles, Bewirely Security. Please proceed with your question.
In the release, you noted late-stage discussions with multiple hyperscalers.
Nick Giles: My next question is, would there come a point where you would re-enter exclusivity with any of these counterparties? Thank you very much.
Thanks for the question.
Speaker Change: Unknown Attendee, Matt Glover, Alex Kovtun, Unknown Attendee, Matt Glover, Alex Kovtun,
Nick Giles: Unknown Attendee, Matt Glover, Alex Kovtun, Unknown Attendee, Matt Glover, Alex Kovtun,
Speaker Change: That does, that's very helpful. Maybe just a follow-up one on the Macquarie investment. How long had you been looking at similar deals and to what extent did terms improve over that timeline? Thank you very much.
Speaker Change: Unknown Attendee, Matt Glover, Alex Kovtun, Unknown Attendee, Matt Glover, Alex Kovtun,
Speaker Change: Seven months, we looked at multiple proposals and I think it's been market developed and the year moved on and the progress that we've made at our side. I think we signed the best terms and I'm very happy with the outcome on the terms we did with this structure, with McQuarry, but we did do a full process to make sure that we were getting...
A, the best partner, and the best terms.
Appreciate all the color. Continue best of luck.
Thanks.
Speaker Change: Thank you. And our next question comes from Rob Brown, Lake Street Capital.
Rob Brown: Good afternoon. Just a little further on the hyperscaler discussions. I know you can't exactly predict, but are they are they kind of moving forward? Are you through final details? Or are there kind of roadblocks that you've run into just some sense of maybe where it's at and what's left to go?
Speaker Change: Unknown Attendee, Matt Glover, Alex Kovtun, Unknown Attendee, Matt Glover, Alex Kovtun,
Speaker Change: Unknown Speaker, The experience we have had thus far, again, very thorough process.
Speaker Change: We've done great, you know, like it's from a design technical perspective, you know, fiber The work we've done there and what's going into into that site specifically in Allendale power, you know all of that has been great and Made a huge amount of progress on that
Matt Glover: Unknown Attendee, Matt Glover, Alex Kovtun, Unknown Attendee, Matt Glover, Alex Kovtun,
Matt Glover: I don't know if anything of this scale available in 2025 is going to allow us to break into full-stack development and operations in the hyperscale market, but the last piece here
Matt Glover: Unknown Attendee, Matt Glover, Alex Kovtun, Unknown Attendee, Matt Glover, Alex Kovtun,
Speaker Change: Okay, got it. And then, you know, with this funding, are there, I guess, the next facilities and the funding backing for, I guess, an additional $4 billion plus? How does that kind of open up the marketplace? How does that accelerate maybe some of these other discussions you're having?
Speaker Change: Again, I think just that the backing in general, right, there's the full amount of due diligence. There's a reason that we both wanted to enter into this partnership. We have a great power pipeline with a great data center development team, great ops team. And so as we finalize this first, we have a significant amount of 2026 power available. That's the next step as far as marketing across three different locations. And what this really does for us as well.
Speaker Change: Funds, I've talked about this for, I think, our last two or three earnings calls, we really needed to move financing and funding down to the asset level. This is an asset-heavy business, a CapEx-heavy business, and this is a huge step in moving that down to the asset level. So every time we start a new campus, every time we get a new contract, there's not the question mark of where do you get the equity, how much dilution comes at the public company. It just lays a very clear roadmap between the equity commitment and then project finance on the debt side that will be layered on top of that to allow us to go out and build, as we said in the prepared remarks, over two gigawatts of the pipeline, which is what we have in the near term.
Okay, great. Thank you. I'll turn it over.
Speaker Change: Thank you. Our next question comes from Darren Aftahi, Roth Capital Partners.
Speaker Change: On the first question, it's really about getting to the right terms and I'm not going to get into whether there's anything else as far as the timing around that. On the second question, it could split. I strongly believe it's going to be a single customer for the entire campus.
Thanks.
Speaker Change: Thank you. Our next question comes from Mike Grondal, Northland Securities.
Speaker Change: Hey guys, thanks. Um, could you remind us exactly how much money you had invested in Ellendale HPC?
Speaker Change: And how much you'll be able to pull out with this Macquarie financing?
Speaker Change: Yeah, I'll call outside, I'll answer that. Hey Mike, so as we disclosed in the AK, we have roughly over $700 million invested in the Ellendale campus and assuming project financing on terms entered along the lease, we expect an excess of $300 million of cash proceeds that we can take back up to the parent.
Speaker Change: And Mike, I think it's important just to as a reminder, you know, we have the McCoy capital facility there. There's some, there's the extra debt that it's going to be paid back as well. So when you're trying to do the math between 700 and then what we pull out, there's there is that that debt repayment. That's actually for the Elmendale campus, view it as the applied requirement on a megawatt basis of $1 million per megawatt from applied, and that will decrease to $750,000 going forward outside the Elmendale campus.
Right, so.
Speaker Change: Out of the 700 million or over 700 million you have invested in Ellendale, you'll end up with a net 400 million with that 180 million of debt paid off and then you'll pull out Some other capital so your net investments about 400
Speaker Change: Unknown Attendee, Matt Glover, Alex Kovtun, Unknown Attendee, Matt Glover, Alex Kovtun,
Speaker Change: The cash comes back out of what is now the HPC subsidiary and goes back to the public barricade.
Okay, and then two more questions. One...
Speaker Change: Unknown Attendee, Matt Glover, Alex Kovtun, Unknown Attendee, Matt Glover, Alex Kovtun,
Speaker Change: Unknown Attendee, Matt Glover, Alex Kovtun, Unknown Attendee, Matt Glover, Alex Kovtun,
Speaker Change: So outside of Ellendale, 1-6 and you can have that available 26 or 27.
www. favorablecourses.ca
Speaker Change: Unknown Attendee, Matt Glover, Alex Kovtun, Unknown Attendee, Matt Glover, Alex Kovtun,
Got it. Thank you.
Speaker Change: Thank you. And our next question comes from George Sutton, Craig Hullam.
Speaker Change: Unknown Attendee, Matt Glover, Alex Kovtun, Unknown Attendee, Matt Glover, Alex Kovtun,
Speaker Change: And just so we can define this for everybody, my belief is, and correct me if I'm wrong, this is effectively the infrastructure equity component.
Speaker Change: Unknown Attendee, Matt Glover, Alex Kovtun, Unknown Attendee, Matt Glover, Alex Kovtun,
Speaker Change: Unknown Attendee, Matt Glover, Alex Kovtun, Unknown Attendee, Matt Glover, Alex Kovtun,
Speaker Change: Unknown Attendee, Matt Glover, Alex Kovtun, Unknown Attendee, Matt Glover, Alex Kovtun
Speaker Change: Unknown Attendee, Matt Glover, Alex Kovtun, Unknown Attendee, Matt Glover, Alex Kovtun,
Speaker Change: Beautiful. Okay, so if they don't choose to support a specific project, that would not contain the equity in that case. That's correct.
Okay, great clarity. Thank you guys.
Thanks George.
And our last question comes from Brett Knoblosch, Cancer Fitzgerald.
Brett Knoblosch: Alright guys, thanks for taking my question and correspondence this morning.
Speaker Change: At the top companies you're talking about, like our public equity, there's nothing on that. And if that's not what you meant, then please correct me.
Speaker Change: Unknown Attendee, Matt Glover, Alex Kovtun, Unknown Attendee, Matt Glover, Alex Kovtun,
Speaker Change: Unknown Attendee, Matt Glover, Alex Kovtun, Unknown Attendee, Matt Glover, Alex Kovtun,
Speaker Change: Unknown Attendee, Matt Glover, Alex Kovtun, Unknown Attendee, Matt Glover, Alex Kovtun,
Speaker Change: Unknown Attendee, Matt Glover, Alex Kovtun, Unknown Attendee, Matt Glover, Alex Kovtun,
Perfect. Thank you so much, guys. Really appreciate it.
Brian: And we do have one more question from Brian, Biden, Needham and Co.
Speaker Change: Set of negotiations, you know, some of which may be ongoing.
Speaker Change: I'll call it being stamped, right? Just getting through the process, signing a lease, being stamped by, you know, one of these types of customers that we have the ability, you know, to do all these things. I think that's gonna help accelerate it. You know, one of the things that we have learned is,
Thank you.
Speaker Change: Thank you. There are no further questions at this time. I would like to pass it back to Wes Cummins for closing remarks.
Wes Cummins: Thank you. Thanks everyone for joining our Q2 Fiscal 2025 conference call. Look forward to speaking with everyone in April.
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